United States

Maryland: Taxpayer Loses Case addressing whether Portable Toilet Rentals Are Taxable

Jan 11, 2016
From KPMG TaxWatch

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The Maryland Tax Court recently flushed out a taxpayer’s arguments that charges for renting and maintaining portable toilets were not subject to sales tax. The taxpayer at issue was in the business of renting portable toilets. On the advice of its accountant, the taxpayer did not charge sales tax. As part of its rental business, the taxpayer transported toilets to and from a customer’s location and typically sanitized the toilets once or twice a week. The periodic sanitation service was included in the rental cost. Following an audit, the Comptroller assessed sales tax on the taxpayer’s portable toilet rentals. In the Comptroller’s view, the taxpayer was renting tangible personal property. The taxpayer, on the other hand, argued that it was providing a nontaxable service. The matter eventually went before the tax court.

The court noted that under prior Maryland caselaw, when a company provides a service and related equipment, it is necessary to first determine whether the overall function is characterized as a rental or transfer of possession, or a service. After making that determination, the question becomes whether that function is taxable. The court determined that the primary function of the taxpayer’s portable toilet business was the provision of portable toilets to customers. The accompanying maintenance and cleaning services, although important, were incidental to the primary function. The court contrasted the renting of a portable toilet with the renting of a garbage can. The court reasoned that while the primary purpose of renting a garbage can is to provide a service to the actual user of the container, a portable toilet is rented to a customer for use by others.

The court next addressed the taxpayer’s argument that tax could not be imposed on portable toilet rentals occurring before 2013, which was when the Comptroller amended a regulation to specify that portable toilets rentals are subject to tax. The court disagreed, explaining that portable toilet rentals were subject to tax as rentals of tangible personal property long before the regulation took effect; the regulation did not make portable toilets taxable. However, the court abated all penalties assessed against the taxpayer because it found that the taxpayer acted in good faith, particularly by beginning to collect tax when informed by the Comptroller that its accountant’s advice was erroneous. It remains to be seen whether the taxpayer will appeal. For more information on T & T Sweeping Services, Inc. v. Comptroller, please contact Michael Riscili at 717-260-4719.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.