United States

Utah: Consumer Good Rental Liability Wavier Fees not Subject to Sales Tax

Jan 18, 2016
From KPMG TaxWatch

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Recently, the Utah Supreme Court considered whether charges to participate in an optional liability waiver program associated with the lease or rental of tangible personal property were subject to sales and use tax. The taxpayer rented a variety of consumer goods to customers on a rent-to-own basis. Customers acquired ownership of the goods only after making all required payments. The taxpayer offered customers the option of purchasing a liability waiver program, which protected the customers in the event the goods were damaged or destroyed due to certain hazards during the rental period.   Customers that opted for this protection paid an extra fee—7.5 percent of the rental payment—each pay period. The taxpayer separately itemized the liability waiver fee on its invoices and charged sales tax only on the rental payment. On audit, the Utah State Tax Commission asserted that the charges for the liability waiver program were subject to sales tax. The taxpayer disagreed, and the matter eventually reached the Utah Supreme Court

Under Utah law, sales tax is imposed on “amounts paid . . . for leases or rentals of tangible personal property.” A Commission regulation implementing the statute required sales tax to be imposed on all amounts charged “in connection with a lease or rental of tangible personal property.” The Commission argued before the court that the liability waiver fee was taxable under the regulation. The court disagreed, focusing instead on the “paid for” language in the statute. The dictionary defines “paid for” as “giving money for goods or services.” In the court’s view, it was not enough for a payment to merely “concern” a good or service; the payment must go to the purpose or aim of the transaction which, in the court’s view, was the right to possess, use or operate the product being rented. The court concluded that the liability waiver fee was not an amount “paid for” the rental of tangible personal property. Payment of the liability waiver fee did not have any effect on the customer’s possession or use of the property; it simply secured the taxpayer’s promise to waive any claims against the customer if certain damage to the property occurred. The court concluded that the Commission’s regulation impermissibly broadened the scope of the statute because it encompassed a wide variety of products and services that could be associated with a rental without actually being paid “for” rental. For more information on Renter-A-Center West, Inc. v. Utah State Tax Commission, please contact Chris Hoge at 801-237-1350.

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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.