United States

South Carolina: Optional Waiver Fee Accompanying Rentals Subject to Sales Tax

Apr 18, 2016
From KPMG TaxWatch

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Recently, the South Carolina Administrative Law Court determined that optional liability waivers offered to customers along with the rental of certain types of tangible personal property were subject to sales tax. The taxpayer at issue was in the business of renting tangible personal property, including furniture, appliances, computers, and other electronics. If a rented item was damaged during the rental period, the customer was liable for the value of the item unless he/she had purchased an optional liability waiver. Under the terms of the waiver, if the rented property was damaged or destroyed as a result of certain types of events while the wavier was in effect, the customer was not liable for the value of the item.  The taxpayer did not charge sales tax on the optional waiver fee. On audit, the South Carolina Department of Revenue asserted that these fees were part of the sales tax base and assessed tax and interest accordingly. The taxpayer disagreed with the assessment and the matter came before the court.

Under South Carolina law, the sales tax base is defined as “the value proceeding or accruing from the sale, lease, or rental of tangible personal property.” The court first determined that the rental agreement and the waiver were not separate agreements. While the waiver was optional and was embodied in a separate document, once purchased it merged into and became an inextricable part of the overall rental transaction. Thus, the waiver fees were part of “the value” which “accrued” from the taxpayer’s rental of tangible personal property.  The court also analyzed recent cases from other jurisdictions addressing the exact issue. In Utah, the court had held that the waiver fees were not part of the amount “paid for” the rental of tangible personal property. In contrast, in Louisiana the court held the waiver sales constituted “gross proceeds derived from the lease or rental of tangible personal property.” South Carolina’s statute, the court determined, was more closely analogous to the Louisiana statute. The court concluded that the waiver fees were subject to sales tax. For more information regarding Rent-A-Center East, Inc. et al v. South Carolina Dep’t of Revenue, please contact Nicole Umpleby at (704) 335-5586.

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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.