United States

Alabama: Fees Charged to Pick-Up Rented Property Not Subject to Sales and Use Tax

Aug 01, 2016
From KPMG TaxWatch

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The Alabama Tax Tribunal recently addressed whether pickup fees charged to customers were subject to sales and use tax. The taxpayer at issue rented inflatables, interactive games, tables, chairs, and various other items to customers. After the rental period ended, customers could return the rented items to the taxpayer, or, for a fee, the taxpayer would pick up the property.  At times, customers changed their minds after property had been rented and opted to return the rented items themselves, thus reducing the amount owed to the taxpayer. To accommodate this possibility, the taxpayer typically did not deposit checks until items were either returned by customers or picked up. As advised by the Department of Revenue during an earlier audit, the taxpayer charged tax on its rentals, but not on the pickup fees. In the current audit, the Department revised its position and assessed rental tax on the pick-up charges.

Before the Tribunal, the Department argued that the pickup fees were taxable because the taxpayer did not have a separate, optional agreement for delivery and pick-up fees, as required by a regulation for the fees to be considered nontaxable. The ALJ first noted that “substance must govern over form” and that the existence (or lack thereof) of a separate contract should not control as to whether labor associated with the rental of property was taxable.  Notwithstanding, the ALJ concluded that, in this instance, the taxpayer’s customers understood that they had the option of returning the items or having the taxpayer pick them up for a fee. Thus, there was an optional agreement, albeit not in writing. Moreover, the regulation did not mandate a seprate, optional written agreement. The ALJ also noted that the pickup services were not taxable because they were performed after the agreed-upon rental period had expired. In contrast, services, such as delivery of property, performed before or in conjunction with a rental are subject to tax. The ALJ noted that the Department employee conducting the prior audit had also concluded that the pickup fees were not taxable, which was why the taxpayer was not charging tax on the pickup fees in the first place. For more information on B&B Inflatable Fun World LLC et al. v. Dep’t of Revenue please contact Scott Jackson at 404-614-8688.


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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.