United States

Kentucky: Sales Tax Does Not Apply to Optional Liability Waiver Fees

Sep 26, 2016
From KPMG TaxWatch

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Recently, the Kentucky Board of Tax Appeals ruled that optional liability waiver fees were not subject to sales tax. The taxpayers at issue were rent-to-own companies that rented tangible personal property, including furniture, appliances, computers, and other electronics, to Kentucky customers. 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 taxpayers did not charge sales tax on the optional waiver fee. On audit, the Kentucky Department of Revenue asserted that these fees were part of the sales tax base and assessed tax and interest accordingly. The Department had not picked up these fees in the taxpayers’ two prior audits. The taxpayers disagreed with the assessment, and the matter came before the recently-revised Board of Tax Appeals

The Board first determined that the optional waivers were not sales of tangible personal property, a fact that was conceded to by the Department. The Board concluded that because a waiver agreement is not tangible personal property (but rather an intangible), the fees were not subject to sales tax. Interestingly, in reaching this decision, the full Board rejected the recommended disposition prepared by the former Board member who acted as the Hearing Officer in the case. Rather, the new Board members ruled in favor of the taxpayers. Recall that on August 8, 2016, the Board of Tax Appeals was consolidated with the Crime Victims Compensation Board and Board of Claims, and the former Board of Tax Appeals members were replaced by new members that do not necessarily have tax expertise. On October 1, these same members will make up the newly-established Kentucky Claims Commission, which will hear tax appeals. For more information on Rent-A-Center East, Inc. & Rent-Way, Inc. v. Dep’t of Revenue, please contact Gregory Ruud (513-763-2463).

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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.