Industry Topics for Rental Companies

Car Rental Companies

Generally, when the rental of the car is taxable, additional charges the car rental company requires the customer to pay as part of the rental agreement are also taxable. However, tax does not apply to optional, separately stated charges for services unrelated to the actual rental agreement.

The following charges and fees are frequently required as part of the taxable car lease agreement:

The following charges/fees are considered not required by the lease agreement and generally not subject to tax:

For additional information on leased vehicles, please see publication 34, Motor Vehicle Dealers and publication 46, Leasing Tangible Personal Property.

One-Way Rental Trucks

When leasing one-way rental trucks, to report tax measured by rental receipts, you must timely elect to report tax measured by rental receipts for the period in which the truck is first put into a rental service and the election is irrevocable.

One-way rental trucks are motor truck vehicles not exceeding the manufacturer's gross vehicle weight rating of 24,000 pounds. These vehicles are used in a rental business and leased for a short-term period of not more than 31 days for one-way or local hauling of personal property.

You must inform your customer that the truck is leased as a one-way rental. As a one-way rental, you are required to report tax on the rental receipts on your sales and use tax return in the first reporting period in which the truck is leased. Once you elect and declare the truck as a one-way rental and report tax measured by rental receipts, the election is irrevocable. If you do not timely elect to treat the vehicle as a one-way rental truck, it will be deemed mobile transportation equipment (MTE) and tax will generally be due based on the purchase price of the truck.

Heavy Equipment Rentals

Generally, when rentals of heavy equipment are taxable, any required services and mandatory charges of the lease agreement that customers are required to pay are also taxable.

However, if you lease the heavy equipment with a mandatory operator to your customers, that is, the equipment would not be rented without your company's operator, this transaction is not considered a lease; instead you are providing a service. But, if your customer has the option to provide their own operator to operate the heavy equipment, this transaction is considered a lease, if the equipment is under their direction and control.

Examples of heavy equipment rental categories are:

• Aerial work platforms (scissor lifts, boom lifts, scaffolding, etc.)
• Air compressors and air tools (gas powered compressor, rotary, screw air, etc.)
• Compaction (rollers, rammers, compactors)
• Concrete masonry (tile saws, trowels, drills, mixers, etc.)
• Earthmoving equipment (bull dozers, sweepers, backhoes, etc.)
• Forklifts and material handling (cranes, material lifts, forklifts, etc.)
• Lawn and landscape (chain saw, tillers, stumpers, etc.)
• Light towers and generators (portable or diesel generators, work lights, etc.)

Rental receipts subject to tax includes any required services or mandatory charges associated with the lease agreement. For example, if the lessee is required to purchase a damage waiver on a taxable lease agreement, any charge for the damage waiver is taxable. For general information on how tax is charged on the training fees and delivery charges of heavy equipment rentals, please see the General tab.

Example:

XYZ Rentals leases sweepers and backhoes and provides a mandatory in-person training at the lessee's location on how to use and operate the machines as part of the taxable lease agreement. The training provided is taxable because the training is mandatory and sold as part of the lease agreement.

Applicable tax rate

You must charge the appropriate district tax rate along with the statewide tax rate when leasing heavy equipment rentals. The correct applicable rate of tax to charge on the lease transaction is the tax rate in effect in the district where the equipment is being used by the lessee. If the district of use is not known, the tax rate should be calculated where the equipment is delivered to the lessee.

Example:

Your customer leases a forklift in Madera County for use at their place of business in the City of Coalinga (Fresno County). You will need to charge your customer the district taxes applicable in the City of Coalinga, including Fresno County taxes, because the district taxes that apply to a lease are based on the location where the leased property is used.

Rent or Lease-to-Own (Sales under a Security Agreement)

A rent or lease-to-own transaction is considered a conditional sale. Tax is due at the beginning of the lease (upfront) based on the purchase price of the property.

Examples of rent or lease-to-own items may include but are not limited to:

• Electronics (Gaming consoles, computers, laptops, televisions, and audio and visual systems)
• Furniture
• Home appliances and vacuums
• Mattresses
• Jewelry and watches
• Health, fitness and sports equipment

A contract that is a sale under a security agreement, is a lease that binds the lessee for a fixed term payment and the lessee obtains title at the end of the term upon completing the required payments or the lessee has the option to purchase the property for a nominal amount not exceeding $100 or one percent of the total contract price, whichever is the lesser amount. This transaction is considered a financing transaction only and not a lease. The lessee obtains the title of the property at the end of the lease agreement upon completion of the required payments. In this type of transaction, tax is due on the total sales price at the time of the sale (up front) and not the monthly rental payments.

However, if the lessee purchases the property and the buyout amount is not nominal, the lessee would owe tax on the buyout price. In this case, a “not nominal” buyout amount means that the buyout price is greater than $100 or one percent of the of the total lease contract price, whichever is the lesser amount. The transaction is regarded as a lease with tax generally due on the rental payments, and the buyout price is also subject to tax.

Example 1:

Your company offers a rent-to-own contract for a sofa. You offer a 12-month fixed term with monthly payments of $50.00 and at the end of the 12 months, the customer obtains title of the sofa. By the end of the term, the total amount paid by the customer will be $600. This is considered the sales price subject to tax. Tax is due on the sales price of $600 and must be collected up front. You must remit tax to the CDTFA measured by the selling price of the sofa to your customer with your return for the reporting period in which the sale occurs or when the sofa is transferred to your customer.

Example 2:

Your company purchases furniture for $100 and offers a lease-to-own contract sold on credit to your customer, for $10 per month for twelve months. The total lease payment for the contract is $120 and includes financing charges. The contract binds the customer for a fixed term payment and the customer obtains the title of the furniture upon completing the required payments. This transaction is a sale under a security agreement and is considered a financing transaction rather than a lease. As a lessor or a retailer, you must keep adequate and complete records showing the actual selling price of the sofa less than $120. For example, your selling price is $110, and the finance charge is $10. On your customer's invoice, you must separately state the fair retail selling price of the sofa ($110) from the finance charge. Accordingly, sales tax would only apply to the actual selling price of $110 to your customer and must be collected up front.

Example 3:

You lease a bicycle for $100 per month with a $150 buyout option at the end of the lease. You paid sales tax reimbursement to your vendor when you initially purchased the bicycles and you do not collect tax on the rental payments. Tax is due on the buyout price of $150 that the customer paid.

Furniture Rentals

Generally, if you make significant changes to a piece of furniture and it is not leased in substantially the same form as acquired or was acquired without payment of tax, tax is due on the rental receipts.

Examples of furniture rentals may include but are not limited to:

• Living room sets
• Antiques
• Dining sets
• Bed and bath
• Accent furniture
• Décors
• Outdoor

If you make repairs and make a significant change to the furniture you rent, your rental receipts will be subject to tax because the furniture is not leased in substantially the same form as acquired, even if tax was timely paid on the purchase of the furniture. For a change to be significant and therefore cause the property not to be in the same form as acquired, the change must either substantially increase the value of the furniture or change the functional capabilities or characteristics of the furniture. In situations where there is a significant change in form but little increase in value, the fact that there is no significant increase in value is irrelevant if there is a major change in the characteristics or functional capabilities of the furniture. In a case where tax is paid on the purchase price of the furniture, you may take a tax-paid purchase resold deduction to offset the tax due on rental payments on your sales and use tax returns.

However, there are situations where there is a small change in form and a little increase in value of the furniture due to minor repairs. In such instances, if there is no substantial increase in value and there is a minor change in the form of the furniture due to minor repairs done that do not change the furniture's general function or characteristics (that is the property is leased in substantially the same form as acquired), the rentals receipts are not subject to tax provided you timely paid the tax at the time of purchase.

Example 1:

You purchase used accent furniture and pay sales tax reimbursement at the time of purchase. You restore and rent them out to your customers. You restore the furniture by replacing the fabric, strapping, slings, cushions, paint, and powder coat them. The restoration increased the value and substantially changed the appearance of the furniture. As a result, the rental receipts are subject to use tax because the repairs made on this furniture were significant and it is thus not leased in the same form as acquired. It does not matter if tax was paid timely on the cost of the furniture. You may take a tax-paid purchase resold deduction for the tax you paid on the cost of the furniture in the same period in which you first leased the furniture.

Example 2:

Your company buys antique furniture, fixes it and rents them out for events. You acquire an antique table and pay tax reimbursement to your vendor. You then change out one rusted screw on the table leg. This is a minor repair that does not increase the value of the furniture. Since your company paid the sales tax on the furniture when it was first purchased, and the property continues to be leased in the same form as acquired, the rental receipts are not subject to tax.

Event and Party Equipment Rentals

Generally, when rentals of event and party equipment are taxable, any required services and mandatory charges of the lease agreement that customers are required to pay are also taxable.

Examples of event and party equipment rentals may include the following items:

• Linens — tablecloths, napkins, table runners, aisle runners, chair covers, stage skirting, and chandelier draping
• Furniture — benches, booths, canopies, chairs, ottomans, pillows, rugs, sectionals, sofas, stools, and tables
• Bars — bar fronts, lighted bars, branded bars, and sectional bars
• Silk floral — accent table décor, candelabras, containers, and votives
• Lighting and staging — lighting instruments, rigging, staging, and trussing
• Props — accent décor, arches, cabanas, columns, cutouts, flats, facades, games, pedestals, props, and signs

Tax applies to the charges for mandatory services if such service is a required part of the taxable lease. An optional service in a taxable lease is not subject to tax if the service occurs after the lease begins, and the service charges are separately stated on the invoice. On the other hand, if the lease is not a taxable lease, neither mandatory and nor optional services are not subject to tax.

If you are a lessor and you rent equipment from another rental company to sublease to your customers, see the Subleases topic under the Leases in General tab for detailed information on how tax applies on subleasing.

Example:

You lease linens, tables, bars, and silk floral arrangements to your customers and offer other optional services such as set-up and placing the leased property. Your customer requests that you set up the tables, bars, and set the flowers in place after the lease term has begun. Tax is collected on the rental receipts because you did not pay sales tax reimbursement at the time of purchase of these items. The separately stated charges for the optional services such as setting up and placing the property at the location are not subject to tax because this is an optional service that occurred after the lease began and the charges are separately stated on the invoice.

Costume Rentals

You purchase materials and items to construct and assemble costumes to lease to your customers. As such, the materials and items purchased are not leased in substantially the same form as acquired. The rentals receipts from the costume rentals are subject to use tax, even if tax was timely paid on the purchase of the materials.

If you paid sales tax on the purchase of materials to incorporate and construct into the costumes, you may take a tax-paid purchase resold deduction on your sales and use tax returns in the same period in which you first leased the costumes.

You may also issue a resale certificate to your vendors when you purchase materials that are physically incorporated or assembled in the costumes that you are leasing. This will allow you to purchase the materials without payment of tax.

Photo Booth Rentals

If you lease a photo booth to your customer, the application of tax depends on many factors, including how the photo booths are acquired, operated at the event, and how the photographs are transferred to the customer.

If you rent the photo booth with a mandatory operator to your customer, this transaction is not considered a lease for the purpose of sales and use tax. Instead, you are providing photography services. When you provide photography services and physical prints of photographs to your customer, the entire amount charged is subject to tax. However, if the pictures are only transmitted electronically and there is no intent of transferring physical prints later to your customer, the entire package is not taxable (package includes the photography service and pictures transmitted electronically).

If your customer has the option to rent the photo booth with or without an operator, the transaction is considered a lease to your customer. In general, your lease receipts for a lump-sum (that is, charges include the rental of the booth, prints, and any use of props) amount are subject to tax, unless you timely paid sales or use tax measured by your purchase price of the booth and related equipment, and the photo booth is leased in substantially the same form as acquired. Assuming your rental receipts from the lease of the booth are subject to tax, if your customer decides to rent (sublease) the booth with an operator, the measure of the tax will include the charges for the rent of the booth, prints and any use of the props but will not include the charge for the operator service.

If you acquired the photo booth in its completed condition and paid the sales or use tax at the time of purchase, including on all the necessary equipment (for example, printer, touch screen, etc.) to operate the booth, the lease receipts are not subject to tax. As long as you bill one lump-sum fee for the use of the rental, you would be the consumer of the supplies used in creating the prints (for example, toner, ink, and papers) and should pay tax when you purchase these items.

However, if you do not have a rental agreement with a customer and you set up a photo booth at an event, such as a festival or at a park, you are generally considered the retailer of the prints you sell from the booth. The prints you sell from the photo booth to the general public are on a “pay-per-print” basis and tax applies to your charge for the prints only. If you paid tax on the photo print paper, you are entitled to take a tax-paid purchase resold prior to use deduction in the same period in which you made your sales.

Example 1:

You charge a flat rate of $600 for a 3-hour photo booth rental. Your customer will operate the photo booth (without an operator) and will have unlimited prints at the event. You paid tax on the initial purchase of the photo booth and you also paid tax on the supplies used in creating the prints. Tax is not due on the rental receipts because you paid tax on the supplies used in creating the prints, and also paid tax on your initial purchase of the booth that you leased out in substantially the same form as acquired.

Example 2:

You purchased parts and equipment to custom build your photo booths. You offer a 4-hour photo booth rental without an operator for $500 to your customer. The package comes with unlimited printing of pictures at the event. Because the photo booth is not leased in the same form as acquired (that is, you custom-built the booths by purchasing parts and equipment), tax applies to the entire amount charged of $500.

Example 3:

You charge a flat rate of $500 for a 4-hour photo booth rental with an option for an operator service. The option to have a photo booth operator is an additional $50 separately stated service charge, with a total package of $550. The package comes with unlimited printing of pictures, any use of the props, and a photo booth operator (per customer request) at the event. Tax is due on the rental amount of ($500) because you did not pay tax on the initial purchase of the photo booth and the related equipment that you leased out in substantially the same form as acquired. The measure of tax will include the charge for the rent but will not include the separately stated charge for the operator service ($50).

For more information on photo booths examples and scenarios, please see our Tax Guide for Photography.

Photographs and Artwork

If you are a photographer or an artist, you may lease your prints, slides, or logos to your customers. Tax is due on the rental receipts if the image is provided in a tangible form, that is something that can be seen, touched, weighed or measured.

You may lease photographs or artwork to a customer or lessee and charge them for the rights included in the transfer (that is for reproduction, copyrights, or distribution rights). Although the use may be restricted, the transaction is still considered a lease.

Tax applies to the fees you charge to allow the lessee to reproduce, copy, or use a photograph or artwork for their own private use (that is not to sell) when you provide the photographic image in a tangible form such as a print, or as an image on a CD/DVD, or flash drive. Accordingly, the lessee may not issue a resale certificate because the lessee is not reselling that actual image. Instead, the lessee is using it for reproduction.

If you lease, license or assign a copyright interest in your photographs, your arrangement with your customer may be a technology transfer agreement (TTA). For more information on a TTA as it relates to your photographs and how tax applies to a TTA, please see Tax Guide for Photography and publication 38, Advertising Agencies.

Book Rentals

If you lease physical books (in store or online), send your customer the number of books rented, and they mail them back after reading them, tax is due on the rental receipts.

If the lessee does not return the book on time and you charge the lessee a fee for the late return of the property, this late fee is also subject to tax. You are required to collect tax from the customer, issue them a receipt, and remit the tax to us.

However, if you paid the tax when you initially purchased the books or timely paid use tax to us and then rent the books in substantially the same form as acquired, tax is not due on the rental receipts or on any late fees associated with the lease.

DVDs, Videotapes, and Videodiscs Rentals

DVDs, videotapes, and videodiscs rentals are subject to tax and tax is measured by the rental receipts.

If you rent these items for private and noncommercial use, you are required to collect and remit tax on the rental receipts regardless if you paid tax based on the cost of the property. A late charge for failing to return the property timely is subject to tax because this is a legitimate additional charge for continued possession and use of the property.

Portable Toilets

You are required to collect and remit tax on the rental receipts of the portable toilets, regardless of whether the unit is leased in a substantially the same form as acquired and regardless of whether sales or use tax has been paid.

Mandatory charges such as mandatory maintenance, cleaning services, or pick up fees required by the lease contract are subject to tax. However, separately stated charges for optional maintenance or cleaning services of portable toilets are not subject to tax.

Delivery charges on portable toilets may be subject to tax depending on whether you deliver them with your own vehicle or by common carrier. If you deliver portable toilets using your own vehicle, the delivery charge is generally subject to tax, unless the charges are separately stated and the delivery occurs after the right to possession of the property is granted to your customer (after the lease commences).

If the portable toilet is delivered by a common carrier, the delivery charge is not subject to tax if all the criteria below are met:

• The delivery charge must be separately stated.
• The portable toilet must be shipped by a common carrier directly to the lessee.
• The delivery amount charged to the lessee must be the actual amount charged by the common carrier.

Example:

You lease portable toilets, charging your customer a mandatory service fee for pumping and cleaning, and a delivery fee for drop off and mandatory pick-up (using your own vehicle). All charges, such as the service fee for the cleaning services, are subject to tax because they are part of your lease agreement specifying such services are part of the rental price and the lessee is required to purchase it from you (mandatory). In this scenario, the delivery charge is also subject to tax because you are using your own vehicle to deliver the portable toilets to your customer as part of the lease agreement. However, if the delivery occurs after the right to possession is granted to your customer and the delivery charges are separately stated on the invoice, the delivery charge is not subject to tax. The pick-up charge is subject to tax because the fee is mandatory.

Farm and Machinery Equipment Rentals

Farm equipment and machinery rentals may qualify for a partial exemption from use tax if leased to a qualified person.

Farm equipment and machinery means implements of husbandry, which include any new or used tool, machine, equipment, appliance, device, or apparatus used in the conduct of agricultural operations, except where such items are intended for sale in the ordinary course of business, and include such items as harrows, tractor implements, agricultural heating and cooling equipment, fuel storage equipment, wind machines, and watering and waste disposal systems for livestock, etc.

Generally, if the lease of qualifying farm equipment and machinery is measured by the rental receipts, the lease will generally qualify for the partial exemption when leased to a qualified person. A qualified person is a person primarily engaged in producing or harvesting agricultural products and must meet the requirements of Regulation 1533.1, Farm Equipment and Machinery in order for the partial exemption to apply. However, if the property is not leased to a qualified person, the lease of farm equipment and machinery will not qualify for the partial exemption.

As a lessor, you must obtain an exemption certificate in substantially the same form as described in Regulation 1533.1, Farm Equipment and Machinery, from the lessee who is a qualified person.

For more information, please see Regulation 1533.1, Farm Equipment and Machinery, or the Tax Guide for Agricultural Industry.

Timber Harvesting Equipment and Machinery Partial Exemption

Leases of off-road commercial timber harvesting equipment and machinery to a qualified person may qualify for a use tax partial exemption.

The lessor must obtain an exemption certificate from the lessee in substantially the same form as described in Regulation 1534, Timber Harvesting Equipment and Machinery. The lessee is not allowed to issue an exemption certificate unless the lessee is a qualified person, that is, one who is in business primarily engaged in commercial timber harvesting operations as described in Regulation 1534.

Racehorse Breeding Stock Partial Exemption

Leases of racehorse breeding stock to a qualified person may qualify for a use tax partial exemption.

The lessor must obtain an exemption certificate from the lessee in substantially the same form as described in Regulation 1535, Racehorse Breeding Stock. The lessee is not allowed to issue an exemption certificate unless the lessee is a qualified person, that is, one who exclusively purchases racehorse breeding stock with the intent and purpose of breeding as described in Regulation 1535.

Tire and Covered Electronic Waste Recycling Fee

In addition to sales and use tax, other fees may apply to leases of merchandise.

Tire fee

If you are in the business of leasing/renting new or used motor vehicles, trailers, construction equipment, or farm equipment and you purchase the vehicle/equipment on which new tires are mounted without paying the tire fee, you are responsible for paying and reporting the tire fee to us on those transactions. You are required to register for a tire fee account and report the tire fees owed.

If your customer decides to purchase the vehicle, trailer, construction equipment, or farm equipment at the end of the lease agreement, you are required to collect the fee from your customer on any tires you mount on the vehicle or equipment at the time of sale. If no new tires are mounted on the vehicle or equipment at the time of sale, or if used tires are mounted on the vehicle or equipment at the time of sale, you should not charge your customer the fee.

For more information on tire fees, please see publication 91, California Tire Fee and our online California Tire Fee Guide.

Covered electronic waste recycling fee

If you lease new or refurbished covered electronic devices (CED) that have a screen size of more than four inches measured diagonally and have been identified in the regulations adopted by the Department of Toxic Substances Control, the electronic waste (eWaste) recycling fee may apply to some of your leases.

CEDs identified in the regulation includes:

• Computer monitors that contain cathode ray tubes or use liquid crystal displays (LCD)
• Televisions that contain cathode ray tubes
• Portable DVD players with LCD screens
• Laptop computers with LCD screens
• Plasma televisions
• Bare cathode ray tubes or any other product that contains a cathode ray tube.

If the lease is a continuing sale and purchase, you must collect the fee from the lessee with the first lease payment. Lease renewals are not subject to eWaste fee unless a new or refurbished CED is provided at the time of renewal. If your customer decides to purchase a used CED, the eWaste fee does not apply to sale of used CEDs.

You may have additional registration requirements with the CDTFA.

For more information on covered electronic waste recycling fee, please see publication 95, Electronic Waste Recycling Fee and our online Covered Electronic Waste Recycling Fee Guide.