Washington – Rental Car Options Taxable

3/5/2013

SALT Report 2215 – A Washington Appeals Judge issued a ruling regarding the taxability of a rental car company’s charges for optional collision damage waivers and optional roadside assistance coverage.  In this case, the Taxpayer is contesting an assessment that was the result of an auditor’s reclassification of income received from the sale of the optional services from the retailing B&O tax classification to the service and other business activities B&O tax classification.

In his appeal, the Taxpayer explains that under the terms of the car rental agreement the customer is responsible for the vehicle and that any damage to it is the responsibility of the customer.  Therefore, the customer’s choice to pay an additional charge for the collision damage waiver or the roadside assistance coverage is a way of altering the terms of the contract to limit its personal liability.

Further, the Taxpayer claims that the collision damage waiver and roadside assistance coverage options fall within the definition of “retail sale” under RCW 82.04.050 and that “automobile towing and similar automotive transportation services” are included in the definition of retail sale under RCW 82.04.050(2)(e). Additionally, the Taxpayer asserts that the optional collision damage waiver and roadside assistance charges are essentially the same as an extended warranty, which is included in the definition of a retail sale in RCW 82.04.050(7).

In its decision, the Appeals Judge noted that the charges imposed by the Taxpayer for the rental of its cars were subject to retailing B&O tax because the rental of tangible personal property is defined as a retail sale. However, the collision damage waiver charges and the roadside assistance coverage charges were not rental fees. Instead, the charges were for optional items chosen by the customer and were not required as part of the car rental purchase.  In this situation, where the charges are for optional items and charged separately from the rental price, the income from those charges are taxable under the service and other activities B&O tax classification.

Further, the Judge stated that the optional collision damage waiver and roadside assistance coverage do not fall within the definition of an “extended warranty” under RCW 82.04.050(7) which provides that an extended warranty is “an agreement for a specified duration to perform the replacement or repair of tangible personal property at no additional charge or a reduced charge.” In this case, the Taxpayer’s customers are not purchasing an agreement to repair or replace the Taxpayer’s vehicle.  Rather, the customer is paying a fee to be relieved of the responsibility of paying the costs of repair that result from collision damage to the Taxpayer’s vehicle.

Accordingly, The Appeals Judge determined that charges for the optional collision damage waiver and the roadside assistance coverage do not fall within the definition of “retail sale” under RCW 82.04.050 and do not fall within any of the business activities specifically classified under chapter 82.04 RCW, therefore, they are subject to the service and other business activities B&O tax.

For Further Information

Washington Department of Revenue – Tax Determination No. 10-0340