Recently, the Kentucky Court of Appeals affirmed a trial court decision holding 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 taxpayers disagreed with the assessment. Both the Board of Tax Appeals and the trial court ruled in favor of the taxpayer.
On appeal, the court adopted key portions of the lower court’s opinion and held that the optional waivers were not sales of tangible personal property, a fact that was conceded to by the Department. The court declined to read the waiver agreement as a provision of the rental agreement, noting that the agreements were not “inextricably linked” and that the waiver did not interfere with the customer’s right to possession or use of his rental property. The waiver simply granted an intangible right to the purchaser, (i.e., the taxpayer would not pursue action against the renter for damage occurring under certain circumstances). For more information on Dep’t of Revenue v. Rent-A-Center East, Inc. & Rent-Way, Inc., please contact Greg Ruud at (513) 763-2463.