Tennessee: Department Addresses Taxability of Motor Vehicle Lease Subscriptions

In a recent letter ruling, the Tennessee Department of Revenue addressed the taxability of a motor vehicle subscription service. Under the taxpayer’s subscription plans, a customer paid a one-time activation fee and a monthly subscription fee for the use of a motor vehicle. The monthly fee included insurance coverage, maintenance and repairs, and the ability to switch out motor vehicles. The taxpayer also imposed additional fees such as a hold fee (for pausing the subscription service), late fees, cleaning fees, and additional driver fees. Under Tennessee law, sales and use tax is imposed on “all leases or rentals of tangible personal property where the lease or rental is part of the taxpayer’s regularly established business.” Tennessee also imposes a rental car surcharge on the rental of cars for a period of 31 days or less, and Tennessee localities are authorized to impose a local option sales tax on any “single article of tangible personal property.” In the letter ruling, the Department first determined that although customers had the ability to substitute vehicles during the term of the monthly agreement, the subscription service constituted a lease of a motor vehicle. Thus, the lease was subject to sales and use tax. For purposes of the local option sales tax, the Department concluded that a motor vehicle is commonly understood as a “single article” despite a customer’s ability to use multiple vehicles during the monthly agreement period. Notably, a customer could only lease one vehicle at a time. As such, the receipts were also subject to the local option tax and the caps on the imposition of the local tax. Finally, the Department ruled that the taxpayer’s charge was not subject to the rental car surcharge because the taxpayer’s agreement with the customer was a lease for a term of more than 31 days. For more information on Letter Ruling 19-08, please contact Justin Stringfield at 615-248-5510.