006.05.06 Ark. Code R. 005-GR-20

Current through Register Vol. 49, No. 10, October, 2024

Rule 006.05.06-005-GR-20 - LEASES AND RENTALS

A. GENERAL. Persons in the established business of leasing or renting articles of tangible personal property to consumers are sellers and must collect and remit tax upon the gross receipts or gross proceeds derived from the lease or rental of the property.

B. DEFINITIONS.

1. "Commercial shipping" means either:

a. The service of transporting the personal property of another for gain or profit; or

b. Transporting one's goods from place to place if the expense of renting the vehicle is an ordinary and necessary expense of the lessee's business operation for federal and Arkansas income tax purposes.

2. "Long-term lease" means a contract to rent or lease property for a term of thirty (30) days or longer to a single consumer.

3. "Long-term rental vehicle tax" means the one and one-half percent (1 1/2) tax levied pursuant to Ark. Code Ann. § 26-63-304 on the entire monthly (or other periodic) payment for the long-term lease of a motor vehicle required to be licensed for use on the highway. (See ET-7.)

4. "Motor vehicle" means a vehicle which is self-propelled and is required to be registered for use on the highway, and does not include trailers or semi-trailers.

5. "Periodic payment" includes all charges, fees, taxes, interest, penalties, late payments, or other amounts included in the lease agreement as due and payable by the lessee to the lessor on a monthly or other periodic basis as consideration for the lease of the motor vehicle. With respect to leases containing a terminal rental adjustment clause ("TRAC"), the upward adjustment of a lease payment is considered part of the entire monthly payment subject to tax. In the event that a lease payment is adjusted downward under a TRAC, the lessor is entitled to take a deduction from gross receipts for such downward adjustment if the lessor refunds to the lessee taxes previously collected from the lessee.

6. "Rental vehicle tax" means the tax levied pursuant to Ark. Code Ann. § 26-63302 and is equal to ten percent (10%) of the gross receipts or gross proceeds derived from the short-term rental of a motor vehicle, plus a local rental vehicle tax equal to the sales tax rate of the city and county in which the lessor's business is located. (See ET-6.)

7. "Short-term rental" means a contract to lease property for a term of less than thirty (30) days to a single consumer.

8. "Short-term rental tax" means the one percent (1%) tax levied pursuant to Ark. Code Ann. § 26-63-301 on the entire payment for the short-term rental of tangible personal property. (See ET-5.)

9. "Vehicle" means every device in, upon, or by which any person or property is, or may be transported upon a highway and which is required to be registered for use on the highway, and includes trailers and semi-trailers.

C. LONG-TERM LEASES OF TANGIBLE PERSONAL PROPERTY (Except for Motor Vehicles).

1. For long-term leases of tangible personal property, except for motor vehicles, the lessor may either purchase the property tax-free as a sale for resale or pay Arkansas sales and use tax on the purchase. If the lessor purchases property intended for subsequent lease without paying Arkansas gross receipts or use tax, he must establish the requirements necessary for a sale-for-resale exemption. (See GR-53.) At the time of purchase, the lessor must elect to pay the tax on property intended for long term lease or purchase the property tax free as a sale for resale. This election may not be changed after the purchase.

2. If the lessor of property paid Arkansas gross receipts or use tax on the purchase of the item, the lessor is not required to collect gross receipts tax on subsequent long-term leases of the property.

3. Repair parts purchased by the lessor to keep the leased property in working order are taxable, unless the property was initially purchased exempt from tax as a sale for resale.

4. See GR-38.2 for the exemption for leases of durable medical equipment, mobility-enhancing equipment, and prosthetic devices.

D. LONG-TERM LEASES OF MOTOR VEHICLES.

1. With respect to motor vehicles leased on a long-term basis on or after August 1, 1997, the lessor has the option of the following:

a. Remitting sales or use tax on the purchase price of the motor vehicle at the time of registration (Option 1); or

b. Registering the motor vehicle exempt from tax (Option 2).

2. Option 1.

a. If the lessor chooses Option 1, then the lessor will not collect sales tax or long-term rental vehicle tax on the consideration for the lease of the motor vehicle paid by the lessee. No tax shall be collected by the lessor on the lease of motor vehicles that have been previously titled and registered in another state by the lessor if sales or use tax was paid to the other state on the purchase price of the vehicle and the total tax paid to the other state equals or exceeds the combined Arkansas state and local use tax as applied to the purchase price of the motor vehicle.

b. If the lessee makes an initial payment on the lease in the form of a payment of money or by transferring ownership of another motor vehicle, no deduction shall be permitted from the value of the leased motor vehicle for purposes of computing the sales or use tax due on the leased motor vehicle at the time of registration. The trade-in deduction available to purchasers of motor vehicles and described in GR-12 shall not apply to leased motor vehicles. The deduction available to purchasers on account of the sale of a used motor vehicle and described in GR-12.1 shall not apply to leased motor vehicles.

Example 1: Lessee owns a used motor vehicle valued at $5,000.00. Lessee enters into a long term lease arrangement with Lessor and agrees to transfer the used motor vehicle to Lessor as an initial payment on the lease. When the motor vehicle is registered, there is no deduction for the $5,000.00 value of the used motor vehicle.

Example 2: Lessee owns a used motor vehicle which he sells for $5,000.00. Lessee enters into a long term lease arrangement with Lessor and agrees to pay $5,000.00 as an initial payment on the lease. When the motor vehicle is registered, there is no deduction for the $5,000.00, which resulted from the sale of the used motor vehicle.

3. Option 2.

a. If the lessor chooses Option 2, then the lessor must collect sales tax and long-term rental vehicle tax on all gross receipts paid or transferred by the lessee as consideration for the lease of the motor vehicle, including down payments and periodic payments. The lessor must report and remit sales tax and long-term rental vehicle tax regardless of whether the lessee timely makes the lease payments required in the lease agreement. Assignment of a lease agreement does not relieve the lessor from the obligations to remit sales or use tax and long-term rental vehicle tax. The lessor's obligation to remit tax ends at the earlier of the expiration of the lease term, or the valid termination of the lease as provided by the terms of the written lease agreement.

b. If the lessee makes an initial payment on the lease in the form of a payment of money or by transferring ownership of another motor vehicle, the value of the payment or motor vehicle is considered taxable gross receipts upon which gross receipts tax and long-term rental vehicle tax are due.

Example 1: Lessee owns a used motor vehicle valued at $5,000.00. Lessee enters into a long term lease arrangement with Lessor and agrees to transfer the used motor vehicle to Lessor as an initial payment on the lease. Lessor must collect gross receipts and long-term rental vehicle tax on $5,000.00 as consideration for the lease of the motor vehicle.

Example 2: Lessee owns a used motor vehicle which he sells for $5,000.00. Lessee enters into a long term lease arrangement with Lessor and agrees to pay $5,000.00 to Lessor as an initial payment on the lease. Lessor must collect gross receipts and long-term rental vehicle tax on $5,000.00 as consideration for the lease of the motor vehicle.

c. Trailers and semi-trailers are not "motor vehicles" and may not be registered exempt from gross receipts tax. The long-term lease of a trailer or semitrailer which has been registered and titled in Arkansas is not subject to gross receipts or long-term rental vehicle tax.

d. A motor vehicle used for long-term or short term rental that was registered in Arkansas and Arkansas sales or use tax was paid or credited prior to August 1, 1997, may be leased on a long-term basis without the collection of sales tax and long-term rental vehicle tax. This presumes that the lessor remains the same. If the original lessor sells the motor vehicle on or after August 1, 1997, then the new lessor has the options described in GR-20(D)(1).

e. A motor vehicle that was registered exempt from sales tax or use tax prior to August 1, 1997, as a short-term rental vehicle may be subsequently leased on a long-term basis. The lessor must choose Option 1 or Option 2 as described in GR-20(D)(1).

(1) If the lessor chooses Option 1, then the lessor must only re-title the vehicle in the lessor's name and pay sales tax at the time of registration. The sales tax will be based on the lessor's purchase price of the vehicle.

(2) If the lessor chooses Option 2, then the lessor must register with the Sales and Use Tax Section as a long-term rental business, obtain a new rental exemption certificate from the Sales and Use Tax Section, and retitle the vehicle in the lessor's name. No sales tax will be paid at the time of registration; however, the lessor must collect and remit sales tax and long-term rental vehicle tax on the monthly (or other periodic) lease payments.

4. Definitions for Motor Vehicle Leasing.

a. A motor vehicle is "leased on a long-term basis on or after August 1, 1997," when the written lease agreement covering the motor vehicle is signed by the lessee on or after August 1, 1997, and the motor vehicle was not registered and titled in Arkansas by the lessor before August 1, 1997.

b. Rental term. Whether a rental of a motor vehicle is considered long-term or short-term is dependent on the written contract and period for which payment is initially due. If a vehicle is rented initially for fourteen (14) days with the rental contract reflecting a term of rental for fourteen (14) days and the customer subsequently decides to continue renting the vehicle for twenty-one (21) more days, the transaction is treated as two short-term rentals, not one long-term rental.

c. "Lessor" means the person who owns the motor vehicle at the time that the lessee signs the lease agreement. The lessor is presumed to be the vehicle owner if the vehicle is titled in the name of the lessor or if the lessor is the last person to whom the vehicle title has been assigned at the time of the lease agreement. Lessor does not include an assignee of the lease agreement or of the vehicle when the assignment occurs after the lessee signs the lease.

5.

a. If a motor vehicle is initially leased to an Arkansas resident under Option 2 and the lessee later becomes a resident of another state during the term of the lease, then the lessor is no longer required to collect and remit Arkansas sales tax and long-term rental tax on the remainder of the monthly lease payments. The lessor must maintain records which accurately reflect that the motor vehicle is no longer leased to an Arkansas resident.

b. If a motor vehicle is initially leased to a resident of another state and the lessee later becomes a resident of Arkansas during the term of the lease, then the lessor must begin collecting and reporting Arkansas sales tax and long-term rental tax only if no tax was paid to another state when the motor vehicle was registered and the lessor chooses Option 2. If no tax was paid to another state and the lessor chooses Option 1, then the lessor must pay state and local use tax on the stated invoice price of the motor vehicle and not collect sales or long-term rental tax from the lessee. If tax was paid to another state and the motor vehicle was first registered in another state, then the lessor is entitled to credit against the Arkansas use tax for taxes paid to the other state, and pay the balance due, if any.

Example 1: Lessee is a Georgia resident at the inception of the twenty-four (24) month motor vehicle lease which notes the invoice price of the motor vehicle as $30,000. The motor vehicle was registered in Georgia; however, no Georgia sales tax was paid. The lessor collected applicable Georgia sales taxes on the monthly rental payments. One year later, Lessee becomes an Arkansas resident and brings his leased car to Arkansas. Lessor chooses Option 1. When Lessee (or Lessor) registers the motor vehicle in Arkansas, Arkansas use tax is due based on the invoice price of $30,000. Lessor will not be obligated to collect and remit tax on the monthly lease payments. No credit is given for taxes paid on the monthly lease payments.

Example 2: Lessee is a Georgia resident at the inception of the twenty-four (24) month motor vehicle lease which notes the invoice price of the motor vehicle as $30,000. The motor vehicle was registered in Georgia; however, no Georgia sales tax was paid. The lessor collected applicable Georgia sales taxes on the monthly rental payments. One year later, Lessee becomes an Arkansas resident and brings his leased car to Arkansas. Lessor chooses Option 2. Lessor must obtain an Arkansas sales tax permit and rental exemption certificate before the motor vehicle may be registered tax free. Lessor must collect and remit tax on the monthly lease payments.

Example 3: Lessee is a Georgia resident at the inception of the twenty-four (24) month motor vehicle lease which notes the invoice price of the motor vehicle as $30,000. The motor vehicle was registered in Georgia and Georgia sales tax paid on the invoice price. The Georgia sales tax rate exceeds the Arkansas sales tax rate. One year later, Lessee becomes an Arkansas resident and brings his leased car to Arkansas. Lessor is not required to collect and remit tax on the monthly lease payments because tax was paid to Georgia when the vehicle was registered.

Example 4: Lessee is a Georgia resident at the inception of the twenty-four (24) month motor vehicle lease which notes the invoice price of the motor vehicle as $30,000. The motor vehicle was registered in Georgia and Georgia sales tax paid on the invoice price. The Georgia sales tax rate is less than the Arkansas sales tax rate. One year later, Lessee becomes an Arkansas resident and brings his leased car to Arkansas. If Lessor chooses Option 1, Lessor is to pay the difference between the Georgia tax and Arkansas tax at registration. If Lessor chooses Option 2, Lessor must obtain an Arkansas sales tax permit and rental certificate. Lessor must collect and remit tax on the monthly rental payments.

6. Direct Pay Permit.

Option 1: Sales or use tax must be paid at the time of registration of the motor vehicle. A lessee holding a direct pay permit may not accrue and remit sales or use tax on the motor vehicle.

Option 2: If a lessee holds a direct pay tax permit, then the lessor is not obligated to collect state and local sales tax or long-term rental tax from the lessee. The lessor must maintain records reflecting that the lessee intends to report and remit the tax on its monthly tax report under its direct pay permit number. No Manufacturer's Investment Credit or InvestArk may be taken to offset liability of a direct pay permit holder for long-term rental tax or short-term rental tax.

7. International Registration Plan.

a. "International registration plan" means the International Registration Plan, Inc. ("IRP"), the Uniform Vehicle Registration Proration and Reciprocity Agreement, or any other registration plan that provides for the apportionment of a commercial vehicle's registration fee in a manner consistent with Ark. Code Ann. § 27-14-501, et seq.

b. The taxability of gross receipts derived from a truck or trailer registered under the Arkansas IRP is determined by GR-20(D).

E. SHORT-TERM RENTALS OF TANGIBLE PERSONAL PROPERTY (Except for Motor Vehicles).

1. In addition to the state and local sales tax, a one percent (1%) short-term rental tax (see Ark. Code Ann. § 26-63-301 and ET-5) is to be collected by the lessor on short-term rentals of tangible personal property regardless of whether Arkansas gross receipts or use tax was paid by the lessor at the time of purchase.

2. A lessor may purchase property intended for subsequent lease without paying Arkansas gross receipts or use tax if the seller establishes the requirements necessary for a sale-for-resale exemption. (See GR-53.)

3. Repair parts purchased to keep the rental property in working order are exempt from gross receipts tax as sales for resale. (See GR-53.)

4. Lessors must maintain sufficient records to establish the intended term of the rental. In the absence of adequate documentation, payment by the lessee for rental charges for periods of less than thirty (30) days shall be evidence that the term of the rental was for less than thirty (30) days.

F. SHORT-TERM RENTALS OF MOTOR VEHICLES.

1. All short-term rentals of motor vehicles, including diesel trucks, are subject to state and local gross receipts tax regardless of whether tax was paid on the vehicle at registration. In addition to the state and local gross receipts (sales) tax, every person in the business of renting licensed motor vehicles in Arkansas must collect rental vehicle tax (see Ark. Code Ann. § 26-63-302 and ET-6) on short-term rentals of licensed motor vehicles. See GR-12(D)(2) for definition of "licensed motor vehicle".

2. The gross receipts or gross proceeds derived from the sale of a motor vehicle to a person engaged in the business of renting a motor vehicle required to be licensed is exempt from state and local sales or use taxes if the motor vehicle is used exclusively for the purpose of rentals for periods of less than thirty (30) days.

3. The lessor must retain records for at least six (6) years that establish the rental history of each vehicle including copies of written contracts with the lessee and mileage incurred on the vehicle by each lessee. Failure to adequately document the exclusive use of the vehicle for rentals will constitute a presumption that the vehicle was not exclusively used for rentals resulting in the revocation of the sales tax exemption claimed at the time of registration of the vehicle. (See GR-12.)

G. RENTAL OF TANGIBLE PERSONAL PROPERTY WITH OPERATOR. If tangible personal property is rented with an operator's services included, the rental of the property and operator service is a non-taxable service, provided that the service alone would have been exempt from tax. If, however, the property alone is rented, then the sales and rental tax shall apply.

H. The chart below sets forth the various taxes that must be collected on the described short term rentals.

I. The lease or rental of tangible personal property, including motor vehicles, is sourced in accordance with Ark. Code Ann. § 26-52-521 and GR-76.

SHORT TERM RENTALS Less than 30 days	State Sales Tax 6% + local	Residential Moving Tax 4.5%	Rental Vehicle Tax 10% + local	Short Term Rental Tax 1%	Total State Tax Rate
TRUCKS - Diesel For commercial shipping	Y	N	N	N	6%
TRUCKS - Diesel For residential moving	Y	Y	N	N	10.5%
TRUCKS - Diesel For purpose other than residential moving or commercial shipping	Y	N	Y	N	16%
TRUCKS - Gasoline For residential moving	Y	Y	N	N	10.5%
TRUCKS - Gasoline For any other purpose	Y	N	Y	N	16%
CARS, MOTORCYCLES	Y	N	Y	N	16%
TRAILERS WITH VEHICLE For residential moving	Y	Y	N	N	16%
TRAILERS WITH VEHICLE For commercial shipping with diesel truck	Y	N	N	N	6%
TRAILERS WITH VEHICLE (see note 1) For other purpose	Y	N	Y	N	16% See note 1 below.
TRAILERS W/O VEHICLE For residential moving	Y	N	N	N	6%
TRAILERS W/O VEHICLE For commercial shipping	Y	N	N	N	6%
TRAILERS W/O VEHICLE For other purpose	Y	N	N	N	6%
MOVING MATERIALS Sale or lease with truck for residential moving - same invoice	Y	Y	N	N	10.5%
MOVING MATERIALS Sale for non-residential move or w/o truck	Y	N	N	N	6%
MOVING MATERIALS Lease for non-residential move or w/o truck	Y	N	N	Y	7%

006.05.06 Ark. Code R. 005-GR-20

Ark. Code Ann. §§ 26-52-103; 26-63-301 et seq.