New Englanders know a thing or two about “taxation without representation.” So do car rental companies. Predatory excise taxes on car rental bills are increasingly being levied to pay for everything from football stadiums to light rail lines to performing arts centers.

A case in Rhode Island illustrates a sneak attack on a heretofore safe target for car rental companies—taxing damage repair reimbursements.

The point of dispute arises when customers choose not to buy CDW. They are ultimately responsible to indemnify the vehicle or equipment rental company for any damage they sustain. In that scenario, the rental company has the vehicle or equipment repaired and charges the customer for reimbursement. The customer either pays the amount directly, or, in most cases, an insurance company is responsible for the repair reimbursement.

In a case involving PVD Rental Inc., a U-Save car rental operator, the Rhode Island Division of Taxation is assessing sales tax on the company for that reimbursement.

Not Insurance
The case is being handled by Moore McLaughlin of McLaughlin & Quinn LLC in Providence. McLaughlin says the Rhode Island sales tax auditor relies on a regulation that states that the Rhode Island sales tax is “computed on the gross amount without any allowance for…insurance…”

McLaughlin contends that this regulation is to have been intended for long-term leases in which the lessor requires the lessee to maintain adequate insurance. A portion of the insurance premium is collected with each monthly payment, analogous to the bank that escrows a small amount in a homeowner’s monthly payment for homeowner’s insurance.

In the present case, however, the amounts being reimbursed are not “insurance.” In fact, these amounts arise as a result of not purchasing the insurance. As a fallback position, the auditor merely maintains that any payment from the customer to the rental company must be pursuant to the rental agreement and is therefore part of the cost of renting the vehicle or equipment. As a result, everything must be taxed.

Financial Harm to Rental Companies
A Fight to the McLaughlin says informal inquiries of other vehicle and equipment rental companies in Rhode Island confirmed that this position by the Rhode Island Division of Taxation is novel in Rhode Island and would result in financial harm to the rental companies.

McLaughlin’s survey of sales and similar taxes in other states has uncovered no other law, regulation or case that attempts to impose a tax on these types of reimbursements, except for a Pennsylvania Sales and Use Tax Ruling. Conversely, several cases in other states have specifically held that those states’ sales, use or vehicle rental taxes do not apply to these types of reimbursements.

Even more peculiar in Rhode Island, McLaughlin says, is the fact that the vehicle and equipment rental companies pay Rhode Island sales tax on a portion of the costs when the vehicles or equipment is repaired. So, in essence, Rhode Island is attempting to collect the sales tax twice on the same transaction.

In sales tax parlance, this doubling-up is known as “stacking” or “pyramiding.”

“Reasonable tax policy avoids stacking and pyramiding,” says McLaughlin.

State Supreme Court
McLaughlin is taking the case through the system; however, he says in R.I. tax cases, the appeals process does not necessarily favor the defendant. Ultimately, this case could have Rhode Island Supreme Court implications. The entire process can take upwards of two years.

In Rhode Island, the sales tax is 7 percent. For an incident that costs $5,000 in damage repairs, the rental company would owe $350 in taxes. McLaughlin points out that the tax bill could be in the thousands for many car rental companies.

Those interested in learning more about this case can reach Moore McLaughlin at mmclaughlin@mclaughlinquinn.com. Perhaps another tea party is in order?