Kentucky: Liability Waiver Contracts Not Subject to Kentucky Sales Tax
The Kentucky Board of Tax Appeals (“Board”) has found that rent-to-own companies were not required to collect sales tax on separate liability waiver contracts they offered to their customers to protect against property damage. Rent-A-Center East, Inc. et al. v. Finance & Admin. Cabinet, Dep’t of Revenue, Order No. K-25136, K14-R-17 (KBTA Sept. 9, 2016). Rent-A-Center and Rent-Way, Inc. (“Rent-A-Center”) are rent-to-own companies that rent and sell household goods to Kentucky and out-of-state customers. A customer who wishes to rent or purchase an item signs a Rental Purchase Agreement and pays a rental purchase fee. They also have the option of purchasing an extra damage waiver that protects against the customer’s potential liability for damage or loss, which is covered by a waiver fee. While Rent-A-Center collected and remitted sales tax on the rental purchase fee, it did not collect and remit sales tax on the waiver fee. The Board found that the waiver fees were related to the waiver agreement, which is not tangible personal property. Because they were not tangible personal property, they were not subject to Kentucky sales tax.
The Department argued that the separate fees should be included in Rent-A-Center’s gross receipts and that there was no specific exclusion of such fees in any statute. The Board first explained that Kentucky imposes a sales tax on gross receipts derived from retail sales of tangible personal property. The Board then determined that the waiver agreement is intangible personal property.
Agreements that govern transactions in multiple states are often not drafted with Kentucky sales tax in mind. Such an agreement may govern sales of intangibles, services, or tangible personal property, or sales of one or more of these. The Kentucky sales tax consequences turn on what is being sold. Intangible? Service? Tangible personal property? In this case, the sale was not of tangible personal property; rather, it was a sale of an intangible. The Board thus held consistently with the long-standing rule that sales of intangibles are not subject to Kentucky sales tax.