Are advance payments and reservation fees for a short-term car rental subject to Colorado sales tax — including when the customer never shows up — and does it matter whether the payment is refundable?
Plain-English summary
A short-term car-rental company normally collects rental charges when the vehicle is returned, but it wants to start offering advance payment options — reservation fees or full/partial prepayment. It asked the Department three things: are these advance payments taxable, when is the tax collected, and does it matter if the customer never shows up or if the payment is refundable?
The Department flagged that Colorado statutes and rules don't directly address advance payments for vehicle rentals, so it reasoned by analogy to hotel-room deposits, which are governed by Special Regulation 22 (SR-22) and its "50% rule." Motor-vehicle rentals, like hotel rooms, are taxable, and tax is figured on the purchase price (the total consideration the customer pays). For advance payments, the Department treated reservation fees and prepaid rental charges the same way and laid out this framework:
- Advance payment applied to the rental — taxable. Any prepayment that ultimately goes toward the rental charge is part of the taxable price.
- Nonrefundable payment > 50% of the daily rental charge — taxable, and the Department said it's appropriate to collect the tax at the time the nonrefundable payment is made. It's taxable either as it's applied to the eventual rental, or — if forfeited on cancellation or a no-show — as a charge for the rental of the vehicle.
- Nonrefundable payment ≤ 50% of the daily rental charge, forfeited — a nontaxable cancellation charge (mirrors the hotel cancellation-charge rule).
- Refundable payments (or amounts ≤ 50%) — tax need not be collected up front; collect it when the vehicle is rented and the customer pays the balance. If a refundable deposit is refunded due to cancellation, no tax is due, and any tax already collected should be refunded.
The Department noted that for practical reasons a company may elect to collect tax when a refundable advance payment is made, as long as it refunds that tax if the reservation is cancelled and the payment is returned. (The letter repeatedly used "we would expect" / "likely" language — it's analogy-based guidance, not a firm determination.)
What this means for you
Car-rental operators
Build your prepayment tax logic around two questions: is the advance payment refundable, and is it more than 50% of the daily rate? For nonrefundable prepayments above 50%, collect the tax at the time of payment — it's taxable whether the customer rents or forfeits by no-show/cancellation. For refundable deposits or small (≤50%) nonrefundable ones, you can wait and tax at the time of rental; refund any tax if you refund the deposit. Treat reservation fees and prepaid rental charges the same way.
No-shows and cancellations
A forfeited nonrefundable deposit over 50% of the daily rate is still taxable — the Department treats it as payment for the rental. A forfeited deposit of 50% or less is a nontaxable cancellation charge. Refunded deposits carry no tax.
Accountants advising rental and fleet clients
This is guidance by analogy: the Department imported the hotel SR-22 50% rule because no vehicle-rental-specific authority exists. That makes it persuasive but soft — note the "we would expect" framing. The core authorities are the motor-vehicle lease/rental tax (§§ 39-26-713(1)(a), 102(23)), the purchase-price rules (§§ 39-26-104(1)(a), 102(5)), and SR-22. Watch the home-rule-city caveat.
Common questions
Q: Is a car-rental reservation fee or prepayment taxable in Colorado?
A: If it's applied to the rental charge, yes. The Department also treats a nonrefundable prepayment over 50% of the daily rate as taxable when paid, even if later forfeited.
Q: A customer prepaid and never showed up. Do I owe tax on the forfeited amount?
A: If the forfeited payment was nonrefundable and exceeded 50% of the daily rental charge, yes — it's treated as a charge for the rental. If it was 50% or less, it's a nontaxable cancellation charge.
Q: When do I collect the tax — at booking or at rental?
A: For nonrefundable prepayments over 50% of the daily rate, collect at the time of payment. For refundable deposits or amounts of 50% or less, you can collect when the vehicle is rented and the balance is paid (though you may elect to collect earlier and refund if cancelled).
Q: What if I refund a refundable deposit?
A: No tax is due on a refunded deposit. If you had collected tax on it, refund that tax too.
Q: Can I rely on this letter?
A: Only as general guidance — and note it's reasoning by analogy to hotel rules, using "we would expect"/"likely" language. A General Information Letter is not binding on the Department. For a binding answer, request a private letter ruling.
Citations and references
Statutes and rules:
- § 39-26-713(1)(a), C.R.S. (sales tax on motor vehicle leases/rentals)
- § 39-26-102(23), C.R.S. (definition of lease/rental)
- § 39-26-104(1)(a), C.R.S. (tax calculated on the purchase price)
- § 39-26-102(5), (7)(a), C.R.S. (purchase price / total consideration)
- § 39-26-102(11), § 39-26-104(1)(f), C.R.S. (hotel-room analogue)
- 1 CCR 201-4, Rule 39-26-104.1(f) (hotel deposits)
- 1 CCR 201-5, SR-22 (deposit forfeits and cancellation charges; 50% rule)
Source
- Landing page: Colorado Sales & Use Tax Letter Rulings
- Original PDF: GIL-16-011.pdf
Original ruling text
Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]
GIL-16-011
July 6, 2016
XXXXXXXXXXXXXXXX
Attn: XXXXXXXXXXXXX
XXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXX
Re: Vehicle Rentals
Dear XXXXXXXXXXX,
You submitted on behalf of XXXXXXXXXXXXXXX (“Company”) a request for guidance regarding the
applicability of sales tax to vehicle rentals.
The Colorado Department of Revenue (“Department”) issues general information letters and private
letter rulings. A general information letter provides a general overview of the relevant tax issues, but
is not binding on the Department. A private letter ruling provides a specific determination for a
specific set of facts, is binding on the Department but not on the taxpayer, and requires payment of a
fee. For more information about general information letters and private letter rulings, please see
Department Rule 1 CCR 201-1, 24-35-103.5 at www.colorado.gov/pacific/tax/letter-rulings
The Department treats this request as one for a general information letter. It is important to
remember that general information letters, such as this one, are general discussions of tax law and
are not binding on the Department. If Company would like the Department to issue a private letter
ruling on the issue raised here, the retailer can submit a request and fee in compliance with
Department Rule 1 CCR 201-1, 24-35-103.5.
Issue
1. Are payments made in advance of vehicle rentals, in the form of either reservation fees or
payment for the full rental charge, subject to sales tax, and if so, when is the applicable sales
tax collected?
2. Are payments made in advance of vehicle rentals, in the form of either reservation fees or
payment for the full rental charge, subject to sales tax if the customer does not appear at the
scheduled time to rent the vehicle?
3. Is the taxability and timing of tax collection the same for both refundable and nonrefundable
payments made in advance of the vehicle rental?
Background
Company provides short-term motor vehicle rentals to business, leisure, and insurance/warranty
replacement customers. Company owns and operates various on and off-airport locations
throughout the United States and in Colorado. Company normally collects rental charges at the time
the rental vehicle is returned, although in certain instances time and mileage charges are collected in
advance. Company is considering offering its customers additional payment options, including full or
partial payment-in-advance of the actual vehicle rental.
Structure of Analysis
To determine whether payments Company collects in advance of vehicle rentals are subject to tax,
the Department will examine the following questions:
1) Are reservation fees taxable sales of goods or services under § 39-26-104, C.R.S.?
a)
Are charges similar to reservation fees, such as hotel room deposits, subject to tax
under § 39-26-104, C.R.S.?
b)
What does the characterization of deposit forfeitures and cancellation charges under
Department Rule 1 CCR 201-5, SR-22 suggest for the taxability of vehicle reservation
fees?
Discussion
Colorado levies sales and use tax on the rental of motor vehicles.1 Tax is calculated on the purchase
price.2 The purchase price means the price paid by the consumer and includes the total
consideration received by the vendor.3 However, various factors may affect the taxability of certain
charges and the timing of sales tax collection.
The taxability of advance payments for motor vehicle rentals is not explicitly addressed in statute,
regulation, or any published Departmental guidance.4 However, Colorado regulations and guidance
regarding sales tax on hotel rooms and accommodations serve as an appropriate analogue and help
elucidate the tax treatment of advance vehicle rental payments.
Colorado law imposes sales tax on hotel rooms and accommodations.5 Deposits made to reserve
hotel rooms are not taxable when paid in advance, but when rooms are furnished any previously
paid deposits are taxable.6 Furthermore, a deposit that is forfeited due to cancellation is considered
payment for a room and is therefore fully taxable if the charge is greater than 50% of the daily
reservation rate.7 Forfeited deposits that are less than 50% of the daily reservation room rate are
classified as cancellation charges and are not subject to tax.8
We would expect similar logic to govern advance payments for vehicle rentals. Like the rental of
hotel rooms, the rental of motor vehicles is taxable. Any advance payment applied toward the charge
for such rental is taxable. Additionally, when a nonrefundable advance payment that exceeds 50% of
the daily rental charge for the vehicle is forfeited due to cancellation or the customer’s failure to
appear at the scheduled time, we would expect it to be properly classifiable as a charge for the rental
of the vehicle and therefore taxable as well. Conversely, a nonrefundable advance payment of 50%
1
2
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5
6
7
8
2
§§ 39-23-102(23) and 713(1)(a), C.R.S.
§ 39-26-104(1)(a), C.R.S.
§§ 39-26-102(7)(a) and 102(5), C.R.S. See also Department Rule 39-26-102.7(a)
For the purpose of this General Information Letter, we do not distinguish advance payments designated
as “reservation fees,” that will ultimately be applied toward the rental charge, from advance payments
designated as “rental charges” at the time of payment. The discussion in this letter applies to advance
payments of either designation.
§§ 39-26-102(11) and 104(1)(f), C.R.S.
Department Rule 1 CCR 201-4, 39-26-104.1(f)
Department Rule 1 CCR 201-5, SR-22
Department Rule 1 CCR 201-5, SR-22
DR 4010A (06/11/14)
or less of the daily rental charge would likely be considered a nontaxable cancellation charge if it
was forfeited due to cancellation.
Consequently, it would seem appropriate to collect sales tax on any nonrefundable advance
payment that exceeds 50% of the daily rental charge at the time the nonrefundable advance
payment is made. Such nonrefundable advance payment is taxable either in its application toward
the charge for the ultimate vehicle rental or as a forfeited deposit if the vehicle rental is cancelled,
either explicitly or by the customer’s failure to appear at the designated time.
By contrast, tax likely need not be collected with advance payments that are refundable9 or that are
50% or less of the daily vehicle rental fee. Tax applicable to these types of advance payments can
be collected at the time when the vehicle is rented and the customer pays any remaining balance for
the rental charge. If nonrefundable advance payments that are less than 50% of the daily rental fee
are forfeited by either explicit cancellation or failure to appear, they would likely be considered
cancellation charges not subject to tax. Similarly, if a refundable advance payment is refunded due
to cancellation, no tax is due and any collected tax should be refunded.
Miscellaneous
This letter represents the good faith opinion of Department personnel who are knowledgeable on
state taxes issues. However, the Department does not make a specific determination here on any of
the issues raised and the Department is not bound by this general information letter.
The Department administers state and state-administered local sales and use taxes. This letter does
not address sales and use taxes administered by home-rule cities and home-rule counties. You may
wish to consult with local governments which administer their own sales or use taxes about the
applicability of those taxes. Visit our web site at www.colorado.gov/tax for more information about
state and local sales taxes.
Enclosed is a redacted version of this letter. Pursuant to statute and regulation, this redacted letter
will be made public within 60 days of the date of this letter. Please let me know in writing within that
60 day period whether you have any suggestions or concerns about this redacted letter.
Sincerely,
Office of Tax Policy Analysis
Colorado Department of Revenue
9
3
For practical reasons, Company may prefer and elect to collect tax at the time a refundable advance
payment is made. If the reservation is cancelled and the advance payment is refunded, the collected tax
should be refunded in the same manner.
DR 4010A (06/11/14)