When does Georgia sales tax apply to a rental-car reservation fee, a full advance payment, or a retained cancellation charge?

Plain-English summary

A short-term car-rental company planned two payment options. A Reservation Fee would be less than the anticipated total, paid when booking, and later applied to final rental charges. An Advance Payment would pay all expected rental charges in full when booking, unless the customer changed the contract. Either payment might be refundable or nonrefundable, and the company did not hold a specific vehicle for a no-show customer throughout the reserved period.

The Department treated the options differently:

• Reservation Fee: not taxable when collected. It secured only a potential right to rent, not possession or control of a specific car, and the final sales price still depended on time, mileage, and other events. If the rental occurred, the full final price -- including the fee as partial payment -- became taxable when calculated and charged after return. If no rental occurred, a retained fee was a nontaxable cancellation penalty.
• Advance Payment: taxable when collected because it was the predetermined full sales price and consideration for the prospective rental. If the rental never occurred, the company had to refund the sales tax to the customer, even if it retained the underlying payment as a cancellation charge.

The ruling addresses Georgia sales and use tax. Its footnote notes that local governments may impose separate rental-car excise taxes governed by their own rules.

What this means for you

Rental-car companies

The label is less important than what the payment buys. A partial booking amount that does not secure a particular vehicle was treated differently from full payment for the agreed rental terms.

Billing and refund teams

Track tax separately from retained cancellation revenue. When no rental occurs, a kept payment may become a penalty rather than rental consideration, but any sales tax collected in anticipation of the rental must be refunded to the customer or otherwise handled as the statute requires.

Common questions

Q: Is a partial reservation fee taxable when the customer books?

A: No. It did not transfer possession or control of a car or guarantee a specific vehicle and was not yet rental consideration.

Q: What happens to that fee if the customer completes the rental?

A: It is applied to the final sales price, and tax is collected on the entire rental charge when that price is calculated and charged.

Q: Is a nonrefundable reservation fee taxable when the customer never appears?

A: No. With no rental and no vehicle held for the full period, the retained amount is a cancellation penalty rather than consideration for tangible personal property.

Q: When is a full advance payment taxed?

A: When collected, because it is the predetermined sales price for the agreed rental unless the contract changes.

Q: What if an advance-paid customer cancels and receives no car?

A: The company must refund the collected sales tax. The retained advance payment may function as a cancellation fee, but no taxable rental occurred.

Q: Can another rental company rely on this ruling?

A: No. It applies only to the requesting company's reservation practices, payment terms, and facts.

Citations and references

Authorities:

• O.C.G.A. § 48-8-2(17) -- rental definition
• O.C.G.A. § 48-8-2(34)(A)(iii) -- sales price
• O.C.G.A. § 48-8-30(a), (d) -- tax on rentals and dealer collection
• O.C.G.A. § 48-8-58 -- credit when collected tax is refunded
• Ga. Comp. R. & Regs. r. 560-12-1-.11 -- dealer rental collection rule

Source

• Landing page: Georgia Sales & Use Tax Letter Rulings
• Original PDF: LR SUT-2017-09

Original ruling text

Georgia Letter Ruling: LR SUT-2017-09
Dated: March 8, 2017
Topic: Motor Vehicle Leases – Sales Price
This letter is in response to your request for guidance on the application of Georgia sales and use tax to certain rental
charges assessed by [Redacted] and its subsidiaries (“Taxpayer”).
Facts Presented by Taxpayer
Taxpayer provides short-term motor vehicle rentals to business, leisure, and insurance/warranty replacement
customers.
When a customer reserves a rental car, Taxpayer makes a notation in its records that the customer expressed the desire
and intention to rent a vehicle of a class at a specified time and location for a specified duration on the terms imposed
by Taxpayer. Generally, Taxpayer does not accept reservations for specific vehicles or even specific vehicle models. 1
If a customer does not show at the specified date and time, the allotted rental vehicle is made available to other
customers. Taxpayer does not set aside a vehicle for the length of an unfulfilled reservation.
Taxpayer’s charges for motor vehicle rental include charges for time, mileage, fuel, liability waivers, personal accident
insurance, navigation systems, taxes, fees, and cost recoveries. Taxpayer normally collects payment in satisfaction of
rental charges at the time the car is returned, although in certain instances time and mileage charges are collected in
advance.
Taxpayer intends to offer its customers additional payment options, including the following payment options:


Reservation Fee. Taxpayer collects the Reservation Fee at the time the reservation is made. It varies in amount,
but it will always be less than the total anticipated charges. The Reservation Fee will be applied to the total rental
charges upon completion of the rental. The Reservation Fee may be refundable or non-refundable.



Advance Payment. Taxpayer collects the Advance Payment at the time the reservation is made. This is payment
in full of all rental charges, as long as the customer does not alter the terms of the rental contract. The Advance
Payment may be refundable or non-refundable.

Issues
1.

Is the Reservation Fee subject to sales and use tax? If so, at what time should tax be paid and remitted? Is the
Reservation Fee subject to tax if the customer does not appear and forfeits a non-refundable fee?

2.

Is the Advance Payment subject to sales and use tax? If so, at what time should tax be paid and remitted? Is the
Advance Payment subject to tax if the customer does not appear and forfeits a non-refundable payment?

Analysis
Georgia levies and imposes a tax (subject to certain specific exemptions) on the retail purchase, retail sale, rental,
storage, use, or consumption of tangible personal property and on certain services. 2 A “rental” is any transfer of
possession or control of tangible personal property for a fixed or indeterminate term for consideration. 3 Therefore,
tax is imposed on a car rental transaction at the time when consideration is paid in exchange for possession or control
of a car.

“Making Reservations – Legal” Rental Qualifications and Requirements. [Redacted Taxpayer’s website link]. Last
accessed May 6, 2016.
2
O.C.G.A. § 48-8-30(a). In addition, each county and municipality may levy rental car excise taxes. The imposition,
payment, and collection of that tax are controlled by the applicable local government. O.C.G.A. § 48-13-90, et seq.
3
O.C.G.A. § 48-8-2(17).
1

Georgia Letter Ruling: LR SUT-2017-09
Dated: March 8, 2017
Topic: Motor Vehicle Leases – Sales Price
Page 2 of 3
Any person offering cars for rent in Georgia must register as a dealer. Every dealer renting tangible personal property
at retail must add the proper amount of sales and use tax to the sales price. 4 “Sales price” is “the total amount of
consideration, including cash, credit, property, and services, for which personal property or services are sold, leased,
or rented…without any deduction for…[c]harges by the seller for any services necessary to complete the sale.” 5
While not directly on point, the regulation regarding Georgia’s hotel-motel fee is instructive. It provides: “when the
agreement between the customer and the hotel provides that the room will not be released or offered to other occupants
even if the customer never occupies the room, the innkeeper must collect the state hotel-motel fee for every night for
which the customer has reserved and paid for the room, regardless of whether the customer actually stays in the
room.”6 In that instance, a taxable sale occurs if a room is held for the customer, regardless of whether it is used.
Taxability of Reservation Fees and Advance Payments turns on whether a room is fully set aside for a customer.
Reservation Fees
Under the Reservation Fee payment option, a customer is able to exercise control and possession of a car by virtue of
paying the Fee and agreeing to additional conditions, but the consideration required to complete the rental transaction
is not determined until customer’s possession of the car concludes. The Reservation Fee holds the customer’s ability
to rent a car until a time certain at the beginning of the reservation period. The Reservation Fee secures a potential
right to rent a car, but that Fee does not guarantee, nor is it consideration for, the right to the use or possession of a
specific car. Since events during customer’s possession, such as time and mileage, contribute to the determination of
the sales price, the consideration for the rental cannot be determined until the customer returns the car to Taxpayer.
At that time, the sales price is calculated and Taxpayer is required to collect the sales tax on the final sales price, the
total rental charges to which the Reservation Fee is then applied.
If a Reservation Fee is paid but the rental car reservations are cancelled, either affirmatively or by the customer’s
failure to appear to take possession of the car, no car is set aside for the customer. Applying the rationale set forth in
the hotel-motel fee regulation, no taxable rental occurs if a customer does not have possession of, or the right to
possession of the car. Since cancellation does not amount to or result in the rental of tangible personal property, any
retained deposits or non-refundable fees imposed by Taxpayer are in the nature of a cancellation penalty and are not
subject to tax.
Advance Payment
Unlike the Reservation Fee, the Advance Payment is made pursuant to an agreement stating that the amount of the
Advance Payment will be the sales price unless the customer changes the terms of the rental. The Advance Payment
is a predetermined sales price entitling the customer to certain terms for possession or control of a car, so the Payment
is full consideration for the car rental upon the time of possession or control of a car. At the time consideration is
exchanged for the right to control the vehicle, Taxpayer is required to collect the sales tax on the total rental charges.
Thus, unless the rental agreement is modified, Taxpayer is required to collect the sales tax based on the Advance
Payment since it will be the final sales price.
Sales and use tax is not levied or imposed unless there is a rental of tangible personal property. 7 If no car rental occurs,
any tax collected in anticipation of a future rental was erroneously collected. Such tax must be remitted to the
Department unless properly refunded to the customer.8 Therefore, when a reservation is cancelled during a free
cancellation period and Taxpayer refunds the Advance Payment to its customer, Taxpayer should also refund to the
customer the corresponding amount of sales tax collected. When a reservation is cancelled and a cancellation fee, such

4

O.C.G.A. § 48-8-30(d); Ga. Comp. R. & Regs. r. 560-12-1-.11.
O.C.G.A. § 48-8-2(34)(A)(iii).
6
Ga. Comp. R. & Regs. r. 560-13-2-.01.
7
O.C.G.A. § 48-8-30.
8
See O.C.G.A. § 48-8-58 (if the purchaser returns property to a dealer and the dealer returns the collected taxes to
the purchaser, the dealer is entitled to a credit for the refunded taxes).
5

Georgia Letter Ruling: LR SUT-2017-09
Dated: March 8, 2017
Topic: Motor Vehicle Leases – Sales Price
Page 3 of 3
as one in the amount of the Advance Payment, is imposed, Taxpayer must still refund to customer any sales tax already
collected since there was no rental.9
Rulings
1.

If a customer takes possession of a rental car for temporary use after paying a Reservation Fee, the sales price for
this car rental is determined when the customer returns the vehicle to Taxpayer. Because the payment of a
Reservation Fee reserves only the right to rent a car but does not result in a specific car being set aside for the
customer for the entirety of the reserved period, the Reservation Fee is not consideration for rental of tangible
personal property and, thus, is not subject to sales and use tax. The result is the same whether the fee is refundable
or nonrefundable because in both cases no sale occurs.
Nevertheless, the entire sales price (to which the Reservation Fee may be applied as partial payment) is ultimately
subject to sales and use tax. Since every dealer renting tangible personal property must add sales and use tax to
the sales price, the tax should be collected from the customer when the sales price is calculated and charged.

2.

The Advance Payment is the sales price of a prospective car rental, and it serves as consideration for the rental
transaction. Since every dealer renting tangible personal property must add sales and use tax to the sales price,
the tax should be collected when the customer makes the Advance Payment. In the event that no rental occurs,
the collected tax should be refunded to the customer.

The opinions expressed in this ruling are based upon the information contained in your request and limited to the
specific transactions, facts, circumstances, and taxpayer in question. Should the circumstances regarding the
transactions change or differ materially from those represented, this ruling may become invalid. Subsequent statutory
or administrative rule changes or judicial interpretations of the statutes or rules upon which this ruling is based may
subject similar future transactions to different tax treatment than that expressed in this ruling.

9

In that situation, since the prepayment is not reimbursed and the customer receives no tangible personal property,
any fees charged or retained are in the nature of a penalty rather than a charge for car rentals.