When a rented machine's purchase option is exercised, are the dealer's 'rental service charges' — really interest on the amount financed — taxable as part of the sale price?

Plain-English summary

Ridings Equipment Corp. is a dealer in heavy construction equipment that also finances purchases for its customers. It may rent a machine to a customer with an option to purchase after a period, and if the option is exercised the customer gets 100% credit for all rent previously paid. At the time of purchase, the invoice includes "rental service charges," which Ridings says are interest charges on the amount financed (a term it says the industry uses for interest). Ridings argued these charges are exempt from sales tax as part of a financing arrangement on an installment sale. It asked whether they're taxable.

The Department held the charges are taxable.

• The taxable receipt is the full sale price. Section 1105(a) taxes the receipts from the sale of tangible personal property, and § 1101(b)(3) defines "receipt" as the sale price valued in money, without any deduction for expenses or early-payment discounts.
• These charges are part of the sale price. The "rental service charges" billed when the purchase option is exercised are part of the price of the machinery, and so are part of the taxable receipt.
• They aren't exempt interest. The charges do not constitute a charge for credit extended at the time of sale, so they don't qualify for the exemption that applies to that kind of interest charge.
• Result: the "rental service charges" are subject to sales tax as part of the machinery's sale price.

What this means for you

Labeling a charge "interest" or "service" doesn't make it exempt. New York's taxable receipt is the sale price with no deduction for expenses. If a charge is really part of what the buyer pays to get the goods, it's in the taxable base — regardless of the name on the invoice line.

Only genuine interest on credit extended at the time of sale is excluded. The exemption is narrow: it's for a separately stated charge for credit the seller extends at sale. Finance-type charges that are baked into the price when a rent-to-own option is exercised generally don't fit that exclusion.

Rent-to-own conversions need care. When a rental with a purchase option converts to a sale, look hard at every add-on in the purchase invoice. Charges tied to the purchase price (even ones the industry calls "interest") are likely part of the taxable receipt.

Common questions

Q: We call them 'rental service charges' meaning interest — why are they taxed?
A: Because on these facts they're part of the machinery's sale price, and the taxable receipt (§ 1101(b)(3)) allows no deduction for expenses. The name doesn't control; being part of the sale price does.

Q: Isn't interest on an installment sale exempt?
A: Only a charge for credit extended at the time of sale gets that exemption. The Department found these charges weren't credit extended at the time of sale, so the exemption didn't apply.

Q: The customer got 100% credit for prior rent — does that matter?
A: The rent credit reduces what's owed, but the "rental service charges" added at the purchase were still part of the sale price and thus taxable.

Citations and references

Statutes and authority:

• Tax Law § 1105(a) — taxes the receipts from sales of tangible personal property
• Tax Law § 1101(b)(3) — defines "receipt" as the sale price valued in money, with no deduction for expenses or early-payment discounts (only a charge for credit extended at the time of sale is treated differently)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1981.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a81_4s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-81(4)S
Sales Tax
August 7, 1981

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S810217A

On February 17, 1981 a Petition for Advisory Opinion was received from Ridings Equipment
Corp., 60 Paul Road, Rochester, New York.
The issue raised is whether New York State Sales Tax is applicable to certain charges,
referred by Petitioner as "rental service charges", made to customers at the time an option to
purchase rented property is exercised.
Petitioner, a dealer in heavy construction equipment, is also involved in financing equipment
purchases for its customers and may make arrangements whereby a customer may rent a piece of
machinery with an option to purchase it after a period of time, whereupon the customer will receive
one hundred percent credit for all rent previously paid. At the time of purchase charges called "rental
service charges," comprising "interest charges on the amount financed," are included in the invoice
amount. Petitioner states that it is commonly held in the heavy equipment industry that "rental
service charges" refer to interest charges, and that this is true in this case. Petitioner asserts that these
charges are exempt from sales tax as they are nothing more than part of a financial arrangement in
connection with an installment sale.
Section 1105(a) of the Tax Law imposes a tax on the receipts from the sale of tangible
personal property. Section 1101(b)(3) of the Tax Law defines the term "receipt" as "The amount of
the sale price of any property and the charge for any service taxable under this article, valued in
money, whether received in money or otherwise, including any amount for which credit is allowed
by the vendor to the purchaser, without any deduction for expenses or early payment discounts . . .".
The "rental service charges" billed by Petitioner to his customers comprise part of the sale
price of the machinery sold, and as such are part of the receipt subject to sales tax. Such amounts do
not constitute a charge for credit extended at the time of sale and therefore do not enjoy the
exemption applicable to such an interest charge.

DATED: July 21, 1981

JAMES H. TULLY., COMMISSIONER
TP-8 (4/80)

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau

LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR