How is a monthly car-subscription service taxed in Tennessee — is the whole fee a taxable motor-vehicle lease, and does the 3% rental car tax apply?

Plain-English summary

The taxpayer runs a car-subscription service in Tennessee — a "Netflix for cars." For a monthly fee, a subscriber can drive vehicles from a fleet (one at a time) and swap one vehicle for another, and the fee bundles in insurance, maintenance and repairs, and sales tax. There are two tiers, a one-time activation fee, and various add-on charges: a hold fee to pause the plan, a late fee, a cleaning fee (pets, smoking, or extra cleaning), and an additional-driver fee. Subscribers sign up in an app; the agreement has an initial term and then auto-renews monthly until either side cancels.

The Department answered two questions.

1. It's a taxable lease of a motor vehicle, and all the fees are part of the taxable price — under the "single article" rules. Handing a subscriber possession of a vehicle (tangible personal property) for a monthly charge, without transferring title, is a lease (§ 67-6-204(a)(1)). Letting the subscriber swap vehicles doesn't change that — it's still the lease of a motor vehicle. A motor vehicle is a "single article" (§ 67-6-702(d)), so Tennessee's single-article structure applies:

• the 7% state sales tax is due on the full price for the whole length of the lease;
• the local-option sales tax applies to the first $1,600 of the sales price (§ 67-6-702(a)(1)); and
• the 2.75% state single-article tax applies to the slice of the price from $1,600.01 up to $3,200 (§ 67-6-202(a)),

all computed on each billing cycle (Rule 1320-05-01-.32(2)). As long as the subscriber keeps renewing monthly, the Department treats it as one continuous lease of a motor vehicle until cancelled — even if the subscriber temporarily suspends with the hold fee. And the "sales price" sweeps in every fee: activation, monthly, hold, late, cleaning, and additional-driver fees all go into the amount that's taxed.

2. It's NOT subject to the 3% rental car tax — the term is too long. Tennessee adds a 3% rental car tax on the retail rental of private passenger vehicles rented in Tennessee for 31 days or less (§ 67-4-1901), levied on gross proceeds (excluding sales tax) and including gas, insurance, and related charges. This subscription is a lease for a term of more than 31 days, so the rental car tax doesn't apply.

The throughline: a monthly car subscription is a long-term motor-vehicle lease. That makes the whole fee bundle subject to sales tax under the single-article rules, but it also pushes the arrangement past the 31-day line that triggers the short-term rental car tax — so the subscription is sales-taxed but not rental-car-taxed.

What this means for you

Car-subscription and long-term vehicle-lease providers

Tennessee treats a vehicle subscription as a lease of a motor vehicle, full stop — substitution rights and bundled insurance/maintenance don't turn it into a service. Collect sales tax on the entire fee, including activation, hold/suspension, late, cleaning, and additional-driver charges, because they're all part of the lease's sales price. Apply the single-article computation (local-option cap at the first $1,600; the 2.75% state single-article tax from $1,600.01 to $3,200) per billing cycle, and treat an auto-renewing subscription as one continuing lease.

When the 3% rental car tax applies (and when it doesn't)

The rental car tax targets short-term rentals — 31 days or less. A subscription or lease that runs longer than 31 days is outside it. If you do both short-term rentals and longer subscriptions, the 31-day line decides which transactions carry the extra 3% surcharge.

Add-on fees ride into the taxable price

Activation, late, cleaning, suspension/hold, and additional-driver fees are consideration for the lease, so they're part of the taxable sales price — you can't peel them out as nontaxable "service" charges. (Compare Letter Rulings 18-04 and 18-05, where overage and penalty-type fees were likewise folded into the taxable rental price.)

Accountants and tax professionals

The analysis: (1) transfer of possession of a vehicle for consideration without title = "lease or rental" (§ 67-6-102(49)), taxable under § 67-6-204(a)(1); (2) a motor vehicle is a "single article" (§ 67-6-702(d)), so the local-option cap (§ 67-6-702(a)(1)) and the 2.75% state single-article tax (§ 67-6-202(a)) apply, computed per billing cycle (Rule 1320-05-01-.32(2)); (3) "sales price" (§ 67-6-102(79)(A)) sweeps in all the ancillary fees; (4) the rental car tax (§ 67-4-1901) reaches only rentals of 31 days or less, so a more-than-31-day subscription is exempt from it. (Note the footnote on out-of-state-dealer local-rate sourcing effective Oct. 1, 2019 — 2019 Tenn. Pub. Acts Ch. 491, § 2; Notice #19-05.)

Common questions

Q: Is a monthly car-subscription service taxable in Tennessee?
A: Yes, as a lease of a motor vehicle. The whole monthly fee — plus activation, hold, late, cleaning, and additional-driver fees — is subject to sales tax, computed under the single-article rules (§ 67-6-202(a); § 67-6-702(a)(1)).

Q: Does swapping vehicles or pausing the plan change the tax?
A: No. The Department treats an auto-renewing subscription as one continuing lease of a single article (a motor vehicle), even if the subscriber swaps vehicles or temporarily suspends with a hold fee.

Q: Do we also charge the 3% rental car tax?
A: No, not on this subscription. The rental car tax applies only to vehicle rentals of 31 days or less (§ 67-4-1901); a subscription that runs more than 31 days is outside it.

Q: Are the activation, late, and cleaning fees taxable?
A: Yes. They're part of the sales price of the lease, so they're included when calculating the sales tax due.

Q: Can I rely on this letter ruling?
A: No. A Tennessee letter ruling is binding on the Department only as to the specific taxpayer and facts it was issued to, and it can be revoked or modified. Confirm your own facts with a tax professional.

Citations and references

Tennessee statutes (Tenn. Code Ann.):

• § 67-6-204(a)(1) (tax on the sales price of all leases and rentals of tangible personal property germane to a regularly established business)
• § 67-6-202(a) (state single-article sales tax of 2.75% on the portion of a single article's price over $1,600 and up to $3,200); § 67-6-702(a)(1) (local-option sales tax; single-article cap on the first $1,600); § 67-6-702(d) (definition of "single article")
• § 67-6-102(78)(A) ("sale"); § 67-6-102(49) ("lease or rental"); § 67-6-102(79)(A) ("sales price"); § 67-6-102(89)(A) ("tangible personal property"); § 67-6-102(76) ("retail sale")
• § 67-4-1901, § 67-4-1901(a), (b) (rental car tax — 3% surcharge on retail rentals of private passenger motor vehicles rented in Tennessee for 31 days or less, on gross proceeds excluding sales taxes)

Rules:

• Tenn. Comp. R. & Regs. 1320-05-01-.32(2) (1987) (sales tax computed on the lease/rental billing cycle)

Related guidance:

• Tenn. Dep't of Revenue Notice #19-05 (out-of-state-dealer local-rate sourcing effective Oct. 1, 2019; 2019 Tenn. Pub. Acts Ch. 491, § 2)
• Tenn. Dep't of Revenue Ltr. Rul. 18-04 and Ltr. Rul. 18-05 (ancillary and penalty-type fees included in the taxable lease/rental price)

Source

• Landing page: https://www.tn.gov/revenue/tax-resources/legal-resources/tax-rulings.html
• Original PDF: https://www.tn.gov/content/dam/tn/revenue/documents/rulings/sales/19-08.pdf

Original ruling text

Letter rulings are binding on the Department only with respect to the individual taxpayer
being addressed in the ruling. This ruling is based on the particular facts and circumstances
presented, and is an interpretation of the law at a specific point in time. The law may have
changed since this ruling was issued, possibly rendering it obsolete. The presentation of this
ruling in a redacted form is provided solely for informational purposes, and is not intended as
a statement of Departmental policy. Taxpayers should consult with a tax professional before
relying on any aspect of this ruling.

The application of the Tennessee sales and use tax and the Tennessee rental car tax to the lease of
motor vehicles provided through a subscription service.

This letter ruling is an interpretation and application of the tax law as it relates to a specific set of
existing facts furnished to the Department by the taxpayer. The rulings herein are binding upon the
Department, and are applicable only to the individual taxpayer being addressed.
This letter ruling may be revoked or modified by the Commissioner at any time. Such revocation or
modification shall be effective retroactively unless the following conditions are met, in which case
the revocation shall be prospective only:
(A)

The taxpayer must not have misstated or omitted material facts involved in the
transaction;

(B)

Facts that develop later must not be materially different from the facts upon
which the ruling was based;

(C)

The applicable law must not have been changed or amended;

(D)

The ruling must have been issued originally with respect to a prospective or
proposed transaction; and

(E)

The taxpayer directly involved must have acted in good faith in relying upon the
ruling; and a retroactive revocation of the ruling must inure to the taxpayer’s
detriment.

[TAXPAYER] (the “Taxpayer”) provides a motor vehicle subscription service (the “Subscription
Service”) in Tennessee to qualified customers pursuant to a Subscription Agreement (the
“Agreement”). Under the terms of the Agreement, a qualified customer (the “Subscriber”) may use
one or more passenger motor vehicles available from a fleet of vehicles as provided in the
Agreement.

1

The Taxpayer offers two different subscription plans, [TIER 1] (Tier 1) and [TIER 2] (Tier 2). Under
both plans, all Subscribers must pay a one-time activation fee of [AMOUNT]. A [TIER 1] plan
Subscriber pays [AMOUNT] per month, which entitles the Subscriber to the use of any of the [TIER 1]
plan vehicles, but never more than one vehicle at a time. The [AMOUNT] monthly fee includes
liability insurance covering the Subscriber’s use of the vehicle, maintenance and repairs to the
vehicle, sales taxes, and the ability to exchange the vehicle for other motor vehicles available
through the [TIER 1] plan. A [TIER 1] plan Subscriber may also pay an additional fee of [AMOUNT] per
day to upgrade to a vehicle that is otherwise reserved for [TIER 2] plan Subscribers. Neither the
Taxpayer nor a [TIER 1] plan Subscriber executes a new Agreement or modifies an existing
Agreement if the Subscriber exchanges one [TIER 1] plan vehicle for another [TIER 1] plan vehicle
pursuant to the Agreement.
A [TIER 2] plan Subscriber pays [AMOUNT] per month, which entitles the Subscriber to the use of
any of the [TIER 2] plan vehicles, but never more than one vehicle at a time. The [AMOUNT] monthly
fee includes liability insurance covering the Subscriber’s use of the vehicle, maintenance and repairs
to the vehicle, sales taxes, and the ability to exchange the vehicle for other motor vehicles available
through the [TIER 2] plan. Neither the Taxpayer nor a [TIER 2] plan Subscriber executes a new
Agreement or modifies an existing Agreement if the Subscriber exchanges one [TIER 2] plan vehicle
for another [TIER 2] plan vehicle pursuant to the Agreement.
Both the [TIER 1] and [TIER 2] plans provide for additional fees to be charged under certain
circumstances as provided in the Agreement. The additional fees are a [AMOUNT] hold fee, a
[AMOUNT] late fee, a cleaning fee of up to [AMOUNT] and fees for use of vehicles by [AN
1
2
ADDITIONAL] Driver (the “[ADDITIONAL] Driver fee”).
Subscribers under both plans may suspend their Subscription Service for [A PERIOD OF TIME] by
paying a [AMOUNT] hold fee. The Taxpayer charges Subscribers a [AMOUNT] late fee if the Taxpayer
is unable to process a monthly subscription fee on the date due. Subscribers may be charged a
cleaning fee if evidence of pets, or smoking is found, or if more than normal cleaning is necessary to
make a vehicle ready for use by another Subscriber.
Potential Subscribers register for the Subscription Service using the Taxpayer’s mobile app and
payments are made by credit or debit card. Upon approval, Subscribers must pay a one-time
activation [REDACTED] fee of [AMOUNT] and the first month’s subscription fee to begin the
Subscription Service. The Agreement has an initial term of [NUMBER] days. After the initial term, the
Agreement renews automatically (i.e., without execution of a new Agreement or modification of an
existing Agreement) on a monthly basis until either the Subscriber or the Taxpayer elects to
terminate the Agreement.

1.

Are the Taxpayer’s activation fees, monthly subscription fees, [AMOUNT] hold fees,
[AMOUNT] late fees, cleaning fees, and [ADDITIONAL] Driver fees subject to the 2.75% state
“single article” sales tax under TENN. CODE ANN. § 67-6-202(a) (2018) and the $1,600 limitation
on the local option sales tax under TENN. CODE ANN. § 67-6-702(a)(1) (2018)?

1

[REDACTED].

2

The amount of this fee is not specified in the Agreement.

2

Ruling: The Taxpayer’s activation fees, monthly subscription fees, [AMOUNT] late fees,
cleaning fees, [AMOUNT] hold fees and [ADDITIONAL] Driver fees are subject to the $1,600
limitation on the local option sales tax under TENN. CODE ANN. § 67-6-702(a)(1) (2018) and the
2.75% state single article sales tax under TENN. CODE ANN. § 67-6-202(a) (2018).
2.

Are the Taxpayer’s subscription fees subject to the rental car tax?
Ruling: No. The Taxpayer’s subscription fees are not subject to the rental car tax pursuant to
TENN. CODE ANN. § 67-4-1901 (Supp. 2018) because the Agreement entered into between the
Taxpayer and the Subscriber constitutes the lease of a motor vehicle in Tennessee for a term
of more than thirty-one (31) days.

3

Under the Retailers’ Sales Tax Act, the retail sale in Tennessee of tangible personal property and
specifically enumerated services are subject to the sales and use tax, unless an exemption applies.
“Retail sale” is defined as “any sale, lease, or rental for any purpose other than for resale, sublease,
4
or subrent.”
TENN. CODE ANN. § 67-6-102(78)(A) defines “sale,” in pertinent part, to mean “any transfer of title or
possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by
any means whatsoever of tangible personal property for a consideration.” Furthermore, TENN. CODE
ANN. § 67-6-102(49) defines “lease or rental” as “any transfer of possession or control of tangible
personal property for a fixed or indeterminate term for consideration.” “A ‘lease or rental’ may
5
include future options to purchase or extend.” “Tangible personal property” includes “property that
can be seen, weighed, measured, felt, or touched, or that is in any other manner perceptible to the
6
senses.”
TENN. CODE ANN. § 67-6-204(a)(1) (2018) imposes a tax on the sales price of all leases and rentals of
tangible personal property where the lease or rental is part of the taxpayer’s regularly established
business or is incidental or germane to its regularly established business. “Sales price” is defined as
“the total amount of consideration, including cash, credit, property, and services, for which personal
7
property or services are sold, leased, or rented.” The sales tax is computed based on the billing
8
cycle set forth in the applicable lease or rental contract.
Under the terms of the Agreement at issue, the Subscriber pays the Taxpayer a monthly fee for the
use of a vehicle. The Taxpayer is transferring possession of the vehicle, which is tangible personal
3

Tennessee Retailers’ Sales Tax Act, ch. 3, §§ 1-18, 1947 Tenn. Pub. Acts 22, 22-54 (codified as amended at TENN. CODE ANN.
§§ 67-6-101 to -907 (2018).
4

TENN. CODE ANN. § 67-6-102(76) (2018).

5

Id.

6

TENN. CODE ANN. § 67-6-102(89)(A).
TENN. CODE ANN. § 67-6-102(79)(A).

7

8

TENN. COMP. R. & REGS. 1320-05-01-.32(2) (1987).

3

property, to the Subscriber for a consideration, without transferring title to the vehicle. Although the
Subscriber may substitute one vehicle for another during the term of the Agreement, it nonetheless
constitutes the lease of a motor vehicle in Tennessee. Thus, the Agreement is subject to the
Tennessee sales and use tax.
SINGLE ARTICLE LIMITATION
TENN. CODE ANN. § 67-6-702(a)(1) (2018) authorizes counties and incorporated cities to impose a tax
on the same privileges that are subject to the state sales and use tax (the “local option sales tax”).
However, the local option sales tax, when applied to the sale of any single article of tangible
personal property, is imposed only on the first $1,600 of the sales price (the “local option single
article cap”). Furthermore, TENN. CODE ANN. § 67-6-202(a) (2018) imposes an additional state tax at
the rate of 2.75% on the amount over $1,600, but less than or equal to $3,200, on the sale or use of
any single article, as defined by TENN. CODE ANN. § 67-6-702(d), of tangible personal property (the
“state single article sales tax”).
TENN. CODE ANN. § 67-6-702(d) defines the term “single article” as “that which is regarded by common
understanding as a separate unit exclusive of any accessories, extra parts, etc., and that which is
capable of being sold as an independent unit or as a common unit of measure, a regular billing or
other obligation.” A motor vehicle is commonly understood to constitute a single article. Generally,
when a taxpayer leases a motor vehicle, the motor vehicle is treated as a single article for purposes
of the local option single article cap as well as the state single article sales tax.
Here the Taxpayer charges Subscribers a monthly fee or fees for the lease of a motor vehicle and
allows Subscribers the opportunity to use multiple vehicles, but never more than one vehicle at any
given time. Therefore, the Taxpayer’s lease of motor vehicles is properly characterized as the lease
of a single article for purposes of the local option single article cap as well as the state single article
sales tax.
As long as the Subscriber continues to renew the Agreement on a monthly basis, the Department will
treat the Agreement as the single lease of a motor vehicle until either the Subscriber or the Taxpayer
elects to terminate the Agreement. This is true even if the Subscriber exercises the option to
temporarily suspend their Subscription Service by paying the [AMOUNT] hold fee. The local option
single article cap and the state single article sales tax, therefore, will apply to the Agreements.
As noted above, the “sales price” is “the total amount of consideration, including cash, credit,
9
property, and services, for which personal property or services are sold, leased, or rented.” The
Taxpayer’s activation fees, monthly subscription fees, late fees, hold fees, cleaning fees and
[ADDITIONAL] Driver fees are all part of the sales price of the lease of a motor vehicle, and must be
included when calculating the amount of sales tax owed. Accordingly, the Taxpayer’s activation fees,
monthly subscription fees, late fees, and [ADDITIONAL] Driver fees will be included in the total
amount subject to the $1,600 limitation on the local option sales tax under TENN. CODE ANN. § 67-610
702(a)(1) and the 2.75% state single article sales tax under TENN. CODE ANN. § 67-6-202(a).
9

TENN. CODE ANN. § 67-6-102(79)(A).

10

Prior to October 1, 2019, TENN. CODE ANN. § 67-6-702(f) provided that dealers with no location in Tennessee could choose to
pay a uniform local rate of 2.25%. Effective October 1, 2019, out-of-state dealers must apply the specific local sales tax rate in
effect for the city or county jurisdiction into which the sale is shipped or delivered. See 2019 Tenn. Pub. Acts Ch. 491, § 2,

4

In sum, the state sales tax rate of 7% is due for the entire length of the lease contract. The local
11
option sales tax will be due on the first $1,600 of the sales price. And the state single article tax will
12
be due on the sales price beginning at $1,600.01 and continuing up to, and including $3,200.
RENTAL CAR TAX
In addition to sales and use tax, Tennessee law requires businesses that rent motor vehicles to
collect and remit a three percent (3%) surcharge or tax (the “rental car tax”) on charges for the retail
rental of private passenger motor vehicles when such vehicles are rented in Tennessee for a period
13
of thirty-one (31) days or less. The rental car tax is levied on the gross proceeds of the rental
agreement, excluding any sales taxes, and includes any charges related to the rental including gas,
14
insurance, and other related charges.
The Agreement entered into between the Taxpayer and the Subscriber constitutes the lease of a
motor vehicle in Tennessee for a term of more than thirty-one (31) days. Therefore, the Taxpayer’s
subscription fees are not subject to the rental car tax.

APPROVED:

David Gerregano
Commissioner of Revenue

DATE:

10/14/19

which deleted TENN. CODE ANN. § 67-7-702(f). For more information see Notice #19-05 at https://www.tn.gov/content/dam
/tn/revenue/documents/notices/sales/sales19-05.pdf.
11

TENN. CODE ANN. § 67-6-202(a).

12

Id.

13

TENN. CODE ANN. § 67-4-1901(a) (Supp. 2018).

14

TENN. CODE ANN. § 67-4-1901(b).

5