Was an optional, nonrefundable damage-waiver fee on a Texas tuxedo rental taxable?

Plain-English summary

A tuxedo-rental business considered offering customers an optional, nonrefundable damage waiver to limit their liability for returning damaged merchandise.

The Comptroller said the damage-waiver fee was taxable because it was a prepayment toward the cost of restoring or repairing damaged merchandise, which the letter treated as taxable services under Texas Tax Code § 151.0101(a)(5).

The letter also supplied historical implementation context: a June 1986 Sales Tax Review announced the tax treatment, but the tax was administratively delayed until September 1, 1986 to give lessors time to reprogram their computers.

What this means for you

Calling a charge a waiver did not separate it from the taxable repair or restoration costs it was designed to cover. Under this ruling, the rental company had to tax the fee.

Common questions

Was the damage-waiver fee taxable? Yes.

Did it matter that the fee was optional and nonrefundable? No change in result is stated; the described fee was taxable.

Why? The Comptroller characterized it as a prepayment for taxable restoration or repair services.

When did the letter say the tax began being imposed administratively? September 1, 1986.

Citations and references

• Tex. Tax Code § 151.0101(a)(5) (repair and restoration services)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9101L1066F01

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, TEXAS 78774

January 10, 1991

Dear ** :

Thank you for your recent letter regarding the taxability of a non-
refundable damage Waiver fee.

You stated that your business is considering giving your customers
the option of a damage waiver when renting tuxedos as a way to limit
the Customer's liability when returning a damaged tuxedo.

Damage waiver fees are taxable. Those fees are simply prepayments
to defray the costs of restoring or repairing damaged merchandise,
which are taxable services. Texas Tax Code 151.0101(a)(5).

I am enclosing a copy of the June 1986 Sales Tax Review, which was
the notification of the taxability of damage waiver fees; however,
administratively the tax was not imposed until September 1, 1986.
This was to give lessors sufficient time to reprogram computers.

This opinion is based on the facts presented. If there are addition-
al or different facts, the opinion may change.

If you have any questions or need additional information, you may
call me toll free at 1-800-252-5555, extension 5-0330. The regular
number is 512/463-4600, or write me at Tax Administration.

Sincerely,
Bettie U. Peterson
Tax Administration Division