Iowa Administrative Code › Agency 701 - Revenue Department › Title III - Sales, Use, and Excise Tax › Chapter 225 - Resale and Processing Exemptions Primarily of Benefit to Retailers › Rule 701-225.6 - The Sales Price From the Leasing of All Tangible Personal Property Subject to Tax

Current through Register Vol. 47, No. 3, July 24, 2024
See rule
				  701-200.1 (423) for the
				  definitions of the words "lease or rental" and "tangible personal property"
				  which are applicable to this rule.
(1)
Past and present taxation of leases.
Prior to July 1, 2004,
				the rental of tangible personal property was treated as a taxable service for
				the purposes of Iowa sales and use tax law; reference 2003 Iowa Code section
				422.43(11) and
				701-subrule 26.18(2) (2003). The "rental" of tangible personal property was not
				a "sale" of that property, and therefore a purchase for subsequent leasing or
				rental was not a purchase for resale. See
Cedar Valley Leasing, Inc. v.
				Iowa Department of Revenue
, 274 N.W.2d 357 (Iowa 1979).
On and after July 1, 2004, the rental of tangible personal
				  property is treated as the sale of that property for the purposes of Iowa sales
				  and use tax law because "leases" and "rentals" of tangible personal property
				  are taxable retail "sales" of that property. The rental of tangible personal
				  property is no longer listed as a taxable enumerated service. The resale
				  exemption in favor of sales for resale of tangible personal property is now
				  applicable to sales and leases of tangible personal property for subsequent
				  rental or lease.
Example A. Al's Rent All buys blowers, hand tools, ladders,
				  plumbers' snakes, sanders, and tillers for subsequent short-term rental to
				  various customers. Al's purchases of these items of equipment are purchases for
				  resale and are exempt from tax as of July 1, 2004.
Example B. In addition to its purchases of equipment for
				  subsequent rental, Al's Rent All leases from its suppliers, long-term, items of
				  heavier equipment such as backhoes, forklifts, manlifts, tractors, and
				  trenchers, again for subsequent leasing to various customers. Since the leasing
				  of tangible personal property is now a purchase of that property, Al's leasing
				  for later sublease is a purchase of tangible personal property and is exempt
				  from tax at the time of purchase as the purchase of tangible personal property
				  for subsequent resale.
(2)
Distinguishing leases and rentals of tangible personal property from
				the furnishing of nontaxable services.
In order to determine whether a
				particular fee is charged for the rental of tangible personal property or for
				the furnishing of a nontaxable service, the department looks at the substance,
				rather than the form, of the transaction. When the possession and use of
				tangible personal property by the recipient is merely incidental as compared to
				the nontaxable service performed, all of the sales price is derived from the
				furnishing of such nontaxable service and, unless a separate fee or charge is
				made for the possession and use of tangible personal property, no sales price
				is derived from the rental of tangible personal property. When the nontaxable
				service is merely incidental to the possession and use of the tangible personal
				property by the recipient, all of the sales price is derived from the
				furnishing of tangible personal property rental and, unless a separate fee or
				charge is made for the nontaxable service, no sales price is derived from the
				nontaxable service. When a tangible personal property rental agreement contains
				separate fee schedules for rent and for nontaxable service, only the sales
				price derived from the tangible personal property rental is subject to tax.
				This rule is not to be so construed as to be at variance with Iowa Code
				sections 423.2(8)  and
				423.3(70) 
				concerning bundled service contracts and transportation services
				respectively.
(3)
Rental of
				real property distinguished from rental of tangible personal property.
If a rental contract allows the renter exclusive possession or use of a defined
				area of real property and, incident to that contract, tangible personal
				property is provided which allows the renter to utilize the real property, if
				there is no separate charge for rental of tangible personal property, the sales
				price is for the rental of real property and is not subject to tax, unless
				taxable room rental is involved; reference rule
				701-285.40 (422,423).
If a person rents tangible personal property and, incidental
				  to the rental of the property, space is provided for the property's use, the
				  sales price from the rental shall be subject to tax. It may at times be
				  difficult to determine whether a particular transaction involves the rental of
				  real property with an incidental use of tangible personal property or the
				  rental of tangible personal property with an incidental use of real
				  property.
(4)
Rental of tangible personal property and rental of fixtures.
The rental of tangible personal property which shall, prior to its use by the
				renter under the rental contract, become a fixture shall not be subject to tax.
				Such a rental is the rental of real property rather than tangible personal
				property. In general, any tangible personal property which is connected to real
				property in a way that it cannot be removed without damage to itself or to the
				real property is a fixture. See
Equitable Life Assurance Society of the
				United States v. Chapman
, 282 N.W. 355 (Iowa 1983) and
Marty
				v. Champlin Refining Co.
, 36 N.W.2d 360 (Iowa 1949). The rental of a
				mobile home or manufactured housing, not sufficiently attached to realty to
				constitute a fixture, is room rental rather than tangible personal property
				rental and subject to tax on that basis; see
Broadway Mobile Home Sales
				Corp. v. State Tax Commission
, 413 N.Y.S.2d 231 (N.Y. 1979). Reference
				also rule 701-285.40 (422,423).
(5)
Rental of tangible personal
				property embodying intangible personal property rights-transactions taxable and
				exempt.
Under the law, the sales price from rental of tangible
				personal property includes royalties and copyright and license fees. The rental
				of all property which is a tangible medium of expression for the intangible
				rights of royalties and copyright and license fees is subject to tax. Thus the
				sales price from the rental of films, videodiscs, videocassettes, and any
				computer software (other than rental of custom programs, reference
				701-paragraph 285.34(3)
"a"
) which is the tangible means of
				expression of intangible property rights is subject to tax. The rental of such
				tangible property shall be subject to tax whether the property is held for
				rental to the general public or for rental to one or a few persons. See
Boswell v. Paramount Television Sales, Inc.
, 282 So.2d 892
				(Ala. 1973). Reference also rule
				701-284.18 (422,423) regarding
				the exemption from the requirements of this subrule for rental of films,
				videotapes and other media to lessees imposing a taxable charge for viewing or
				rental of the media or to lessees that broadcast the contents of these media
				for public viewing or listening.
(6)
Deposits and additional
				fees.
Taxability of a deposit required by an owner of rental property
				as a condition of the rental depends upon the type of deposit required. A
				deposit subject to forfeiture for the lessee's failure to comply with the
				rental agreement is not subject to tax. This type of deposit is separate from
				the rental payments and therefore is not taxable as part of the rental. Such
				deposits may include those for reservation, late return of the rental property
				or damage to the rental property. Deposits not subject to forfeiture which
				represent part of the rental receipts are considered part of the taxable rental
				and are subject to tax. Such deposits may include a deposit of the first rental
				payment which is applied to the rental receipts.
When tangible personal property is rented for a flat fee per
				  month, per year, or for other designated periods, plus an additional fee based
				  on quantity and capacity of production or use, the entire charge is
				  taxable.
(7)
Leasing of tangible personal property moving in interstate
				commerce.
a. On and after July 1,
				2004, in the case of a lease or rental that requires recurring periodic
				payments, the first periodic payment is taxed to Iowa if the property was
				delivered to the lessee in Iowa. Periodic payments made subsequent to the first
				payment may be taxed only by the state in which the property is primarily
				located for the period covered by the payment. The primary property location
				shall be as indicated by an address for the property provided by the lessee
				that is available to the lessor from its records maintained in the ordinary
				course of business, when use of this address does not constitute bad faith. The
				property location shall not be altered by intermittent use at different
				locations, such as use of business property that accompanies employees on
				business trips and service calls.
b. Where a nonresident lessor leases tangible
				personal property to a resident or nonresident lessee and the lessee uses the
				property in Iowa, the nonresident lessor has the responsibility of collecting
				Iowa use tax on the lease payments if Iowa is the primary location of the
				property, provided the lessor maintains a place of business in Iowa as
				described in 2005 Iowa Code sections
				423.1(43)  and
				423.14(2).
				Whether the lease agreement is executed in Iowa or not is irrelevant.
State Tax Commission v. General Trading Co.
,
				322 U.S.
				335,
				64 S.Ct. 1028,88 L.Ed 1309
				(1944).
c. Where a lessee is the
				recipient of equipment rental services sourced to Iowa and no tax has been
				collected from such lessee by the lessor, the lessee should remit Iowa use tax
				to the department of revenue. In the event no tax is remitted, the department,
				in its discretion, may seek to collect the tax from the lessor or lessee. In
				the event that the lessee rents tangible personal property, and the lessor does
				not maintain a place of business in Iowa and does not collect use tax pursuant
				to 2005 Iowa Code section
				423.14, such lessee shall remit
				tax on its rental payments to the department.
d. Where a resident lessor leases equipment
				to a nonresident lessee outside Iowa and the equipment is delivered to the
				lessee outside Iowa, the act of leasing is exempt from the Iowa sales tax on
				the rental payments. However, in the event the lessee brings the equipment into
				Iowa, uses it in Iowa, and Iowa becomes the primary location of the property,
				Iowa use tax applies to subsequent rental payments.
e. If a sales or use tax has already been
				paid to another state on the sales price of tangible personal property prior to
				the use of that property in Iowa, a tax credit against the Iowa use tax on the
				purchase price will be given. After the equipment is brought into Iowa, if a
				sales or use tax is properly payable and is paid to another state on the rental
				payments of equipment, for the same time the Iowa tax is imposed on such
				rentals, a tax credit against the Iowa use tax on such rental payments will be
				given.
This rule is intended to implement Iowa Code sections
				  423.1(22),
				  423.1(43),
				  423.1(45),
				  423.1(54),
				  423.2(1), and
				  423.15(2).