dealer advocacy & governmental affairs


True Rental Scenario vs. Rent-to-Own (Conditional Sale)


By WILL ROGERS, Director of Government Affairs [willr@ineda.com]


Recently, the Association received an inquiry from a construction equipment dealer regarding the rental and sale of equipment and when sales and excise tax are applicable. Based on the facts we gathered, the following was developed to provide guidance as to situations when and how taxes should be collected in true rental or in a rent-to-own.


True Rental Scenario


Sunshine Equipment rents a skid-steer to a contractor to be used for the purpose of new construction. The contractor is not required to pay sales or excise tax on the rental price of the skid-steer1


. In addition,


there is no arrangement between Sunshine Equipment and the contractor to purchase the skid-steer after a certain period of time. Under this scenario, if the contractor purchases the skid-steer at a later time and has no prearranged agreement to purchase the equipment, the contractor would only need to pay taxes on the sale price of the skid-steer since neither Sunshine Equipment nor the contractor intended to convert the rental to a permanent transfer of ownership.


Example: Sunshine Equipment acquires a skid-steer and lists the sales price at $100,000. Sunshine Equipment agrees to rent a skid-steer to the contractor for 6 months who pays $5,000 per month in fees. After the six months, the contractor then decides to purchase the skid-steer at an adjusted sales price of $70,000. The contractor only needs to pay excise tax on the $70,000 sales price.


Rent-to-Own (Conditional Sale)


Sunshine Equipment rents a skid-steer to a contractor to be used for the purpose of new construction. As part of the contract or agreement, Sunshine Equipment will credit part or all of the rental payments toward the purchase price of the equipment2


. The State of Iowa views this as a “conditional sale”3 and requires that sales or excise tax be collected on the original sales price of the skid steer when applicable.4


Example: Sunshine Equipment acquires a skid-steer and lists the sales price at $100,000. A contractor rents the skid-steer for 6 months and pays $5,000 per month in fees. The agreement between Sunshine Equipment and the contractor details a buyout provision that applies any rental payments to the overall sales price of the equipment. If the contractor executes the purchase op- tion, excise tax should be collected on the original sales price of $100,000.


Notes: 1


Iowa Code Chapter 423D


2IDOR Memo 08300036, Dated June 27, 2008. “Memo from Greg Lee to Darwin Clupper.” 3Iowa Code section 423.1(46)


4Iowa Administrative Code section 701—213.3(423) Source: WILL ROGERS and GREG LEE 26 | The Retailer Magazine | Jan/Feb


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