Bulletin 20, October 1, 2013

MAINE REVENUE SERVICES

SALES, FUEL & SPECIAL TAX DIVISION

INSTRUCTIONAL BULLETIN NO. 20

LEASE AND RENTAL TRANSACTIONS

This bulletin is intended solely as advice to assist persons in determining and complying with their

obligations under Maine tax law. It is written in a relatively informal style and is intended to

address issues commonly faced by those involved in lease and rental transactions in Maine.

Taxpayers are responsible for complying with all applicable tax statutes and rules. Although

bulletins issued by Maine Revenue Services (“MRS”) do not have the same legal force and effect

as rules, justifiable reliance upon this bulletin will be considered in mitigation of any penalties for

any underpayment of tax due. This bulletin is current as of the last revision date shown at the end

of the document.

The application of sales, use or service provider tax to any specific lease transaction depends upon

the terms of the lease. The following information applies to most property and is intended as a

guideline for determining the correct application of tax.

The Sales and Use Tax Law provides that every lessor engaged in the leasing of tangible personal

property located in this State must register with MRS and collect and remit sales or use tax in

connection with the leasing of that property. The Sales and Use Tax Law is found in Part 3 of

Title 36 of the Maine Revised Statutes (“M.R.S.”). For most items, the applicable sales tax rate is

the general rate established by 36 M.R.S. § 1811. Section 1811 establishes a separate higher rate

for the short-term rental of automobiles and certain other rentals. Any person engaged in leasing

automobiles, either on a short-term or long-term basis, should also see Instructional Bulletin No.

24 (“Vehicle Dealers”).

The Service Provider Tax Law provides that service providers must also register with MRS and

remit service provider tax on the lease or rental of certain types of property. The Service Provider

Tax Law is found in Part 4 of Title 36. The applicable service provider tax rate is established by

36 M.R.S. § 2552. For more information regarding the service provider tax, see Instructional

Bulletin No. 55.

Title 36, MRS rules, Instructional Bulletins, and forms that are referenced in this bulletin may be

viewed on the MRS website, www.maine.gov/revenue.

1. GENERAL TYPES OF LEASING TRANSACTIONS

A. STRAIGHT (TRUE) LEASE. In a “straight” or “true” lease, the lessor enters into a lease

agreement with a lessee for a stated period of time (including day-to-day, week-to-week, and

similar leases) and the property is to be returned to the lessor at the conclusion of the lease

term. The lessor is making taxable use of the property through the derivation of rental income

in the State of Maine. The lessor is liable for sales or use tax when the property enters the

State (generally at the beginning of the lease), based on the purchase price paid by the lessor

for the property. If sales tax was not paid to the vendor when the property was purchased, the

lessor must report the use tax directly to MRS. No sales tax is charged to the lessee, and the

lease payments are not subject to sales or use tax. If the property is returned to the lessor

and leased to another Maine customer, no additional use tax is due.

B. TRUE LEASE WITH OPTION TO PURCHASE. In a true lease with an option to

purchase, the lessor enters into a lease agreement with the lessee for a stated period of time

and offers the lessee a bona fide option to purchase the property at the conclusion of the term

of the lease or at any time during the lease.

The lessor is making taxable use of the property through the derivation of rental income in the

State, just as in the “straight lease” situation described above. The lessor is liable for sales or

use tax when the property enters the State (generally at the beginning of the lease) based on

the purchase price paid by the lessor for the property.

If the lessee elects to exercise the option to purchase, the lessor is making a sale of the property.

Unless the sale is otherwise exempt from tax by statute, the lessor must collect and remit

sales tax on the option price, including any amounts previously paid as rentals if those

amounts are applied to that price.

For leases that have been deemed by the State Tax Assessor (“Assessor”) to be in lieu of

purchase, see paragraph C below.

C. LEASE IN LIEU OF PURCHASE. Any lease, including a lease of an automobile, that

is deemed by the Assessor to be a lease “in lieu of purchase” is treated as a sale for sales and

use tax purposes. The sale occurs at the commencement of the lease. The sale price on which

sales or use tax is based is the total of all of the projected lease payments. Separately stated

finance charges and personal property taxes should be excluded from the sale price.

The Assessor may review the specific terms of a particular lease in order to determine whether

it is a lease “in lieu of purchase.” A lease will generally be a lease “in lieu of purchase” under

the following circumstances if all of the following conditions are satisfied:

• If the terms of the lease create a security interest as defined by 11 M.R.S. § 1-1201(35);

• If the lease contains an option to purchase the leased property for $1.00 or other

nominal consideration; and

• If the lessee must assume responsibility for the disposition of the property at the end of

the lease term; or if the lease is a so-called T.R.A.C. (Terminal Rental Adjustment

Clause) lease.

If a lease is determined to be a lease in lieu of purchase and the term of the lease is

indeterminable at the commencement of the lease, sales tax must be collected and remitted on

each lease payment. If a lease in lieu of purchase is for a determinable period, but has an option

to continue for a further indeterminable term, sales tax must be collected and remitted up front

on the determinable amount. When this period is complete, sales tax must then be collected

and remitted on each subsequent lease payment.

Lessors are encouraged to contact MRS when they are uncertain whether a particular lease

constitutes a lease in lieu of purchase.

D. INTERIM RENTALS. A retailer that purchases tangible personal property for resale then

removes the property from inventory to rent out is generally required to pay use tax based on

its cost of the property. However, 36 M.R.S. § 1758 allows the retailer, in lieu of paying this

use tax, to collect a sales tax on all the rental payments received if the rental qualifies as an

“interim rental.” In order to qualify as an interim rental:

• The property must be purchased for resale; and

• The property cannot be rented to any one person for more than 12 months.

Any retailer that engages in interim rental transactions must maintain adequate records for

audit purposes, detailing when each item is withdrawn from inventory, to whom the property

is rented, the duration of the rental, and the amount of rental income and tax collected. If, after

electing to treat the transactions as interim rentals, a retailer makes any other taxable use of the

property, including the rental to one customer for more than a year, the retailer becomes liable

for the use tax based on the purchase price of the property, less the amount of tax collected on

the rentals.

2. RENTALS AND LEASES SUBJECT TO SALES TAX

A. AUTOMOBILES. Maine sales and use tax laws treat the rental and leasing of

automobiles differently from the rental and leasing of other vehicles. The term “automobile”

is defined as a self-propelled, 4-wheel motor vehicle designed primarily to carry passengers,

including a pickup truck or van with a registered gross vehicle weight of 10,000 pounds or

less. 36 M.R.S. § 1752(1-B). Under this definition, the term “automobile” would also include

a 4-wheel all-terrain vehicle (“ATV”). See 36 M.R.S. §§ 1752(1-B) and (7).

(1) Short-term rentals. Short-term rentals of automobiles are subject to sales tax at the

separate, higher rate established by 36 M.R.S. § 1811. “Short-term” means a period of less

than one year. A person that makes short-term rentals of automobiles may purchase the

automobile free of tax, but must collect tax on each rental payment. The short-term rental

rate also applies to the rental of trucks and vans with a gross vehicle weight of up to 26,000

pounds, but only when the rental is by a person engaged primarily in the business of renting

automobiles. The short-term rental rate does not apply to vehicles with more than four

wheels, motorcycles, motor homes, or trucks and vans weighing 26,000 pounds or more.

All rental payments made pursuant to a rental agreement executed in Maine are subject to

tax regardless of where the rented automobile is used. The tax is based on the value of the

rental, which means the total rental charged to the lessee for time and mileage including

any other fees or services associated with the rental, without any deduction for separately

itemized charges. Separately stated fees associated with the rental of the vehicle that are

taxable include, but are not limited to:

• Maintenance and service contracts;

• Drop-off or pick-up fees;

• Airport surcharges;

• Intercity fees;

• One-way charges;

• Collision damage waiver or loss damage waiver (“CDW” or “LDW”) charges;

• Young driver charges;

• Additional driver charges;

• Additional keys;

• Mileage fees;

• Cost recovery fees, such as license recovery fees, concession recovery fees, title or

registration fees, and other governmental fees;

• Rentals of additional equipment such as infant seats, ski racks, GPS systems, or toll

transponders (e.g., E-Z pass); and

• Cleaning fees.

Separately stated fees that are not part of the taxable rental charge of the vehicle include,

but are not limited to:

• Reimbursement of tolls;

• Charges for goods and services sold after the rental has terminated (such as fuel

sales); and

• Sales of optional insurance coverage for the protection of the lessee or of the

lessee’s personal property (such as additional liability insurance, personal accident

insurance, or personal effects protection).

(2) Long-term rentals. Long-term rentals of automobiles are subject to the general sales

tax rate established by 36 M.R.S. § 1811. “Long-term” means 12 months or more. The

tax is due in the month in which the lease begins. The sale price consists of the total

monthly lease payments plus the equity of any trade-in plus any cash down payment. Total

monthly lease payments are arrived at by multiplying the dollar amount of each lease

payment by the number of payments in the lease term. Trade-in equity is the value of any

trade-in that reduces the cost of the lease. (Note: unlike sales of automobiles, no deduction

is allowed for trade-in allowances.) “Cash down payment” means any initial cash payment

that reduces the cost of the lease, including rebates applied to the lease. A cash down

payment does not include pre-payment of lease payments or required “up front” costs

disbursed by the lessor such as sales tax, excise tax, and registration fees.

Taxes, such as excise taxes and sales tax, are excluded from the sale price. Ancillary

services such as registration fees, life/disability insurance, warranties, and management

services, are excluded from the sale price only if separately stated from the lease payment.

A fee charged when the lessee opts to return a vehicle to the lessor rather than exercising

the option to purchase it (sometimes called a “disposition fee”) is not subject to sales tax.

Nonresidents of Maine that enter into a long-term lease of an automobile with a Maine

dealer may sign an “Immediate Removal Affidavit” (Form ST-A-106) if they are going to

immediately remove the automobile from Maine. If a properly completed affidavit is

accepted by the dealer in good faith, the dealer is not required to collect sales tax on the

lease transaction. Automobile dealers and lessors should see Instructional Bulletin No. 24

(“Vehicle Dealers”) for more information.

B. MOTOR HOMES AND CAMPER TRAILERS. The rental or lease of a camper trailer

or a motor home is a taxable service subject to the general sales tax rate established by 36

M.R.S. § 1811. However, the statutory definition of “retail sale” excludes the sale of a camper

trailer or a motor home to a person engaged in the business of renting these items. This

exclusion applies only if the motor homes or camper trailers are subsequently rented or leased

as tangible personal property. If, instead, the motor homes or camper trailers are used to

provide the rental of living quarters, the purchase of the motor homes or camper trailers do not

qualify for the exclusion and are subject to sales tax. If a camper trailer or motor home is sold

after having been rented for a period of time, the sale is subject to sales tax.

For purposes of this paragraph, “camper trailer” is defined in 36 M.R.S. § 1481(1-A) and

“motor home” is defined in 29-A M.R.S. § 101(40). “Motor home” does not include a mobile

home.

Note: A campground rental that may include the use of a motor home or camper trailer owned

by the campground is a rental of living quarters and is subject to the higher rate of tax as

established in 36 M.R.S. § 1811.

3. RENTALS AND LEASES SUBJECT TO SERVICE PROVIDER TAX

The service provider tax is imposed upon the provider of the services rather than upon the

customer. The statute allows, but does not require, the provider to pass the tax on to the customer.

If the provider includes the tax on the customer’s bill, it must be separately stated and identified

clearly as service provider tax. For more information on the service provider tax, see Instructional

Bulletin No. 55 (“Service Provider Tax”).

A. RENTAL OF VIDEO MEDIA & EQUIPMENT. Rentals by any person of video media

(including video games, DVDs, Blu-ray discs, etc.) and video equipment used to record or play

back video media are subject to the service provider tax. The taxable sale price includes any

consideration for services that are part of the rental transaction, such as a late charge in the

form of an additional day’s rental, movie passes redeemable for a certain number of DVDs,

and insurance or damage waiver fees.

The statutory definitions of “video media” and “video equipment” exclude commercial video

tape and equipment rentals. Movies rented to theaters are not subject to tax.

A person engaged in the business of renting video media and video equipment is not required

to pay sales tax on equipment purchased for subsequent rental. A resale certificate must be

provided to the vendor. For more information, see Instructional Bulletin No. 54 (“Resale

Certificates”).

Note: If video media or video equipment are sold after having been rented for a period of time,

the sale is subject to sales tax.

B. RENT-TO-OWN BUSINESSES. Many leases and rentals engaged in by “rent-to-own”

businesses have components that may result in both sales tax and service provider tax.

Businesses should be careful to account for their sales on the correct return and at the correct

rate.

(1) Taxable rentals. Rentals of audio media, audio equipment, and furniture as defined

by 36 M.R.S. §§ 2551(1) and (4) by “rent-to-own” businesses regulated under Title 9-A,

Article 11, are subject to the service provider tax. Tax must be applied to each rental

payment. If a customer elects to purchase the product being rented, sales tax must be

collected on the buyout price at the time of the sale. See paragraph (3) below.

A person engaged in the business of renting audio media, audio equipment, or furniture is

not required to pay sales tax on the purchase of these items to be rented. A resale certificate

must be provided to the vendor. For more information on resale certificates, see

Instructional Bulletin No. 54 (“Resale Certificates”).

(2) Non-taxable rentals. “Rent-to-own” businesses should not collect sales tax or report

service provider tax on the rental of products not included in the definition of audio media,

audio equipment, or furniture, such as:

• Electronic devices rented to businesses;

• Computers rented to businesses;

• Office equipment, such as photocopiers or fax machines;

• Fixtures affixed to realty;

• Tools & equipment; and

• Decorative furnishings.

When a “rent-to-own” business purchases any of these products, sales tax must be paid on

the purchase price at the time of purchase. If these products are purchased without paying

sales tax for any reason, use tax must be reported to MRS based on the purchase price.

(3) Option to purchase. If a customer elects to purchase a product being rented, sales tax

is due on the transaction based on the buyout price. No credit is allowed for the sales or

use tax previously paid by the lessor on the original purchase of the product or for the

service provider tax paid by the lessor on the lease payments. If a customer elects to

continue renting a product to the end of the term of the contract and the contract provides

that at the end of the rental term the customer will own the item after the last payment is

made, the last rental payment represents the “sale price.” Sales tax, rather than service

provider tax, must be computed on the final rental payment.

4. EXEMPT ORGANIZATIONS AND EXEMPT ACTIVITIES

The purchase of tangible personal property that is then leased to a governmental entity or exempt

organization, or used by a lessee in an exempt activity under the terms of a straight lease or a lease

with an option to purchase, is taxable to the lessor based on the purchase price. The fact that the

property is rented by an exempt organization or used by a lessee in an exempt activity does not

relieve the lessor from liability for use tax. However, the following are exceptions to this rule:

• Leases in lieu of purchase to agencies of the State or federal government, leases in lieu of

purchase to organizations exempt under 36 M.R.S. § 1760, and leases in lieu of purchase

of certain property where the sale is not subject to tax due to the use of the property, such

as in production (see 36 M.R.S. § 1760(31)), are exempt from sales tax. See Section 1(C)

above for an explanation of leases in lieu of purchase.

• Certain purchases of depreciable machinery and equipment for lease to customers who are

engaged in commercial agricultural production, commercial aquacultural production,

commercial fishing, or commercial wood harvesting are eligible for a refund of sales or

use tax. See Instructional Bulletin No. 59 (“Farming, Fishing and Wood Harvesting”).

• Purchases of a portable classroom or tangible personal property to be physically

incorporated into a portable classroom for lease to a school are exempt under 36 M.R.S. §

1760(58).

Purchase of repair or replacement parts for leased property by a lessee who is an exempt

organization or is engaged in an exempt activity are exempt from tax.

For more information on exempt sales to governmental agencies and exempt organizations, see

Rule 302 (“Sales to Governmental Agencies and Exempt Organizations”) and Instructional

Bulletin No. 36 (“Exempt Organizations and Governmental Agencies”).

5. OTHER SITUATIONS

A. ASSIGNMENTS (LESSOR). The transfer of title to leased property from one lessor to

another lessor constitutes a taxable sale between the two lessors. However, if one lessor is

assigning only the financing arrangements, no sale has occurred. Since leases in lieu of

purchase are sales to the lessee (title being held by the lessee), a lessor’s assignment of such a

lease to another lessor does not constitute a taxable event and no sales tax liability is incurred

by the assignment.

B. PRIOR USE OUTSIDE OF MAINE. Property that is used outside of Maine for more

than 12 months by the present owner prior to being used in Maine is not subject to use tax.

This exemption from the use tax includes leases executed outside of Maine since lessors are

the “users” of the leased property. If a lessee subsequently makes use of the leased property

in Maine, no use tax is due from the lessor. This exemption applies only if the use of the

property outside of Maine during the 12 months after it was purchased was sufficiently

substantial. Whether the use of any particular property outside of Maine during the 12-month

period was sufficiently substantial is a case-specific determination depending upon all of the

facts and circumstances.

C. “SALE/LEASEBACK” TRANSACTIONS. A “sale/leaseback” transaction occurs

when a person purchases property, sells the property to a leasing entity, then leases the property

back from the lessor. This type of financing arrangement is generally a combination of three

separate transactions. The application of sales tax to each transaction depends on a number of

factors. Due to the complexity of these factors, each arrangement must be analyzed based on

its own set of facts. Generally, the transactions will occur as follows:

• The first transaction is the original purchase of the property by the end user (lessee),

and is generally a taxable transaction unless a statutory exemption applies.

• The subsequent sale of the property from the purchaser to the leasing entity is the

second transaction. This is generally a casual sale, not typically subject to tax unless it

is an item listed in 36 M.R.S. § 1764.

• The taxability of the final transaction, the lease of the property back to the purchaser

by the leasing entity (lessor), is determined primarily by the type of lease executed

between the leasing entity and the purchaser. See Section 1 above.

For a discussion of sale/leaseback transactions involving machinery and equipment used in

production (manufacturing), see Instructional Bulletin No. 22 (“Manufacturers”).

D. SOFTWARE LICENSES. Software licenses are generally treated as leases and are

taxable to the lessor based upon the purchase price. If the software lessor is also the developer

of the software, the taxable cost of the product is based upon the lessor’s material costs.

Software licenses that must be renewed on an annual basis are regarded as one-year licenses.

Therefore, the software is taxable to the lessor based on the lessor’s purchase price at the time

of the original licensing transaction. The lease amount and the cost of subsequent renewals

have no sales or use tax consequences.

If the software license is perpetual or for 10 years or more (with no annual renewals), it is a

lease in lieu of purchase. The lessor may purchase the software without paying sales tax, but

must then collect sales tax from the lessee at the start of the lease based upon the total amount

of the lease payments. Separately stated finance charges should be excluded from the sale

price.

6. ADDITIONAL INFORMATION

The information in this bulletin addresses some of the more common questions regarding the Sales,

Use and Service Provider Tax Laws faced by lessors. It is not intended to be all-inclusive.

Requests for information on specific situations should be in writing, should contain full

information as to the transaction in question, and should be directed to:

MAINE REVENUE SERVICE

SALES, FUEL & SPECIAL TAX DIVISION

P.O. BOX 1060

AUGUSTA, ME 04332-1060

TEL: (207) 624-9693

V/TTY: 7-1-1

www.maine.gov/revenue

Issued: November 1, 2000

Amended: March 1, 2008

October 1, 2012

June 17, 2016

September 16, 2019

Last Revised: November 15, 2022

(Published under Appropriation 010-18F-0002-07)

The Department of Administrative and Financial Services does not discriminate on the basis of

disability in admission to, access to, or operation of its programs, services or activities.