At the commencement of the rental transactions, in addition to the standard rental charge, Taxpayer offers Customers several rental car options. One of the options is to return the rental car without refilling the fuel tank. If Customers choose that option, Taxpayer imposes a Fuel Refill Charge. Taxpayer further offers Customers two alternatives with respect to the Fuel Refill Charge: Customers can (1) pre-pay or (2) post-pay based on the consumption of the fuel. The pre-pay option provides Customers an option, before using the rental vehicles, to lock into a lower price for the fuel they are going to consume when they return the cars. The post-pay option allows Customers to postpone their decisions until they return the rental cars. For example, Customers can choose to pre-pay $3 per gallon prior to their use of the cars or post-pay $5 per gallon when they return the rental cars without refilling the fuel. The total amount of the Fuel Refill Charges for Customers who choose to pre-pay or post-pay is not determined at this time. Taxpayer's employees note Customers' choice(s) in the rental agreements and Customers initial and acknowledge their choice(s) stated in the rental agreements.
Before Customers use the rental cars, Taxpayer and Customers inspect the cars at Taxpayer's parking lot. Taxpayer notes the condition of the cars and the amount of fuel indicated on the dashboard of the cars. When the lease periods end, Customers are expected to return the rental cars in good condition (similar to the condition before Customers use the cars), which includes the same level of fuel in the cars. Most of Customers return the rental cars with the same level of fuel in the cars while some Customers choose to return the rental cars without refilling the fuel.
Regardless of whether Customers choose the options offered by Taxpayer, Taxpayer bills Customers and Customers pay after they return the rental cars. Taxpayer's invoices generally contain a standard rental charge as well as sales tax and auto rental excise tax on the standard rental charge. For Customers who return the rental cars without refilling the fuel, in addition to the standard rental charge, Taxpayer charges a separately stated line item (i.e., Fuel) in the invoices; however, the invoices do not specifically state whether Customers elected the pre-pay or post-pay options. Taxpayer's invoices show that it does not collect either sales tax or auto rental excise tax on the "Fuel" charge. Taxpayer subsequently refills the fuel tanks of the cars at nearby gas stations and pays the advertised price.
The Indiana Department of Revenue ("Department") audited Taxpayer's business records for 2009 through 2011 tax years. Taxpayer and the Department agreed to utilize a sampling method to project the audit result. Pursuant to the audit, the Department determined that Taxpayer failed to collect sales tax and auto rental excise tax on Fuel Refill Charges for the years at issue.
The Department's audit also determined that Taxpayer did not pay sales tax or self-assess and remit use tax on certain purchases of tangible personal property, which Taxpayer used for its business. The audit thus assessed Taxpayer additional taxes and interest.
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The Department's audit assessed sales tax on the Fuel Refill Charges on the ground that the charges were part of the consideration for the rental transactions. The audit noted that:
Audit discovered rental invoices including charges for fuel to refill vehicles upon return to the level of fuel included at the inception of rental. The fuel refill charge was omitted from taxable rental income. According to 45 IAC 2.2-4-27 , the gross receipts from renting or leasing of tangible personal property, by whatever means effected and irrespective of the terms employed by the parties to describe such transaction, is taxable. Gross receipts means the gross receipts from the rental or leasing of tangible personal property without any deduction for expenses or costs incidental to the conduct of the business. (Page 4 to Audit Summary).
Taxpayer, to the contrary, claimed that "the Fuel Refill Charge is not part of the rental transaction." Rather, Taxpayer claimed that the Fuel Refill Charge is a reimbursement for its additional costs due to Customers' failure to refill the vehicles. Taxpayer also asserted that the Fuel Refill Charge is for an optional service and divisible from the underlying rental transaction. Thus, as a service, the Fuel Refill Charge is not subject to sales tax. Taxpayer further argued that itself was the consumer of the fuel and properly paid sales tax when it refilled the cars at the nearby gas stations.
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In this instance, Taxpayer claimed that, before the rental transactions occurred, it offered Customers various options, which included the option of returning the rental cars without refilling the fuel. Taxpayer also stated that it specifically informed Customers that the Fuel Refill Charge is an additional cost outside the standard fee for the rental of the vehicle. Taxpayer thus maintained that the Fuel Refill Charge is for an optional service which is separate and divisible from the underlying rental transaction and is not taxable. Alternatively, Taxpayer asserted that because it supplied Customers the rental cars with fuel, Taxpayer itself was the consumer of the fuel under 45 IAC 2.2-4-27 (d)(4). Thus, Taxpayer maintained that it properly paid sales tax at the nearby gas stations when it refilled the tanks of its rental cars, and that the Fuel Refill Charge is intended to reimburse Taxpayer for the cost of the fuel. Taxpayer contended that the audit's assessments on the Fuel Refill Charge were taxes on the taxes which it already paid, thus resulting in tax pyramiding. Taxpayer submitted three sample copies of its rental agreements and invoices to support its protest.
Upon reviewing Taxpayer's documentation, however, the Department is not able to agree. Pursuant to 45 IAC 2.2-4-27 , "[T]he gross receipts from renting or leasing tangible personal property are taxable." Taxpayer, as the lessor, is responsible for collecting the amount of actual receipts from the rental or lease. 45 IAC 2.2-4-27 (d)(1) further states that "[t]he amount of actual receipts means the gross receipts from the rental or leasing of tangible personal property without any deduction whatever for expenses or costs incidental to the conduct of the business. The gross receipts include any consideration received from the exercise of an option contained in the rental of lease agreement." In this instance, Taxpayer's documentation demonstrated that, at the commencement of the rental transactions, it offered Customers various options, which include returning the rental car without refilling the fuel tank. Specifically, pursuant to the rental agreements, Customers were afforded options when they return the rental cars without refilling the fuel tanks, including pre-pay or post-pay the fuel based on the amount of fuel Customers consumed. Thus, Taxpayer offered, and Customers exercised, the options contained in the rental agreements. Taxpayer noted Customers' choice(s) in the rental agreements; Customers initialed and acknowledged their choice(s) stated in the rental agreements. As a result, the Fuel Refill Charges arose from, and were attributed to, the options chosen by Customers concerning the rental cars pursuant to the rental agreements, and, therefore, were part of the consideration of the rental transactions.
Taxpayer asserted that it itself was the consumer of the fuel under 45 IAC 2.2-4-27 (d)(4) because it supplied the rental cars with fuel. But, its documentation demonstrated otherwise. Taxpayer's supporting documentation showed that Taxpayer and Customers inspected the rental cars; that Taxpayer noted the level of the fuel in the rental cars; that Customers are required to return the rental cars in a good condition similar to the condition before Customers used the rental cars; and that Customers were required to return the car with the same level of fuel without incurring additional charges. Thus, Taxpayer did not furnish rental cars with fuel under its rental agreements because the rental cars were required to be returned at the same amount of the fuel. While Taxpayer's rental cars contained sufficient fuel ready to be used, Customers themselves were responsible for the consumption of the fuel. Thus, Customers were the consumers of the fuel in the rental transactions at issue. Only when Customers returned the rental cars without the same amount of fuel, did Taxpayer impose the Fuel Refill Charges. Thus, Taxpayer was not the consumer of the fuel and its reliance of 45 IAC 2.2-4-27 (d)(4) is misplaced.
Finally, Taxpayer invited the Department to conclude, in its favor, that a sales tax on the Fuel Refill Charges is a tax on a tax, which resulted in tax pyramiding and has been discouraged by the Indiana legislature. The Department, however, must respectfully decline Taxpayer's invitation because the Indiana General Assembly has addressed Taxpayer's concern by allowing various exemptions to the sales tax, which are outlined under IC § 6-2.5-5 et seq. As discussed above, for sales/use tax purposes, Taxpayer, as a lessor of a rental transaction, is considered to be a retail merchant of a retail transaction. Thus, pursuant to 45 IAC 2.2-4-27 (a), while the gross receipts from renting or leasing tangible personal property are taxable, exemptions to the sales/use tax are also afforded to an equivalent sales transaction, such as the rental transaction in this instance.
In short, the Fuel Refill Charges were options offered under the rental agreements and were part of consideration with respect to the rental transactions. Thus, the Fuel Refill Charges are subject to sales tax.
