Tennessee Issues Sales Tax Guidance on Car Subscription Services
In today’s economy there are subscription services for just about anything, including cars, and a Tennessee letter ruling highlights some of the unique state tax issues presented by this growing business model.
By Jeff Glickman, SALT Partner
Today we seem to have subscriptions for everything from movies to clothing to meals, and now . . . cars. Over the last couple of years “car subscription services” have risen in popularity. Basically, customers pay a monthly fee for the right to drive a certain class of cars (depending on the amount of the fee). The fee typically includes insurance, maintenance and repairs, basically giving the customer all of the features of car ownership without actual ownership and all of hassles associated with ownership.
Business that offer subscriptions should be mindful of the sales tax consequences, taking into account the structure of the subscription and what is being offered. Calling something a “subscription service” does not necessarily convert a sale/lease of a taxable product into a nontaxable service just because the subscription may include additional features. Recently, Tennessee issued a letter ruling addressing the sales and use tax consequences of vehicle subscription services.
The taxpayer provide a motor vehicle subscription service. Customers entered into a subscription agreement which obligated them to pay a monthly fee (there were two tiers depending on the class of cars the customer was interested in driving) which covered insurance, maintenance, repairs, and the ability to exchange the vehicle for another in the same tier.
In addition to the monthly fee, several other fees are or may be imposed. All customers pay an activation fee at the start of a subscription plan. Lower tier customers may also pay an upgrade fee if they want to use a higher tier car for a period of time. Customers may also be charged (i) a late fee if the monthly payment is late, (ii) a cleaning fee for pets, smoke, or if extra cleaning is needed when a car is turned in, and (iii) an additional driver fee. Finally, customers may suspend their subscription for a period of time by paying a hold fee.
First, the ruling concludes that the subscription agreement constitutes a lease of a motor vehicle and is thus subject to sales tax.
Next, the ruling addresses an unusual feature of Tennessee’s sales and use tax system. Tennessee’s state sales tax rate is 7 percent, and state law authorizes localities to impose a local sales tax at a rate of up to 2.75 percent. However, the local tax may only be applied up to the first $1,600 charged for the sale or use of any single article of personal property. In addition, the state can then impose an additional 2.75 percent on amounts in excess of $1,600 up to $3,200 on the sale or use of any single article of personal property. The single article rule applies only to certain items of personal property, including motor vehicles.
The issue here was whether the single article rule would apply to the subscription agreement and all of the charges pursuant thereto. The ruling notes that a typical motor vehicle lease has been treated as a lease of a single article. Therefore, despite the fact that the subscription customer can exchange cars, since the customer can never have more than one car at a time, the ruling concludes that the subscription agreement will constitute a single article. This will remain the case until either the provider or the customer terminates the subscription agreement, and that paying the hold fee to temporarily suspend the agreement will not impact the single article treatment.
Finally, the ruling explains that since the term “sales price” includes the total amount of consideration, all of the fees that are or may be imposed pursuant to the subscription agreement must be taken into account when applying the single article rate rules.
Many sales and use tax rules tend to be applied based on the form, as opposed to the substance, of the transaction. As businesses develop new models for offering goods and services, thereby potentially changing the form of the transaction, it is important to address the potential sales and use tax consequence since those formalistic changes may alter the applicability of sales and use tax.
Aprio’s SALT team can assist your company with evaluating the sales and use tax consequences of your business transactions so that you stay in compliance with your sales tax obligations and do not incur unexpected liabilities and penalties. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.
This article was featured in the Nov./Dec. 2019 SALT Newsletter.
 Tennessee Letter Ruling #19-08 (Oct. 14, 2019).
 See Tenn. Code Ann. §§ 67-7-202 and 67-7-702. There are other states that impose maximum sales thresholds for sales tax purposes on certain purchases.
Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.