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On what amount should local and state taxes be computed, on the base rental price alone or after having added to it all the rental company-imposed fees? In other words, does one need to pay taxes on the rental fees?

The question is motivated by my last rental, in which, due to a sudden issue, I had to return the car at a different location. I called the rental company and agreed to pay their hefty "one way drop-off fee", which was comparable to the cost of the entire weekly rental. In the final bill, however, an even greater amount was taken from my credit card. When I called customer service, I was told that the amount I was given on the phone was pre-tax and that "of course" I had to be pay state and local taxes on it.

I have two issues with this answer, the first, minor one, is that this should have been explicitly mentioned at the time we agreed on this supplemental contract. The second one is that the concept of having to pay taxes on a fee seems a rather absurd one, even though I guess one could possibly construe the fee as the payment for an additional service that I requested.

Is the rental company correct in its assessment?

EDIT
Not sure if this is the correct way to partially amend a question. I just wanted to add that after reading this very informative article on Autoslash I realized that my description of the "extra charges imposed on the fees" was incorrect as I lumped them all in the local and state taxes bucket, while they were of different nature. In fact, to the 10% of the Los Angeles sales tax, and the 3.5% of the California tourism collection fee the rental agency added also an 11.11% of airport concession fee, which, according to Autoslash, is a "fee not mandated by airport authorities, but it ensures the rental car company gets a slice of revenue while putting the airport’s cut in its own bucket."
To clarify, all the three percentages mentioned above, roughly amounting to 25%, were computed in the rental contract on a basis amount that included the weekly rental cost plus the daily fees imposed by the rental car agency (customer facility charge and vehicle license recovery fee). Then afterwards, in the final bill, all three of them were charged as well on the one-way drop off-fee that I had been quoted. Not a big deal, but the fact that the memory lapse at the time of quoting did not involve just mandated taxes makes it just a couple of tones shadier.

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    Depends on local tax laws (which government what is and isn't taxable), and possibly on exactly how the items are described. I don't think I have ever seen a case where a company tried to pad the tax, so I would bet that whatever they are doing is correct. If they're willing to put it on a receipt, so they could be in trouble if they get it wrong, I would assume they were doing the right thing.
    – keshlam
    Commented Jun 26, 2023 at 14:37
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    In the US you will never have taxes included in the quote you're given.
    – littleadv
    Commented Jun 26, 2023 at 14:38
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    please specify the locations involved. It might be triggered by the pickup point, or the drop-off point.
    – mhoran_psprep
    Commented Jun 26, 2023 at 14:39
  • Location is California, I rented at Los Angeles airport and returned at San Diego airport. The value of the one-way drop-off fee was given twice to me in two different phone calls without specifying "plus tax" either time. @keshlam I would also assume in principle the rental agency is doing the right thing if in this specific occasion had not had other reasons to be skeptical of that assumption, like a flurry of late charges added despite I had purchased an extension and whose "adjustment" led to a receipt so confusing to require painstaking reverse engineering lol
    – MarcoD
    Commented Jun 27, 2023 at 0:37
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    @littleadv The body of the question asks "are fees included in the basis for sales tax?" but your comment I thought was a reply to "are fees part of the sales tax?" At least that's the way I read it. Now that I REALLY read carefully, I realize your comment is ambiguous also! So I retract that part. It's still a mini answer though 😉
    – Aldus Bumblebore
    Commented Jun 27, 2023 at 4:44

2 Answers 2

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The second one is that the concept of having to pay taxes on a fee seems a rather absurd one, even though I guess one could possibly construe the fee as the payment for an additional service that I requested. Is the rental company correct in its assessment?

In the United States, the decision to tax fees varies from state to state.

So the question "is the company correct?" depends on the exact state, and the exact definition of the fee.

It might even be controlled at the city/county level depending on how the state law is written.

The question

I was told that the amount I was given on the phone was pre-tax and that "of course" I had to be pay state and local taxes on it. I have two issues with this answer, the first, minor one, is that this should have been explicitly mentioned at the time we agreed on this supplemental contract.

Unless there is a recording of the conversation, it would be hard to prove they didn't say plus tax.

An email or text exchange would provide more information, but you don't have that.

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  • Thanks for your clarification on the different state to state treatment of taxable items. The state in question is California; I rented at Los Angeles airport, and returned at San Diego airport. I understand now this is a question that only a local tax expert could answer, and your answer that this is not something unheard of suffices to me. Even though I have not one but two call recordings proving that "plus tax" was never uttered. However I assume those would be only worth in a potential court case (which I have no intention of pursuing) and maybe not even in a credit card dispute
    – MarcoD
    Commented Jun 27, 2023 at 0:47
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    @MarcoD It is very believable that it was never uttered, but even if you had a recording - it wouldn't help you in court. The taxes are imposed by the State, and the rental company has no influence on them. They are just collecting and remitting them, you're the one paying the tax, and you're paying it to the State.
    – littleadv
    Commented Jun 27, 2023 at 4:32
  • Agreed, if there is a tax it has to be paid. It was the last paragraph in the above answer that made me wonder whether a merchant has an obligation to explicitly say "plus tax" when making a sale or he is legitimized to complete the sale based on the customers's agreement on a pre-tax amount and then, after the sale, send an invoice that includes tax. In theory, a merchant might use this "trick" to facilitate the close of a sale, as a customer might likely not be aware of the tax treatment in that specific locale and the extra amount might be what makes or breaks the whole purchase for him.
    – MarcoD
    Commented Jul 2, 2023 at 21:25
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Often fees are sales-taxable to avoid taxpaying entities gaming the system. E.g.

  • Rental car price $1/week
  • Rental car usage fee $1000/week
  • Sales tax 10%
  • Sales tax 10 cents on a $1001 transaction

There are states where even shipping costs are taxable, or shipping is tax exempt but "handling" fees are taxable, to avoid the one weird trick of "Item $1 shipping $100".

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  • Thanks, that is a very interesting aspect. As a non-expert in tax rules, I was just wondering what would be the merchant's interest in gaming the system that way, as it seems it would only benefit the customer, who pays the sales tax. Wouldn't the merchant end up paying the same amount of income tax?
    – MarcoD
    Commented Jul 2, 2023 at 21:34
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    No, if they aren't taxing you, they're not getting taxed. What's even worse, is they may tax YOU, then file it as the above, and then they don't get taxed.
    – Nelson
    Commented Jul 3, 2023 at 0:44
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    @MarcoD Nothing to do with income tax. If the sales tax is lower, then the final price to the customer is lower, attracting business to the merchant and thereby making the business more profitable. The economic cost of sales tax is borne by both buyer and seller regardless of how the tax is formally computed.
    – Ari Brodsky
    Commented Jul 3, 2023 at 6:44

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