As most taxpayers are aware, the make-up of the Kentucky Board of Tax Appeals (the “Board”) changed following the election of Governor Matt Bevin last fall. In April, Chairman Marcus Carey and Board member Carlo Wessels were appointed to replace former Chairman Cecil Dunn and Board member Lindy Karns. Board member Jessica Burke was later appointed to replace former Board member Lanola Parsons. The “new” Board, consisting of Chairman Carey, Mr. Wessels, and Ms. Burke, recently rejected a recommended decision prepared by a former board member acting as a hearing officer. The recommended decision was a holding in favor of the Kentucky Department of Revenue (the “Department”). Instead, the Board found in favor of the taxpayers, Rent-a-Center East, Inc. and Rent-Way, Inc.
The taxpayers are rent-to-own companies that rent and sell household goods, including furniture, appliances, electronics, and computers. To rent or purchase tangible personal property, customers must execute a Rental Purchase Agreement and pay a rental purchase fee. The taxpayers collect and remit sales tax on the rental purchase fee.
The Rental Purchase Agreement provides that customers are liable for the fair market value of the property if it is lost, stolen, damaged, or destroyed. At the time of signing the agreement, customers have the option of purchasing an “Optional Liability Waiver Provision”, which covers much of a customer’s potential liability for losses. Customers choosing to purchase this coverage pay a separately stated waiver fee in addition to the weekly, semi-monthly, or monthly rental payment. The optional waiver fee is then added to the original Rental Purchase Agreement.
The taxpayers did not collect and remit sales tax on optional waiver fees charged to customers for tax years 2007 through 2011. Although the Department failed to pick up these waiver fees in prior audits, it concluded the waiver fees were taxable and issued assessments to the taxpayers for the tax years at issue. The Department argued the waiver fees were part of the taxpayers’ gross receipts from the lease or rental of tangible personal property and thus were subject to Kentucky sales tax.
The taxpayers appealed the assessments issued by the Department, arguing the waiver fees were charges for intangible property and therefore not subject to sales tax. The Board agreed, rejecting the recommended decision in favor of the Department. The Board held the optional waiver agreement, for which a separately stated fee is charged, is not tangible personal property as defined by Kentucky law. Indeed, the Board noted that the Department conceded the waivers at issue were not tangible personal property. Because Kentucky imposes sales tax only on gross receipts derived from retail sales of tangible personal property (and certain select services not at issue in this case), the Board held the waiver fees were not subject to tax.
 See Rent-a-Center East, Inc. and Rent-Way, Inc. v. Finance and Admin. Cabinet, Dep’t of Revenue, File No. K14-R-17, Final Order No. K-25136 (Ky. Bd. Tax App. Sept. 6, 2016).