Sales Tax Reference guide

On May 3, 1951, the Governor of the State of Maine approved legislation imposing a sales and use tax at the rate of 2% on retail sales to be effective beginning July 1, 1951. The Legislature also provided approximately 22 exemptions and exclusions.

Since 1951 many new exemptions and exclusions have been enacted. In total there are well over 100 different sales tax exemptions in addition to the items and services that are excluded from the tax base.

The following chart summarizes the tax rate and major changes in the tax base over the years:

*Year*	*Rate increased to:*	*Tax Base broadened to include:*
1957	3%
1959		Rentals of living quarters
1963	4%
1965		Telephone and telegraph services
1967	4.5%
1969	5%
1977		Rentals of automobiles on short term basis
1984		Cigarettes, liquor, extended cable tv
1986	7% on rental of living quarters and short term rentals of automobiles	Fabrication services
1989	10% on alcoholic drinks	Rentals of video tapes and video equipment
1990		Rentals of video games
1991	6% general rate; 7% meals and drinks	Snack foods
1993		Gross receipts tax on nursing homes and restaurants (7%)
1994	10% on short term rentals of automobiles
1995		Long term rentals of automobiles
1998	General rate decreased to 5.5%
2000	General rate decreased to 5%
2001	7% on all food prepared by retailer
2004	5%	Service Provider Tax Private non-medical institution service added
July 1, 2005	7% 5%	Casual rental of living quarters Community support services Day habilitation services Personal support services Residential training services
Oct 1, 2005	5%	Extended satellite television service

As you can see by this historical summation, the sales and use tax law has been constantly amended over the years. It is a major undertaking to administer a law that is subject to change each year and educate the public in a timely manner to obtain compliance.

SALES TAX

To summarize the sales tax law, one sentence could be quoted from the statute.

A tax is imposed on the value of all tangible personal property and taxable services sold at retail in this State. §1811

This statement says it all provided one has a basic understanding of the terms used. The Law contains many definitions to clarify the meanings of various terms found within the statute. The most important of these definitions are “tangible personal property”, “taxable services”, “sale”, and “retail sale”.

TANGIBLE PERSONAL PROPERTY

“Tangible personal property” is defined as follows:

...personal property that may be seen, weighed, measured, felt, touched or in any other manner perceived by the senses, but does not include rights and credits, insurance policies, bills of exchange, stocks and bonds and similar evidences of indebtedness or ownership. “Tangible personal property” includes electricity. “Tangible personal property” includes any computer software that is not a custom computer software program. §1752(17)

“Custom computer software program” means any computer software that is written or prepared exclusively for a particular customer. “Custom computer software program” does not include a “canned” or prewritten program that is held or exists for a general or repeated sale, lease or license, even if the program was initially developed on a custom basis or for in-house use. An existing prewritten program that has been modified to meet a particular customer's needs is a “custom computer software program” to the extent of the modification, and to the extent that the amount charged for the modification is separately stated. § 1752(1-E)

Thus, sales and use tax applies to anything that can be seen, felt and touched. This is easy to visualize in the case of vehicles, appliances, tables and chairs, our clothes, etc. The gray area begins with tangible products that are generated as a result of a service being performed for the purchaser. For instance, blueprints by a surveyor, financial statements by an accountant, a will drawn up by a lawyer, etc. A discussion in the area of services is provided later in this guide.

TAXABLE SERVICES

Sales of services in general are not taxable. However, certain services are specifically subject to sales tax as follows:

Rental of living quarters in any hotel, rooming house, tourist or trailer camp;
Rental or lease of an automobile;
Transmission and distribution of electricity;
Extended Service Warranty on an automobile; and
Prepaid calling services. §1752(17-B)

Other services that are subject to a service provider tax rather than a sales tax include:

Telecommunications service;
Extended cable and extended satellite television service;
Fabrication services;
Rental of video media and video equipment;
Rental of furniture, audio tapes and audio equipment pursuant to a rental-purchase agreement as defined in Title 9-A, section 11-105. §1752(17-A)

Once again definitions in the statute play an important role in clarifying these terms which are discussed in the “Taxable Services” and the "Service Provider Tax" sections of this guide.

SALE

A sale is defined as:

...any transfer, exchange or barter, in any manner or by any means whatsoever, for a consideration and includes leases and contracts payable by rental or license fees for the right of possession and use, but only when such leases and contracts are deemed by the State Tax Assessor to be in lieu of purchase. § 1752(13)

In order for a sale to occur, two things must happen. An item or service must be transferred to another party and that party must pay for it somehow. The most common type of sale occurs by selling property in exchange for cash. However, two people could agree to exchange property without any further cash payment or a person could agree to transfer property in exchange for services rendered. In either case a sale still exists.

RETAIL SALE

Retail sale means:

...any sale of tangible personal property in the ordinary course of business for any purpose other than for resale, except resale as a casual sale, in the form of tangible personal property. 'Retail sale' also means any sale of a taxable service in the ordinary course of business for any purpose other than for resale, except resale as a casual sale. §1752 (11)

Thus the sale of a refrigerator in an appliance store is a retail sale and subject to tax since the refrigerator is tangible personal property and the sale is in the ordinary business of the appliance store. The same applies to taxable services such as the rental of a video tape in a video store. However, if the appliance store was to sell their office desk, the desk is tangible but not an item they ordinarily sell in their store. The sale of the desk is not a retail sale but rather a casual sale. This definition does provide an exclusion and a limitation.

The definition excludes a sale for resale. Therefore, the appliance store does not pay a tax on its purchase of refrigerators from its supplier. The definition also states, however, that if the resale will be at casual sale then the original purchase is a retail sale and subject to tax. For instance if I were to purchase a refrigerator, since I am not in the business of making sales of tangible personal property, I cannot escape paying tax by claiming I am reselling the refrigerator. This is true even if I do resell it to my neighbor.

The limitation placed on this exclusion, is that the product being purchased must be resold as tangible personal property. For instance, the sale of lumber to a carpenter to build a house is a retail sale and cannot be purchased exempt for resale since the sale of the finished product is a sale of “real” property not personal property.

The definition of “retail sale” continues to specifically state situations included in the term as follows:

(1) Conditional sales, installment lease sales and any other transfer of tangible personal property when the title is retained as security for the payment of the purchase price and is intended to be transferred later; and

(2) Sale of products for internal human consumption to a person for resale through vending machines when sold to a retailer whose gross receipts from the retail sale of tangible personal property derived through sales from vending machines are more than 50% of the retailer's gross receipts. The tax must be paid by the retailer to the State.

(3) A sale in the ordinary course of business by a retailer to a purchaser who is not engaged in selling that kind of tangible personal property or taxable service in the ordinary course of repeated and successive transactions of like character; and

(4) The sale or liquidation of a business or the sale of substantially all of the assets of a business, to the extent that the seller purchased the assets of the business for resale, lease or rental in the ordinary course of business, except when:

(a) The sale is to an affiliated entity and the transferee, or ultimate transferee in a series of transactions among affiliated entities, purchases the assets for resale, lease or rental in the ordinary course of business; or

(b) The sale is to a person that purchases the assets for resale, lease or rental in the ordinary course of business or that purchases the assets for transfer to an affiliate, directly or through a series of transactions among affiliated entities, for resale, lease or rental by the affiliate in the ordinary course of business.

For purposes of this subparagraph, “affiliate” or “affiliated” includes both direct and indirect affiliates.

In the first inclusion, a transaction that is financed is a retail sale even though the title to the property does not pass to the purchaser until a later date. In the second inclusion, sales to a person primarily engaged in making vending machine sales of food products are retail sales. In the third inclusion, the sale by a retailer to a person of property that that person does not ordinarily sell is a retail sale. And in the fourth inclusion, the sale of goods that a business had purchased for resale is a retail sale even when sold as part of a sale or liquidation of the business. In all cases, tax applies to the sale unless it is otherwise exempt.

The definition of “retail sale” excludes the following:

(1) Any casual sale;

(2) Any sale by a personal representative in the settlement of an estate, unless the sale is made through a retailer, or unless the sale is made in the continuation or operation of a business;

(3) The sale, to a person engaged in the business of renting automobiles, of automobiles, integral parts of automobiles or accessories to automobiles, for rental or for use in an automobile rented, on a short-term basis;

(4) The sale to a person engaged in the business of renting audio or video tapes and audio or video equipment, of audio or video tapes or audio or video equipment for rental;

(5) The sale to a person engaged in the business of renting or leasing automobiles, of automobiles for rental or lease for one year or more; or

(6) The sale, to a person engaged in the business of providing cable or satellite television services, of associated equipment for rental or lease to subscribers in conjunction with a sale of extended cable or extended satellite television services; or:

(7) The sale to a person engaged in the business of renting furniture, or audio media and audio equipment of furniture, audio media or audio equipment for rental pursuant to a rental-purchase agreement as defined in Title 9-A, section 11-105.

(8) The sale of loaner vehicles to a new vehicle dealer licensed as such pursuant to Title 29-A, section 953. For purposes of this subparagraph, “loaner vehicle” means an automobile to be provided to the dealer’s service customers for short-term use free of charge pursuant to the dealer’s franchise, as defined in Title 10, section 1171, subsection 6.

These exclusions have the effect of an exemption, since if they are excluded from the definition of retail sale, they are not subject to tax. For instance:

the sale of my television to my neighbor is a casual sale and is not subject to tax; (There are certain casual sales, discussed below, that are specifically taxed in the law.)
the sale of items in an estate if sold by a personal representative who is not engaged in business is not taxable;
the sale of an automobile or parts and accessories for such automobile to a person who rents it on a short term basis, the sale of video media and equipment to a person renting the same and the sale of an automobile to a person who will lease it 12 months or more are not taxable. (This was enacted to avoid paying tax on the purchase as well as collect tax on the rentals.)

CASUAL SALES

Although the definition of ”retail sale“ excludes casual sales, the statute does impose tax on certain casual sales as follows:

The tax imposed by chapters 211 to 225 shall be levied upon all casual rentals of living quarters in a hotel, rooming house or tourist or trailer camp and upon all casual sales involving the sale of trailers, truck campers, motor vehicles, special mobile equipment except farm tractors and lumber harvesting vehicles or loaders, watercraft or aircraft except those sold for resale at retail sale or to a corporation, partnership, limited liability company or limited liability partnership when the seller is the owner of a majority of the common stock of the corporation or of the ownership interests in the partnership, limited liability company or limited liability partnership. This section does not apply to the rental of living quarters rented for a total of fewer than 15 days in the calendar year, except that a person who owns and offers for rental more than one property in the State during the calendar year is liable for collecting sales tax with respect to the rental of each unit regardless of the number of days for which it is rented. § 1764

You will note a similarity in these items in that most require some form of registration with either Dept. of Motor Vehicles or Dept. of Inland Fisheries and Wildlife. The statute further requires that tax must be paid as a prerequisite to registration. Therefore, rather than the casual seller bearing the responsibility of collecting the tax on such a sale, which would be administratively impractical, tax is collected by the registering agency.

More information on this topic can be found in the “EXEMPTIONS” section of this book.

USE TAX

Each state that imposes a sales tax has a complementary use tax that simply provides if a sales tax has not been paid on purchases for use within Maine, a use tax is due. The statute reads in part:

A tax is imposed, at the respective rate provided in section 1811, on the storage, use or other consumption in this State of tangible personal property or a service, the sale of which would be subject to tax under section 1764 or 1811...... When tangible personal property purchased for resale is withdrawn from inventory by the retailer for the retailer's own use, use tax liability accrues at the date of withdrawal. §1861

Use tax is a substitute for sales tax. All states that have a sales tax also impose a use tax that is intended in part to minimize unfair competition between sales made instate and those made out-of-state. The use tax rate is the same as the sales tax rate.

Use tax applies when sales tax has not been charged. Purchases made out-of-state are the most common type of transactions subject to a use tax. For instance, if a retailer purchases goods from a supplier located in Massachusetts, use tax applies. A Maine resident or business does not escape sales tax by purchasing out-of-state. Some of the more common taxable items are office supplies and equipment, computer hardware, software and supplies, janitorial supplies, fax machines and supplies, photocopiers and supplies and books. If a retailer removes goods from inventory that are being held for resale, and makes use of them, use tax applies. Use tax, in this case, is based on the cost of the item to the retailer, not on the retail selling price.

The same exemptions that apply to sales tax apply to use tax. Common exempt goods are magazines and newspapers published at least quarterly and goods purchased for resale. A retailer would report any use tax liabilities on the current month's sales tax return. If purchases are made in a state that charges sales tax and the purchase was taxed, no additional tax is due in Maine provided the tax was equal to or more than Maine's rate. If the tax is less than Maine's rate, the retailer owes the difference. For instance if another state's rate is 3% and Maine's rate is 5%, a Maine use tax of 2% is due.

Some out-of-state companies charge sales tax because they have a presence in Maine that requires them to register, collect and remit sales tax. Others voluntarily register. Use tax does not apply if a supplier has charged a Maine sales tax.

TAX RATES

A tax is imposed on the value of all tangible personal property and taxable services sold at retail in this State. The rate of tax is 7% on the value of liquor sold in licensed establishments as defined in Title 28-A, section 2, subsection 15, in accordance with Title 28-A, chapter 43; 7% on the value of rental of living quarters in any hotel, rooming house or tourist or trailer camp; 10% on the value of rental for a period of less than one year of an automobile, including a loaner vehicle that is provided other than to a motor vehicle dealer’s service customers pursuant to a manufacturer’s or dealer’s warranty; 7% on the value of prepared food; and 5% on the value of all other tangible personal property and taxable services. Value is measured by the sale price, except as otherwise provided. The value of rental for a period of less than one year of an automobile is the total rental charged to the lessee and includes, but is not limited to, maintenance and service contracts, drop-off or pick-up fees, airport surcharges, mileage fees and any separately itemized charges on the rental agreement to recover the owner’s estimated costs of the charges imposed by government authority for title fees, inspection fees, local excise tax and agent fees on all vehicles in its rental fleet registered in the State. All fees must be disclosed when an estimated quote is provided to the lessee. As used in this section “loaner vehicle” has the same meaning as in section 1752, subsection 11, paragraph B, subparagraph (8). §1811

To summarize § 1811, the rate of 5% applies to all sales of:

tangible personal property
rental or lease of an automobile for more than one year
prepaid calling arrangements
transmission and distribution of electricity

The rate of 7% applies to all sales of:

prepared food
alcoholic drinks sold from establishments which are licensed to sell alcoholic drinks for on-premises consumption
certain rentals of living quarters.

The rate of 10% applies to all:

short-term rentals of automobiles.

The rate of 5% Service Provider Tax imposed in §2552, and as explained later in this document, applies to all:

fabrication services
telecommunications services
extended cable and extended satellite television services
rental of audio or video media, video games and audio or video equipment
rental of furniture, audio media, audio equipment and home electronics
private nonmedical institution services
community support services
day habilitation services
personal support services
residential training services.

Use tax rates are applied the same way as sales tax.

LIABILITY FOR PAYMENT OF TAX

The sales tax is a levy on the purchaser, not the seller.

The liability for, or the incidence of, the tax imposed by this Part is declared to be a levy on the consumer. The retailer shall add the amount of the tax to the sale price and may state the amount of the tax separately from the sale price of tangible personal property or taxable services on price display signs, sales or delivery slips, bills and statements which advertise or indicate the sale price of that property or those services. §1753

However, the seller is obligated to collect the tax from the purchaser.

Every retailer shall add the sales tax imposed by chapters 211 to 225, or the average equivalent of that tax, to his sale price, except as otherwise provided, and when added the tax shall constitute a part of the price, shall be a debt of the purchaser to the retailer until paid and shall be recoverable at law in the same manner as the purchase price. §1812

The taxes collected by a seller are considered to be held in trust for the State.

....(t)he liability for the taxes or fees and the interest or penalty on taxes or fees is enforceable by assessment and collection, in the manner prescribed in this Part, against the person and against any officer, director, member, agent or employee of that person who, in that capacity, is responsible for the control or management of the funds or finances of that person or is responsible for the payment of that person's taxes. §177

SALE PRICE

“Sale price” is defined as follows:

...the total amount of a retail sale valued in money, whether received in money or otherwise. § 1752(14)

Pursuant to this definition, tax applies not only to cash sales, but also to credit sales, and to transactions where the sale price is paid in part or in whole by barter, rendition of services, or any other valuable consideration. “Sale price” includes the following:

Sale price includes certain services

Services which are a part of a retail sale; § 1752(14), sub-§A(1)

Sales tax applies to the full charge for the goods sold, including any charges for services which are a part of the sale. For example, a caterer undertakes to prepare and serve food for a reception, his charge covering not only the cost of the food, but also the cost of preparation and service. Tax applies to the entire charge, since preparing and serving the food are services which are part of the sale. Even though charges for preparation and serving are separately stated, tax would still apply to these charges.

Alteration Charges

When a merchant offers goods for sale, and undertakes to alter them to the customer's requirements, the charges for such alterations are part of the sale price on which tax is based, whether separately stated or not. For example, a customer selects a coat. However, certain alterations are necessary before the coat is satisfactory as a piece of wearing apparel for the customer. The merchant or someone contracted by the merchant performs the alterations and charges the customer an additional $10 alteration fee. The alteration charges are considered a part of the sale price upon which tax is based, even though such charges are separately stated.

Fabrication Charges

Charges for production, fabrication or processing of tangible personal property are included in sale price when performed on tangible personal property belonging to the fabricator. Accordingly, the point at which title passes to the customer is of no relevance in determining the taxability of such charges. For example, a customer enters into a contract with a boat builder to construct a boat in accordance with certain plans and specifications. The charges for the labor of building the boat would be taxable regardless of whether title to the materials passes to the customer before or after the production occurs. For services performed on tangible personal property furnished directly or indirectly by the customer, see the Service Provider Tax explanation of fabrication services.

Assembly Charges

Some types of furniture and equipment are sold either on a knocked down, or unfinished, or on an assembled, or finished basis; the assembled or finished item being priced correspondingly higher. Charges for assembling or finishing, in such cases, are part of the taxable sale price, whether separately stated or not.

In all the above cases, the alteration, fabrication, assembly or finishing of the article sold constitute “services which are a part of (the) sale” and are taxable whether separately stated or not.

Sale price includes more than cash sales

All receipts, cash, credits and property of any kind or nature and any amount for which credit is allowed by the seller to the purchaser, without any deduction on account of the cost of the property sold, the cost of the materials used, labor or service cost, interest paid, losses or any other expenses. § 1752(14), sub-§A(2)

Tax applies not only to cash sales, but also to credit sales, and to transactions where the sale price is paid in part or in whole by barter, rendition of services, or any other valuable consideration. The total selling price of a product constitutes its sale price regardless of the fact that the price may be broken down into components of cost of materials, labor and services performed on the product prior to the sale.

Trade-ins

When property is sold, with an allowance being made for traded-in property, tax applies to the entire sale price, including the allowance for trade-in. Thus, if a refrigerator is sold for $800, the customer paying $700 in cash and $100 by way of allowance on a traded in refrigerator, tax is based on the full price of $800.

Allowable trade-in credits

However, the law provides an exception to this rule.

When one or more of the following items of tangible personal property are traded in toward the sale price of another of the same kind of the following items, the tax imposed by this Part shall be levied only upon the difference between the sale price of the purchased property and the trade-in allowance of the property taken in trade, except for transactions between dealers involving exchange of the property from inventory:

1. Motor vehicles.

3. Watercraft.

4. Aircraft.

6. Chain saws.

7. Special mobile equipment.

8. Trailers.

9. Truck campers. §1765

Trailer. “Trailer” means a vehicle without motive power and mounted on wheels that is designed to carry persons or property and to be drawn by a motor vehicle and not operated on tracks. “Trailer” includes a camper trailer as defined in section 1481, subsection 1-A. § 1752(19-A)

Truck camper. " Truck camper" means a slide-in camper designed to be mounted on a truck body to provide temporary living quarters for recreational, camping, travel or other use. § 1752(20-A)

Motor vehicle. "Motor vehicle" means any self-propelled vehicle designed for the conveyance of passengers or property on the public highways. "Motor vehicle" includes an all-terrain vehicle as defined in Title 12, section 7851 and a snowmobile as defined in Title 12, section 7821. § 1752(7)

Special mobile equipment. "Special mobile equipment" means any self-propelled vehicle not designed or used primarily for the transportation of persons or property that may be operated or moved only incidentally over the highways, including, but not limited to, road construction or maintenance machinery, farm tractors, lumber harvesting vehicles or loaders, ditch-digging apparatus, stone crushers, air compressors, power shovels, cranes, graders, rollers, well drillers and wood sawing equipment. § 1752(14-B)

Watercraft. "Watercraft" means any type of vessel, boat, canoe or craft designed for use as a means of transportation on water, other than a seaplane, including motors, electronic and mechanical equipment and other machinery, whether permanently or temporarily attached, which are customarily used in the operations of the watercraft. § 1752(24)

Aircraft. “Aircraft” means any powered contrivance designed for navigation in the air except a rocket or missile. § 1752(1-A)

Thus whenever one of the above items is traded against the same type of item, the tax would be computed on the difference. For sales tax purposes, trade-in allowances only apply to the above listed items. Retailers who sell any vehicles mentioned above are advised to obtain the Bureau's Instruction Bulletin #24 which provides more detail in this area.

Core charges

Customers who purchase certain property that can be reconditioned and resold by the seller are encouraged to bring their used property to the seller by being charged what is often called a "core charge". The core charge is usually refunded or credited to the customer when the used property is brought to the seller. Core charges are considered part of the selling price of the new property being purchased and are subject to tax. For instance, an alternator may be sold for $80.00 with a core charge being stated in the amount of $10.00. The total selling price subject to tax is $90.00. If a used alternator is traded-in at the same time as the purchase of the new alternator, the selling price subject to tax remains at $90.00 even though a $10.00 credit is allowed. If the used alternator is returned to the seller at a later date and the customer is refunded the $10.00 core charge, no refund of sales tax is allowed. The definition of “sale price” does not exclude an allowance of this sort nor are core charges allowable as trade-in credits.

Sale price does not include vendor discounts

The definition continues to exclude the following charges:

Discounts allowed and taken on sales; § 1752(14), sub-§B(1)

If a 2% allowance is made for payment within a stated time, and this allowance or discount is actually taken by the customer, tax will apply to the stated price less the discount, or the amount actually paid.

For example, two customers purchase $100 worth of taxable goods, with 2% being allowed for prompt payment. Customer A pays promptly and thus takes the 2% discount: tax is based upon a sale price of $98. Customer B does not pay promptly and does not take the 2% discount: tax is based upon a sale price of $100.

On the other hand, if interest is charged on overdue accounts, tax does not apply to the interest so charged.

Coupons and rebates are another form of discount although not always deductible from the sale price. Coupons are issued by either a manufacturer of the product or by a retailer. The application of sales tax in each case differs.

Manufacturers' Coupons

When a retailer accepts a manufacturers' coupon, the retailer does not recognize any loss in the profit made on the sale. The retailer is reimbursed for the face value of the coupon by the manufacturer. In other words, the patron uses the coupon like cash and the retailer receives the cash when the coupons are redeemed with the manufacturer. The sale price on which tax is based is the total selling price before deducting the value of the coupons.

Example: A customer, when purchasing laundry detergent, redeems a coupon issued by the manufacturer of the detergent. The sale price of the detergent is $2.29 and the face value of the coupon is $.25. The sales tax is computed on $2.29; the sale price before deducting the value of the coupon.

Retailer's Coupons

When a retailer issues a store coupon, the retailer is reducing the price of the item purchased with the coupon by an amount equal to the face value of the coupon. The retailer reduces his profit on the sale and the value of the coupon is not recovered from any other party. This type of coupon is a seller's discount that is deducted from the sale price before computing the sales tax.

Example: A drug store publishes in an advertising flyer its own store coupon offering $.50 off the purchase of a particular shampoo. The shampoo sells for $2.89. The sales tax is computed on $2.39, the sale price after deducting the value of the coupon.

Gift Certificates

When a customer purchases a gift certificate, they are simply exchanging cash for another form of cash from the retailer. The purchase of a gift certificate is therefore not a taxable transaction. It is not until the gift certificate is presented to pay for a purchase of tangible personal property or service that the transaction is taxed, assuming that the goods or services are taxable. The sale price of the purchased goods is not reduced by the amount of the gift certificate before calculating the sales tax.

Rebates

Similarly, rebates are treated as a seller's discount if the retailer is the one providing the rebate. However, rebates are more commonly provided by manufacturers and for the same reason stated above, are not deducted from the sale price before computing tax. This remains true even if the rebate is assigned by the purchaser to the seller.

Sales tax paid on goods returned under warranty is refundable

Allowances in cash or by credit made upon the return of merchandise pursuant to warranty; § 1752(14), sub-§B(2)

When an adjustment of price is made by a retailer on the return of defective merchandise that has been warranted, the adjustment, or allowance, is deductible on a subsequent sales tax return of the retailer if the original sale was taxable and was so reported by the retailer.

For example, a tire is sold with a 30-month warranty, adjustment being based upon period of use. Assuming the tire was sold for $30.00 with an allowance of $1.00 per month for the period by which the tire fails to meet the warranty. If the tire is returned for failure after 24 months, the allowance would be $6.00. The purchaser would be entitled to refund of $6.00 plus sales tax on this amount; and the retailer would deduct $6.00 on its next sales tax return. Usually such adjustments are made as the result of a written warranty, as in the case of an automobile tire. It is not necessary that the warranty be in writing, since there is a general unwritten warranty that goods are not defective for the purpose for which they are intended.

While an adjustment of sales tax liability may be made for allowance by warranty, whether written or not, an adjustment cannot be made where the merchandise is returned as unsatisfactory, not because of written warranty or because it is defective and so fails to meet an unwritten warranty; but because the purchaser finds it is not suited for the purchaser’s purpose. In the latter case, unless the full purchase price is refunded, no adjustment of sales tax can be made.

For example, a customer purchases a snow blower. After using it for a short time the customer finds it is not powerful enough. There is neither failure to meet a written warranty nor any defect in the machine. The customer returns it to the dealer and is allowed 85% of the original purchase price. There is no adjustment permitted so far as sales tax is concerned.

Sales tax paid on goods returned is refundable if the full price is refunded

The price of property returned when the full price is refunded either in cash or by credit; § 1752(14), sub-§B(3)

If merchandise is returned by the customer and the full purchase price is refunded, either in cash or by credit toward other purchases, sales tax charged would be refunded to the customer or included in the credit. The retailer would deduct the original purchase price of the item on a subsequent sales tax return.

If, in connection with such returned merchandise, the retailer makes a standard service charge, the transaction will nevertheless be considered as a refund of the full purchase price if the service charge is separately shown and so identified on the invoice to the customer or in the records of the retailer. The customer would be entitled to a refund of the entire sales tax paid on the original transaction. For example, a retailer makes a standard service charge of $1.00 in all cases where merchandise is returned by the customer for refund. The invoice or credit memo to the customer indicates “purchase price refunded $30.00, less service charge $1.00 - net $29.00”. The retailer should treat this as a refund of the full purchase price and also refund the sales tax originally paid on the $30.00 sale. Note, however, that except for deduction of a standard service charge, the refund must be of the entire purchase price. For example, if an item has been used by the customer and the retailer therefore refunds less than the full purchase price (the transaction not involving an express or implied warranty), no adjustment of sales tax can be made.

Installation and repair charges may not be taxable

The price received for labor or services used in installing or applying or repairing the property sold, if separately charged or stated; § 1752(14), sub-§B(4)

If an appliance store sells a dishwasher but also agrees to install it for a fee, the installation labor charge would not be taxed if separately stated from the purchase price of the dishwasher. If not separately stated, the total charge is subject to tax.

When repair parts or accessories are installed in an item owned by the customer, and the charge for installation or repair labor is separately stated from the charge for the parts or accessories, only the materials portion of the sale is subject to tax. If labor and materials are not separately stated, but invoiced as one bundled price, the entire amount charged to the customer is taxable. (See Instructional Bulletin #53 for handling of repairs under warranties, service contracts and maintenance agreements.)

Tips are generally not taxable

Any amount charged or collected, in lieu of a gratuity or tip, as a specifically stated service charge, when that amount is to be disbursed by a hotel, motel, restaurant or other eating establishment to its employees as wages; § 1752(14), sub-§B(5)

An amount charged or collected in lieu of a gratuity or tip, as a specifically stated service charge, when the amount so charged is to be disbursed by a hotel, motel, restaurant or other eating establishment to its employees as wages is not part of the taxable base. An amount or flat percentage charged or collected in lieu of a gratuity is not part of the selling price provided the gratuity is disbursed by the seller to the employee as wages. If not disbursed to the employee, the gratuity is part of the selling price.

Certain excise taxes are not subject to a sales tax

The amount of any tax imposed by the United States on or with respect to retail sales, whether imposed upon the retailer or the consumer, except any manufacturers', importers', alcohol or tobacco excise tax; § 1752(14), sub-§B(6)

Examples of federal retailer's excise taxes are the 10% federal luxury tax and the 12% heavy vehicle tax. Generally speaking, federal excise taxes imposed on automobiles, tires, firearms, tobacco, liquor and sporting goods are manufacturers' excise taxes and are taxable as part of the sale price. As a result, the total selling price of cigarettes and beer, for instance, are taxable even though federal excise taxes are embedded in the retail price.

Certain delivery charges are taxable

The cost of transportation from the retailer's place of business or other point from which shipment is made directly to the purchaser, provided that those charges are separately stated and the transportation occurs by means of common carrier, contract carrier or the United States mail; § 1752(14), sub-§B(7)

Transportation charges are exempt from sales tax if all three of the above requirements are met, namely:

1) Shipment is made directly to the purchaser

It is not necessary that shipment be made directly from the location of the seller, so transportation charges associated with a so-called “drop shipment” may be exempt if the other requirements are met. The cost of transporting the property sold to the location of the seller is always part of the taxable sale price of the property, whether or not it is separately stated to the customer.

Examples of situations in which transportation charges are subject to tax because they are not for shipment directly to the location of the purchaser are:

i. “Home party” sales where the goods ordered at the party are shipped to the representative and then delivered by the representative to the customers;

ii. The cost of shipping property (such as inventory) from the manufacturer to the retailer (“incoming freight”), even though that cost is separately stated on the invoice to the customer;

iii. Catalog or special order sales made at a retail location where the goods are shipped to the retailer and picked up by the customer at the retail location.

2) Charges are separately stated

Although advisable, it is not essential that the transportation charges be separately stated on the invoice of the seller. Any verifiable record showing the amount of the transportation charge as a separate item, such as a bill of lading, is acceptable evidence to substantiate a deduction for transportation charges. In the absence of a verifiable record, no deduction can be allowed. An estimate of the cost of transportation, by either the seller or the purchaser, is not acceptable.

The cost of transportation is not separately stated when it is combined with charges for other services as in the case of a “shipping and handling” charge.

A charge for delivery by the seller is taxable

3) Shipment is made by common or contract carrier or the US Mail

Charges for delivery by the seller are part of the sale price for purposes of computing the sales tax. There are no circumstances under which the seller of tangible personal property can be a common or contract carrier with respect to that property.

Lemon law fee is exempt

The fee imposed by Title 10, section 1169, subsection 11; § 1752(14), sub-§B(8)

This excludes the $1 lemon law arbitration fee from taxation.

Recycling assistance fees

The fee imposed by section 4832, subsection 1; § 1752(14), sub-§ B(9)

A fee is imposed on the retail sale in this State of new tires and new lead-acid batteries in the amount of $1 per tire or lead-acid battery. A fee in the same amount is imposed on the storage, use or other consumption in this State of tires and lead-acid batteries purchased new in this State by the user or purchased outside the State by the user the fee imposed by this section has been paid.§ 4832(1)

A recycling assistance fee is imposed on the retail sale of new tires and new lead-acid batteries at the rate of $1.00 each. Sales of used tires and batteries are not subject to the fee. The fee applies to all items in each category whether used for residential, commercial or industrial purposes unless specifically exempted. The fee is applied in the same manner as sales and use tax. Any exclusion, exemption or credit provided in the sales and use tax law also applies to the recycling assistance fee. Bulletin 48 provides more detail on this subject.

Lead-acid batteries

“Lead-acid battery” means a device designed and used for the storage of electrical energy through chemical reactions involving lead and acids. § 4831(2)

The law is specific in applying the fee to only batteries which involve lead and acids. These are most commonly used to store electrical energy for motorized vehicles, such as automobiles, trucks, motorcycles, etc. "Lead-acid batteries" include those sold for security systems installed in real property. "Lead-acid batteries" do not include those sold for motorized wheelchairs and tricarts.

Tires

“Tire” means the device made of rubber or any similar substance which is intended to be attached to a motorized vehicle or trailer and is designed to support the load of the motorized vehicle or trailer. § 4831(4)

“Motorized vehicle” means any self-propelled vehicle, including motorcycles, construction and farm vehicles and other off-road vehicles, not operating exclusively on tracks. § 4831(3)

“Trailer” means any vehicle without motive power that is designed to be drawn by a motorized vehicle. § 4831(5)

Only tires to be attached to a motorized vehicle or trailer are subject to the fee. For purposes of this fee, retread tires are used tires and are not subject to the fee. "Tires" include those sold for airplanes and lawn and garden tractors but do not include those sold for motorized wheelchairs, tricarts and push-type lawn mowers.

Lead-acid battery deposits are exempt

The lead-acid battery deposit imposed by Title 38, section 1604, subsection 2-B. §1752(14), sub-§B(10)

This excludes the $10 lead acid battery deposit from taxation. The lead-acid battery deposit, required by 38 M.R.S.A., §1604, requires the retailer to charge a $10.00 deposit to the consumer if no used battery is presented at the time of sale.

The recycling assistance fee is not to be confused with the lead-acid battery deposit. The recycling fee is in addition to the $10.00 deposit and applies even though the deposit may not be applicable.

Premiums on Motor Vehicle Oil Changes

In addition to any other tax or charge imposed under state or federal law, a premium is imposed on all motor vehicle oil changes sold in the State at retail in the amount of $1 per oil change on a vehicle with a gross vehicle weight of under 10,000 pounds, $2 on a vehicle with a gross vehicle weight of 10,000 pounds to 25,999 pounds and $3 on a vehicle with a gross vehicle weight of 26,000 pounds or more. Any person that owns a fleet of vehicles and performs oil changes on those vehicles shall pay a premium of $1 for each oil change performed on each vehicle in the fleet with a gross vehicle weight of under 10,000 pounds, $2 for each vehicle with a gross vehicle weight of 10,000 pounds to 25,999 pounds and $3 for each vehicle with a gross vehicle weight of 26,000 pounds or more. All premiums must be paid monthly to the State Tax Assessor. By the 20th day of each month, the State Tax Assessor shall notify the State Controller and the Treasurer of State of the amount of revenue attributable to the premium collected under this subsection in the previous month. When notified by the State Tax Assessor, the State Controller shall transfer that amount to the fund. Title 10, §1020(6)

Effective October 1, 2007 a premium is imposed on all motor vehicle oil changes sold at retail in this State in the amount of $1 per oil change (if the vehicle’s gross weight is under 10,000 lbs), $2 per oil change (if the vehicle’s gross weight is 10,000 lbs to 25,999 lbs) and $3 per oil change (if the vehicle’s gross weight is 26,000 lbs or more). Any person who owns a fleet of vehicles (defined as 3 or more registered to the same person) and who performs their own oil changes is also subject to the premium. All premiums must be paid monthly to the State Tax Assessor and are dedicated to the Waste Motor Oil Revenue Fund.

A “motor vehicle oil change” is defined as “the changing of any lubricating oil classified for use in an internal combustion engine, transmission, gearbox, differential or hydraulics in a motor vehicle.” A “motor vehicle” is defined as “a self-propelled vehicle not operated exclusively on tracks but does not include … a snowmobile … an all-terrain vehicle … and a motorized wheelchair or an electric personal assistive mobility device.”

TAXABLE SERVICES

The taxation of services is not new to Maine. In fact Maine has taxed services since 1959 when it began to tax rentals of living quarters. In 1965, it was telephone and telegraph services; in 1977 short term rentals of automobiles; in 1984 extended cable television services; in 1986 fabrication services and custom computer programming; in 1989 rentals of video tapes; in 1995 long-term rentals of automobiles; in 1999 certain rent-to-own transactions; in 2004 the creation of the service provider tax and in 2005 the addition of extended satellite television services. In all of these situations, no sale of tangible personal property exists. Rather a service is being rendered.

In determining if a service is taxable, some are clearly exempt and others are clearly taxable. Only sales of services defined as taxable services by statute are taxable. However, transactions do occur somewhere in the middle that make such a determination more difficult.

Another distinction is whether a sale is treated as a sale of services, tangible personal property, or intangible property. Historically the Bureau has regarded financial reports, wills and blueprints as intangibles. The purchaser is obtaining the technical services of the provider even though the provider, in turn, presents an instrument to convey thoughts, ideas or research of the provider. The value of the transaction is in the service being rendered. On the other hand the Bureau is sometimes faced with determining if a transaction is a service or is a sale of tangible personal property wherein a service is provided but results in a transfer of tangible personal property. For instance the production of such items as brochures and audio and video tapes, requires a high degree of technical expertise. The cost of production is mainly creative time and labor and the cost of materials used in the production is relatively small. However, the value of this transaction is in the tangible personal property being produced and transferred.

As previously mentioned, sales of services in general are not taxable. However, the statute identifies certain services that are specifically subject to sales tax.

Rental of living quarters in any hotel, rooming house, tourist or trailer camp;
Rental or lease of an automobile;
Transmission and distribution of electricity; and.
Extended Service Warranty on an automobile; and
Prepaid calling service.
§1752(17-B)

Certain other services are subject to theservice provider tax rather than the sales tax. Explanation of these services is also included in this guide and can be found at the end of this section.

Telecommunications service;
Extended cable and extended satellite television service;
Fabrication services;
Rental of video media and video equipment;
Rental of furniture, audio media and audio equipment pursuant to a rental purchase agreement as defined in Title 9-A, section 11-105.

TRANSIENT RENTALS

Rental of living quarters in any hotel, rooming house, tourist or trailer camp; § 1752(17-A)

The following definitions found in the sales and use tax law provide the foundation for determining the type of living quarters that are taxable.

Living quarters. “Living quarters” means sleeping rooms, sleeping or housekeeping accommodations, and tent or trailer space. § 1752(6)

Hotel. “Hotel” means every building or other structure kept, used, maintained, advertised as or held out to the public to be a place where living quarters are supplied for pay to transient or permanent guests and tenants. § 1752(4)

Rooming house. “Rooming house” means every house, boat, vehicle, motor court, trailer court or other structure or any place or location kept, used, maintained, advertised or held out to the public to be a place where living quarters are supplied for pay to transient or permanent guests or tenants, whether in one or adjoining buildings. § 1752(12)

Tourist camp. “Tourist camp” means a place where tents or tent houses, or camp cottages or other structures are located and offered to the public or any segment thereof for human habitation. § 1752(19)

Trailer camp. “Trailer camp” means a place where space is offered with or without service facilities to the public for tenting or for the parking and accommodation of automobile trailers which are used for living quarters and the rental price shall include all service charges paid to the lessor. § 1752(20)

Generally, the amount paid for occupancy of these rooms or spaces are subject to the sales tax. There are situations, however, where a rental charge is not for the rental of living quarters and would not be taxable or is a rental that is specifically exempt.

Incidental Charges at Hotels and Motels

When a hotel offers separate facilities (such as a golf course or tennis courts) that are not a part of the rental of living quarters, and where any charges for those facilities are in fact extra and are paid only by persons who make use of the facilities and are shown as a separate item on the bill, those charges are not subject to tax. Tax does apply to the amount billed for extra services that are a part of the rental of a room in a hotel or boarding house, whether or not separately stated. Some examples of services that are considered a part of the rental of living quarters include extra charges for use of a cot or crib or for use of cooking facilities.

Rental of Public Rooms

Rental by a hotel of a dining room, assembly room or other area not intended for use as living quarters is not taxable. When a hotel rents a room designed as living quarters, such as a hospitality suite with bedrooms, the rental will be considered taxable regardless of the use actually made of the room by the person renting it.

Rentals of Video Tapes and Video Equipment.

Tent and Trailer Space

The rental of space for the pitching of tents or the parking of motor homes, travel trailers and camper trailers is taxable. The rental price includes all service charges paid to the lessor, whether or not those charges are separately collected or stated. If the tents or trailers themselves are rented, that rental is also taxable.

Occupancy for 28 days or more

The law provides an exemption that reads:

Continuous residence refunds and credits. Rental charged to any person who resides continuously for 28 days at any one hotel, rooming house, tourist or trailer camp if:

A. The person does not maintain a primary residence at some other location; or

B. The person is residing away from that person's primary residence in connection with employment or education.

Tax paid by such a person to the retailer under section 1812 during the initial 28-day period must be refunded by the retailer. If the tax has been reported and paid to the State by the retailer, it may be taken as a credit by the retailer on the return filed by the retailer covering the month in which the refund was made to the tenant.
§ 1760(20)

Rental charged to any person who resides continuously for 28 days or more in the same hotel, rooming house, tourist camp or trailer camp is nontaxable if the living quarters are the person's primary residence, or if the rental is in connection with education or employment. This exemption applies, for instance, to apartment rentals (as it is a person's primary residence), rentals to college students (as it is for education) and rentals to such people as construction workers (as it is for employment reasons). If tax has been paid by the person during the initial 28-day period, that tax should be refunded by the retailer (lessor). If the retailer (lessor) has reported and paid the tax to the State, the retailer should take a corresponding credit on the Sales and Use Tax Return filed for the period in which the refund or credit occurred by adjusting the taxable rentals figure shown on the return.

Living Quarters Furnished To Employees

The law also provides another exemption that reads:

Certain meals and lodging. Meals or lodging provided to employees at their place of employment when the value of those meals or that lodging is allowed as a credit toward the wages of those employees. § 1760(75)

Tax does not apply to rentals of living quarters that are furnished by an employer to an employee, at premises controlled by the employer, and solely for the convenience of the employer provided the charge is allowed as a credit toward the wages of the employee.

Specific Exemptions

The sales and use tax law provides the following specific exemptions from tax:

Camps. Rental charged for living quarters, sleeping or housekeeping accommodations at camps entitled to exemption from property tax under section 652, subsection 1. § 1760(17)

Certain institutions. Rental charged for living or sleeping quarters in an institution licensed by the State for the hospitalization or nursing care of human beings. § 1760(18)

Schools. Rental charged for living quarters, sleeping or housekeeping accommodations to any student necessitated by attendance at a school as defined in subsection 16. § 1760(19)

"School" means a public or incorporated nonprofit primary, secondary or postsecondary educational institution that has a regular faculty, curriculum and organized body of pupils or students in attendance throughout the usual school year and that keeps and furnishes to students and others records required and accepted for entrance to schools of secondary, collegiate or graduate rank. § 1752(14-E)

Casual Rentals

The tax imposed by chapters 211 to 225 must be levied upon all casual rentals of living quarters in a hotel, rooming house or tourist or trailer camp … This section does not apply to the rental of living quarters rented for a total of fewer than 15 days in the calendar year, except that a person who owns and offers for rental more than one property in the State during the calendar year is liable for collecting sales tax with respect to the rental of each unit regardless of the number of days for which it is rented. § 1764

A person who has only one room or a single camp for rent is required to register as a retailer and collect the 7% sales tax unless rental is for fewer than 15 days each year. Property that is placed in the hands of a real estate agent or other person engaged in the business of renting or managing rentals of living quarters is not a casual rental but is subject to sales tax in the same manner as that of a hotel.

Forfeited room deposits or cancellation fees

The definition of “sale price” excludes the following:

(11) Any amount charged or collected by a person engaged in the rental of living quarters as a forfeited room deposit or cancellation fee if the prospective occupant of the living quarters cancels the reservation on or before the scheduled date of arrival.
§1752(14), sub-§B(11)

When a patron rents a room, it is customary for the establishment to require a deposit to hold the room. If the patron cancels or fails to show up on the date of arrival, the deposit, or a portion of the deposit, is forfeited by the patron. The statute distinguishes between amounts which are deemed to be rentals of living quarters and those amounts which are deemed cancellation fees.

If a patron cancels his or her reservation on or prior to the scheduled date of arrival and the establishment retains a “cancellation fee”, the fee is not subject to Maine sales tax. However, if the patron fails to show on the scheduled date of arrival, any amount forfeited to the establishment is treated as rental of living quarters and is subject to the 7% tax.

PREPAID CALLING ARRANGEMENTS

Prepaid calling service; § 1752(17-B)

"Prepaid calling service" is defined as:

... the right to access exclusively telecommunications services that must be paid for in advance that enables the origination of calls using an access number or authorization code or both, whether manually or electronically dialed, and that is sold in predetermined units or dollars, the number of which declines with use in a known amount. The sale or recharge of the service is considered a sale within the State if the transfer for consideration takes place at the vendor's place of business in the State. If the sale or recharge of prepaid calling service does not take place at the vendor's place of business, the sale or recharge is deemed to take place at the customer's shipping address, or if there is no item shipped, at the customer's billing address or the location associated with the customer's mobile telephone number. The sale of the service is deemed to occur on the date of the transfer for consideration of the service. §1752(8-B)

Prepaid calling cards and other calling arrangements are taxable at the time of sale. The "sale price" is the card's or arrangement's full face value. In the event the sale or "recharge" does not occur at a vendor's place of business, the sale is deemed to take place at the customer's billing address.

TRANSMISSION AND DISTRIBUTION OF ELECTRICITY

Transmission and distribution of electricity. § 1752(17-B)

Since March 1, 2000, electricity has been provided by two separate companies; an electricity supplier, and a transmission and distribution (T&D) company. The electricity supplier sells electricity to consumers in a competitive market. The T&D company delivers the electricity over lines which they maintain and service. The sale of electricity is a taxable sale of tangible personal property. The charge for the transmission and distribution of the electricity is a taxable service and is likewise subject to tax.

EXTENDED WARRANTY ON AUTOMOBILES

The sale of an extended service contract on an automobile that entitles the purchaser to specific benefits in the service of the automobile for a specific duration. § 1752(17-B)

Effective September 20, 2007, sales tax applies to the sale of an extended service contract on an automobile that entitles the purchaser to specific benefits in the service of the automobile for a specific duration. The sale of the extended warranty is taxable, while the parts used in subsequent repairs are exempt. Prior to this date, the sale of an extended warranty was a nontaxable service and any parts associated with subsequent repairs were taxable. Note that this change applies to the sale of extended warranties on automobiles only. The sale of extended warranties on any other property continues to be exempt.

RENTAL OR LEASE OF AUTOS

Rental or lease of an automobile. § 1752(17-B)

Since definitions play a crucial role in taxation, the term "automobile" has the following definition:

"'Automobile,' for purposes of subsection 17-B, means a self-propelled 4-wheel motor vehicle designed primarily to carry passengers and not designed to run on tracks." § 1752, sub - § 1-B

Automobiles include, but are not limited to, SUVs, so-called jeeps and scouts and pick-up trucks. Passenger vans are also automobiles even if retrofitted for another use, such as a service vehicle. Automobiles do not include those which have more than 4 wheels, such as dual rear wheel pick-ups, cargo vans and motor homes.

Rentals of automobiles fall into two categories: short term and long term. Within long term rentals, there could be a number of different types of transactions. The tax consequences in each category differ.

Short term rentals

Rentals for less than 12 months to one person are deemed to be short-term rentals and are subject to a 10% tax. Typically these are daily rental operations. Taxable rentals include all charges for the rental of the automobile, including maintenance and service contracts, drop-off or pick-up fees, airport surcharges, mileage fees and any separately itemized charges on the rental agreement to recover the owner’s estimated costs of the charges imposed by government authority for title fees, inspection fees, local excise tax and agent fees on all vehicles in its rental fleet registered in the State.(§1811) Rentals do not include cancellation charges or sales of gasoline.

All rental payments made pursuant to a rental executed in Maine are subject to Maine tax whether the automobile is to be used exclusively in Maine or outside the state. Alternatively, rental payments associated with a rental executed outside the state is not subject to Maine's tax even if the automobile is used exclusively in Maine. Rentals to agencies of government and to organizations that are exempt from sales tax are exempt on the same basis as other retail sales.

As previously mentioned, the definition of "retail sale" excludes "(t)he sale, to a person engaged in the business of renting automobiles, of automobiles, integral parts of automobiles or accessories to automobiles, forrental or for use in an automobile rented on a short-term basis". Automobiles purchased exclusively for short term rental are purchased tax exempt. However, if any other use is made of the automobile, the lessor becomes subject to a use tax based on the lessor's purchase price.

Long term rentals

Rentals or leases of automobiles for 12 months or more are long term leases. With regards to automobiles only, the tax base for long term leases differ from any other type of vehicle or equipment. The statute states:

“Rental or lease of an automobile for one year or more must be taxed at the time of the lease or rental transaction at 5% of the following: the total monthly lease payment multiplied by the number of payments in the lease or rental, the amount of equity involved in any trade-in and the value of any cash down payment. Collection and remittance of the tax is the responsibility of the person that negotiates the lease transaction with the lessee.” § 1811, ¶ 6

As a result, the statute provides that sales tax is computed on the total of three categories:

total lease payments
trade-in equity
cash down payment

Total lease payments

Total lease payments are arrived at by multiplying the lease payment by the number of payments in the lease term. If the lease indicates that the 36 monthly payments of $300.00 are due on the 10th of each month, the tax base for this category is $10,800. Taxes, such as federal luxury tax, excise and sales taxes, are allowable exclusions from the tax base. Ancillary services such as registration fees, life/disability insurance, warranties and management services, are excluded only if separately stated from the lease payment. For example, if the lease stated above is inclusive of ancillary services, the tax base remains the same. It is immaterial that the $300 could be broken down into a variety of charges. If on the other hand, the lessor bills the lessee $150 for ancillary services in addition to the $300 each month, these services would not be taxable.

Floating interest rates: Leases that have floating interest rates should use the rate effective at the time the lease is executed in determining the total lease payments. However, a reconciliation will be required at the end of the term to determine if any tax adjustment is necessary. For example, at the beginning of a lease it is determined that the lease payment is $350.00 based on the current interest rate and the term is for 24 months. The total lease payments which are part of the tax base and subject to tax amounts to $8400.00. During the lease the interest rate fluctuates to a degree that the actual total of the lease payments amounts to $9000.00. A tax adjustment of $30.00 (presuming the rate is 5%) is necessary on the last lease payment for the extra $600.00 in payments.

Trade-in equity

Trade-in equity is the value of any kind of trade-in which is a cost reduction to the lease. For instance if a vehicle is taken in trade with a value assigned to it in the amount of $3000.00 with no lien, the $3000.00 must be added to the tax base. If a lien was involved and the customer owed $1000.00, the net amount, or $2000.00, is added to the tax base. If the lien is greater than the trade-in value, no equity exists and no value is added (or deducted) from the tax base.

Cash Down Payment

Cash down represents any initial cash payment which is a cost reduction to the lease. Cash down includes rebates applied to the lease. It does not include pre-payment of lease payments or payments of sales tax, excise tax, registration fees and other required "up front" costs that are disbursed by the lessor.

Special situations

Open-end leases

Open-end leases may or may not have a stated lease term. Thus total rental payments may not be determinable in advance. If a term is determinable and the term is 12 months or more, such as a 12 month lease with monthly renewals thereafter, the lease will be considered a long term lease. The tax base would be computed on the total of the known lease payments. Monthly renewals would be taxed at the rate of 5% on each payment as they accrue.

If a term is not determinable or the designated term is less than 12 months, the lease will be considered a short-term lease. Each lease payment should be taxed as they accrue at the short-term tax rate of 10%.

A Terminal Rental Adjustment Clause (TRAC) lease is an example of an open-end lease. However, at the end of the lease, the final lease payment is adjusted either upward or downward based upon the condition of the vehicle. Since this represents additional rent due or credit for overpaid rentals, an adjustment to tax is necessary. If there is an increase in the rental payment, additional tax is due. If there is a credit adjustment, a tax credit is appropriate.

Lease extensions

In the event a lease is extended, tax is to be computed once again. The lease will continue to be regarded as a long term lease even though the extension may be for a term of less than 12 months. If the term is known, the tax base would include the payment multiplied by the additional number of months. If the term is not determinable, tax would be computed on each payment as they accrue.

Early Termination of Lease or removal from state

There is no provision in the sales and use tax law for the refund of any sales tax, in the case where a lease on which tax has been collected is terminated prior to the end of its term or where the property covered in a lease executed in Maine is subsequently removed from the state.

Leases to non-residents

Out-of-state residents that enter into a long term lease of an automobile with a Maine dealer are exempt from Maine sales and use tax provided the automobile is immediately removed from the state and the purchaser executes an "Immediate Removal Affidavit". (See §1760, sub-§23-C)

LEASES

Although leases in general are not a “taxable service”, the area of leasing requires a discussion of the different tax treatments of leases. There are generally four types of lease transactions;

a true lease
a lease with option to purchase
a lease in lieu of purchase and
an open end lease.

True Lease

In a true lease, the lessor enters into a lease agreement with a lessee for a stated period of time and the property is to be returned to the lessor at the conclusion of the lease term. The lessor is making a taxable use of the property through the derivation of rental income. The lessor is liable for a use tax, due at the beginning of the lease, based on the lessor's cost of the property. If the property is returned to the lessor and leased to another party, no additional use tax is due. No sales tax is charged to the lessee nor are lease payments subject to tax.

Lease with option to purchase

In a lease with option to purchase, the same liability to the lessor exists as stated in a true lease. However, at the end of the term, the lessee has the option to purchase the property for a stated amount, fair market value or some other value. If the option is exercised, a taxable sale occurs and sales tax would be charged at that time to the lessee based on the option price, including any amounts previously paid as rentals and applied to that price.

Lease in lieu of purchase including automobiles

In a lease in lieu of purchase, the lessee will acquire title at the end of the lease term. This type of lease is deemed a “sale” at the commencement of the lease. The lessee would be charged sales tax up front based on the total lease payments. (Finance charges which are separately stated may be excluded from the taxable base.)

Leases with nominal purchase options, such as $1.00, are considered leases in lieu of purchase. In addition, TRAC leases may qualify as leases-in-lieu of purchase, depending on the contractual terms.

Trade-ins on leased property

Trade-in credits are only allowed in transactions involving the “sale” of certain vehicles. Trade-in credits are not allowed on leased property unless the lease is in lieu of purchase and the leased property is of the type that allows trade-in credits.

Leases to exempt organizations

Leases to exempt organizations are treated no differently than the leases mentioned above with the following exceptions: rentals and leases of automobiles, interim rentals and leases in lieu of purchase, being “sales”, are exempt when rented/leased to a sales tax exempt organization. In the case of a lease with option to purchase, the lease is taxable as previously described, while the sale that occurs when the option exercised is exempt.

Interim Rentals

The Sales and Use Tax Law contains a special provision to cover situations where tangible personal property that had been purchased for resale is rented as an incident to holding the property for resale. This does not apply to situations where the purchase of the property was for rental purposes and the ultimate sale of the property is incidental only. Nor does it apply to short-term or long-term rentals or leases of automobiles.

The law permits the retailer in such cases to elect to collect and remit sales tax on rental payments rather than pay a use tax on the purchase price. Sales tax on rentals is to be passed on to the original and any subsequent lessees. If the property is rented to a person for more than one year or the retailer makes other use of the property, other than rental or sale, the election is void and the retailer is liable for use tax on the property.

Retailers must maintain supporting documentation of the rentals for audit purposes.

Software licenses

Unlike a sale, a software license provides the user with the authorization to only use the software without title to the software transferring to the user. A software license is therefore treated as a lease. Software licenses that are issued and renewed annually are taxable to the lessor based upon the purchase price. If the software lessor is also the developer of the software, the cost of the product is based upon the lessor’s material costs.

A software license will be considered a lease in lieu of purchase when the license is perpetual or for 10 years or more with no annual renewals. In this situation, the lessor would collect a sales tax from the lessee at the commencement of the lease based upon the total amount of lease payments.

BUREAU INFORMATION

Sales Tax Reference guide