United States: Significant Changes To Heavy Equipment Rentals Tax Are Now Effective

Effective January 1, 2022, Washington SSB 5638 (passed in the 2020 legislative session) creates significant changes to taxation not only to the equipment rental industry but also to the construction industry which often leases equipment from both related and unrelated parties.

This new law does two things:

1.  imposes a new state excise tax on heavy equipment rental transactions (Ch. 82.51 RCW); and
2. exempts certain heavy equipment rentals from the personal property tax (RCW 84.36.597).

Although companies eligible for the property tax exemption are explicitly subject to the new excise tax, the reverse is not stated, creating the possibility that companies that are not eligible for the property tax exemption will nevertheless be subject to the new excise tax. This unintended double tax situation will likely be considered for a revision in the 2023 legislative session as part of a technical correction bill.
 

Heavy Equipment Rental Excise Tax

Effective January 1, 2022, a new excise of 1.25 percent is imposed on each rental in Washington of heavy equipment to a consumer by a heavy equipment rental property dealer. However, the tax does not apply to interstate rental transactions that are "made from a rental location" in one state and "delivered to the consumer" in another state:

The exemption creates significant ambiguity because the statute does not provide guidance for determining where a rental is "made from" or what a "rental location" is.  

A Special Notice issued September 17, 2021, provides some insight into the Department's interpretation of the statute. The Notice provides that "[l]ike sales tax, this tax will be based on the location where the customer picks up the heavy equipment, or based on the location where the heavy equipment will be delivered to the customer." This guidance thus suggests that the Department will look to RCW 82.32.730 to determine where a rental of heavy equipment occurs because that is the statute that controls the sourcing of transactions subject to sales tax. The Department's Special Notice further provides that the "heavy equipment rental tax applies to all heavy equipment rentals made from a rental location in-state, and is in addition  to the state and local retail sales tax." According to the Special Notice, both taxes should be separately stated on the invoice, and reported and paid to the Department in the same manner as retail sales tax.
 

New Heavy Equipment Property Tax Exemption

In Washington, all real and personal property in the state is subject to property tax each year based on its value, unless a specific exemption is provided. The new property tax exemption provides that all heavy equipment rental property owned by a heavy equipment rental property dealer is exempt from taxation.

"Heavy equipment rental property" is broadly defined to include virtually all property that is "customarily used for construction, earthmoving, or industrial applications" so long as the property is "mobile" and is "rented without an operator." There are, however, some exceptions to this definition of property. Notably, heavy equipment rental property does not include small hand tools, chainsaws, or lawnmowers. A taxpayer qualifies as a "heavy equipment rental property dealer" so long as the taxpayer that is the leasing entity (rental company) derives at least 50 percent of its income from the rental of heavy equipment rental property. A notable limitation of the exemption is that it does not apply to heavy equipment rental property that the dealer rented or leased to an "affiliated person" (a statutorily defined term).

If the taxpayer does not qualify for the exemption, then it would continue to file its Washington property tax returns on its heavy equipment.

Footnote

1 RCW 82.51.030(2) (emphasis added).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.