Was an optional, separately stated collision damage waiver charge taxable as part of a Louisiana vehicle rental?

Plain-English summary

An optional collision damage waiver was taxable as part of the gross proceeds from a Louisiana automobile rental.

Without the waiver, the renter accepted responsibility for physical damage to the vehicle. By paying the separately stated CDW charge, the renter obtained the lessor's agreement to waive damage claims, subject to exclusions.

The Department held that the charge came directly from the rental relationship. It did not matter that the renter could decline the waiver or that the contract itemized it separately.

Why the waiver was part of rental proceeds

The rental created the renter's duty to protect the vehicle and pay for damage. Only the lessor—or someone standing in the lessor's shoes—could waive that contractual duty. The waiver therefore could not exist independently of the rental.

The ruling also relied on La. R.S. 22:2091.10, which exempted collision damage waiver rates from insurance taxation on the condition that applicable sales taxes at the place of rental-contract issuance were collected and remitted.

Why delivery-charge precedent did not control

The ruling distinguished McNamara v. Patterson Services. Transportation could be arranged separately through a third party, and the lessor there did not add compensation for arranging it. Collision damage waiver, by contrast, necessarily arose from the rental contract and was sold by the lessor for compensation.

Common questions

Q: Was the collision damage waiver taxable?

A: Yes, as part of gross proceeds from the vehicle rental.

Q: Did being optional make it nontaxable?

A: No.

Q: Did separately stating the charge change the result?

A: No. The waiver still arose from and modified the rental contract.

Q: Was the waiver treated as insurance?

A: The cited statute said the collision-damage-waiver portion of the rental agreement was not insurance and expressly contemplated sales taxation.

Citations and references

• La. R.S. 47:301(7)(A) and 47:302(B) — lease or rental and taxable gross proceeds
• La. R.S. 22:2091.2, 22:2091.3(A), and 22:2091.10 — collision damage waivers
• La. Civ. Code art. 11 — ordinary meaning of statutory terms
• McNamara v. Patterson Services, Inc., 382 So. 2d 971 (La. App. 1st Cir. 1980)
• LAC 61:III.101.C — Revenue Ruling authority and reliance statement

Source

• Landing page: Louisiana Department of Revenue Policies
• Original PDF: LA Revenue Ruling 06-007

Original ruling text

Revenue Ruling
No. 06- 007
May 16, 2006
Sales and Use Tax
The Sales Tax Treatment of Collision Damage Waivers
The purpose of this revenue ruling is to clarify the sales tax treatment of purchases of collision
damage waivers in the context of automobile lease or rental transactions.
Issue
Is a collision damage waiver (“CDW”), which may be purchased optionally in connection with
an automobile rental transaction, subject to sales tax under La. Rev. Stat.§47:302(B)?
Facts
When a customer rents a vehicle from a car or truck rental agency, the customer accepts
responsibility for damage to the vehicle rented. Accordingly, if the customer returns the vehicle
in a damaged condition, the customer is generally liable for any damages to the vehicle. To avoid
this responsibility, the customer is given the option to purchase CDW under the rental contract.
If the customer purchases CDW, the rental agency waives its right to recover damages from the
customer for physical damage to the rented vehicle, subject to certain exclusions.
This CDW product is optional. In this respect, the customer can rent the same vehicle without
CDW coverage and without payment of the separate charge for CDW. CDW is separately
offered in the rental contract and is itemized as a separate charge on the rental contract.
Law
La. Rev. Stat. §47:302(B) allows the state to levy a tax upon the gross proceeds derived from the
lease or rental of each item or article of tangible personal property within Louisiana. La. Rev.
Stat. §47:301(7)(A) defines “lease or rental” as “the leasing or renting of tangible personal
property and the possession or use thereof by the lessee or renter, for a consideration, without
transfer of the title of such property.”
La. Rev. Stat. §22:2091.3(A) defines “[c]ollision damage waiver” as “any contract or contractual
provision, whether separate from or a part of a motor vehicle rental agreement, whereby the
lessor agrees for a charge, to waive any and all claims against the lessee for any damages to the
rental motor vehicle during the term of the rental agreement.” According to La. Rev. Stat.
§22:2091.2, “the collision damage waiver portion of the rental agreement…shall not be
considered insurance.” Further, La. Rev. Stat. §22:2091.10 provides explicitly as follows:
The rates charged for the collision damage waiver by a licensee under this Part
shall be exempt from insurance taxes and insurance taxation provided that sales
taxes in effect in the locale of rental contract issuance are applied, collected, and
remitted to the proper tax authority. 1

1

Emphasis added.

Revenue Ruling No. 06-007
Page 2 of 3

Analysis
In the facts at hand, there is a taxable lease or rental of a motor vehicle. So, the relevant inquiry
is whether or not CDW is part of the “gross proceeds derived from the lease or rental of tangible
personal property.” The term “gross proceeds” is not defined in Louisiana statutory law or
regulations. The words of a law must be given their generally prevailing meaning. 2 By
determining the common usage of “gross” and “proceeds,” one finds that the common usage of
“gross proceeds” is the total amount of money derived from a commercial or fundraising
venture, exclusive of deductions. 3
The common usage of the term “derive” is to “come from.” 4 Here, the CDW payment is derived
or comes from the lease or rental of tangible personal property in that the lessee’s responsibility
for any damages associated with the rental vehicle are necessarily linked to the lease or rental of
the automobile. The lessee is not free to vary the terms of the lease or rental agreement that
provides that the lessee is responsible for these damages unless the lessee pays an additional fee
for the lessor to waive any claims for damages arising from the lessee’s use of the vehicle. In
essence, in order for the lessee to modify the terms of the original lease contract as to a certain
aspect of the contract, he or she must pay a fee. The fact that CDW is optional does not mean it
is not “derived from” the lease or rental transaction.
The lease or rental creates a duty by the lessee to the lessor that did not exist before—a duty to
protect the vehicle and the attendant obligation to repair any damages occurring while the vehicle
is possessed by the lessee. The enforcement of the duty by the lessee to indemnify the lessor is
the object of the waiver created when the lessee purchases CDW. So, the lessee would not have
an additional need or desire to contract with the lessor to “waive” the lessor’s right to collect
against him unless the lease occurred in the first place.
Furthermore, the lessee cannot purchase CDW from any entity other than the lessor because only
the lessor (or a party standing in the shoes of the lessor) can enforce the obligation of the lessee
to indemnify for any damage caused by his use of the leased property. 5 The purchase of CDW
necessarily has to arise from a lease or rental contract. Here, CDW derives or comes from the
original lease agreement between the lessor and lessee and is part of the gross proceeds derived
from the lease or rental of the motor vehicle.
It has been asserted to the Department that McNamara v. Patterson Services, Inc., 382 So 2d 971
(La. App. 1st Cir 1980) stands for the proposition that a rental transaction can incorporate other
items that are not subject to sales/use tax and that mere inclusion of such items in a single
contractual document does not otherwise cause nontaxable items to become taxable. The
Department believes Patterson is distinguishable from the case at hand.
In Patterson, the Department sought to tax transportation charges on the rental of drilling
equipment. In that case, the lease contract specifically provided that the lessee was responsible
for the equipment rented while it was out of the possession of the lessor (Patterson) and that the
lessee would bear all transportation charges. In some instances, the lessor arranged for delivery
2

La. C.C. Art 11
The American Heritage Dictionary (Second College Edition, 1982) defines “proceeds” as “the amount of money
derived from a commercial or fund-raising venture” and defines “gross” as “exclusive of deductions or total.”
4
Webster’s Revised Unabridged Dictionary (1913) defines “derive” as “come from.”
5
Although some insurance products are available which claim to be “collision damage waivers,” close examination
of these policies reveals that they are merely third party insurance contracts and in no way alter the responsibilities
of the automobile lessor and lessee as to each other.
3

Revenue Ruling No. 06-007
Page 3 of 3

and separately billed the lessee for the transportation charges with no additional charge to the
lessee for arranging this service. The lessor successfully argued that the Department’s regulation
at that time was overly broad in that it stated that transportation charges billed to the lessee in
connection with a lease were to be included in the amount subject to tax.
In the facts as stated in this ruling, the lessors are compensated for their selling CDW to the
lessee, unlike in Patterson. Moreover, the CDW is a part of the same rental contract as the
lease/rental of the automobile, unlike in Patterson where the delivery was billed separately.
Third, the nature of CDW necessarily arising from a lease or rental contract is sufficiently
different from transportation charges, which could easily be contracted for separately from a
lease or rental contract through a third party, to justify a different conclusion than that reached by
the court in Patterson.
Lastly, unlike in Patterson, there is a clear statutory basis for the CDW being taxable as La. Rev.
Stat. §22:2091.10 provides that the rates charged for CDW shall be exempt from insurance
taxation provided that the sales taxes in effect in the locale of the rental contract issuance are
applied, collected, and remitted to the proper tax authority. The plain language of that provision
contemplates taxation of CDW as part of a lease or rental transaction, which further supports that
CDW is part of the gross proceeds derived from the lease or rental of a motor vehicle.
Ruling
CDW is properly includable as part of the gross proceeds derived from the lease or rental of an
automobile because the CDW necessarily arises from the lease or rental of the automobile, can
only be contracted for with the lessor of the automobile, and the language of La. Rev. Stat.
§22:2091.10 expresses a clear legislative intent that CDW is subject to taxation.

Cynthia Bridges
Secretary
By: Leslie C. Strahan
Attorney
Policy Services Division

A Revenue Ruling is written to provide guidance to the public and to Department of Revenue employees.
It is issued under Section 61:III.101.C of the Louisiana Administrative Code to apply principles of law to a
specific set of facts. A Revenue Ruling does not have the force and effect of law and is not binding on the
public. It is a statement of the department's position and is binding on the department until superseded or
modified by a subsequent change in statute, regulation, declaratory ruling, or court decision.