Does a car rental company have to charge sales tax on an optional Collision Damage Waiver?

Plain-English summary

The Missouri Department of Revenue ruled that a rental car company's optional Collision Damage Waiver (CDW), offered to renters of Tesla vehicles, is not subject to Missouri sales tax, even though the company had been collecting tax on it.

Missouri taxes sales of tangible personal property and, under Section 144.021, RSMo, also taxes charges for services that are genuinely part of such a sale. The key question was whether the CDW counted as part of the underlying vehicle rental. The Department concluded it did not, because the CDW is optional -- renters can take it or decline it, and many decline. That optionality is itself evidence the CDW is a separate, extra service rather than baked into the rental price. The Department cited Enterprise Leasing Co. of Kansas v. Director of Revenue, an Administrative Hearing Commission decision reaching the same conclusion for a similar optional damage waiver.

What this means for you

Car and equipment rental companies

If you offer an optional damage waiver, insurance product, or similar add-on that renters can decline, and a meaningful number actually do decline it, that optionality supports treating the charge as a separate, nontaxable service rather than part of the taxable rental price. If your company has been taxing an optional waiver like this, this ruling may support a refund claim or a change in how you charge tax going forward -- consult a Missouri tax professional about your specific situation.

Renters and rental customers

An optional damage waiver fee charged separately from the base rental rate should not carry Missouri sales tax, based on this ruling's reasoning, if the waiver is genuinely optional.

Accountants and tax professionals

The controlling fact here is genuine optionality -- not just how the charge is labeled on an invoice. A waiver framed as "optional" but effectively required (bundled into the price, or with no real ability to decline) would likely be treated differently. Confirm your client's actual rental practice matches the facts of this ruling before relying on it.

Common questions

Q: Is every rental-car damage waiver exempt from Missouri sales tax?
A: Not automatically. This ruling turned on the waiver being truly optional, with customers able to decline it (and many do). A waiver that's effectively mandatory, or bundled into the rental price with no real opt-out, would likely be analyzed differently.

Q: Why does it matter whether customers can decline the CDW?
A: The Department reasoned that the ability to decline and pay separately for the CDW shows it's an extra service, not part of the core rental transaction for the vehicle. If it were baked into the mandatory rental price, it would likely be taxable as part of that sale.

Q: Can another rental company stop charging tax on its own damage waiver based on this ruling?
A: Not automatically. A Missouri letter ruling binds the Department only as to the requesting Applicant, only for three years, and only while the facts and law don't change. Another company should confirm its own waiver is genuinely optional and consult a tax professional before changing its practices.

Citations and references

Statutes and cases:

• Section 144.020, RSMo (imposition of sales tax on tangible personal property)
• Section 144.021, RSMo (tax on gross receipts and related services)
• Enterprise Leasing Co. of Kansas v. Director of Revenue, 1993 WL 476514 (Mo. Admin. Hrg. Com. 1993)

Source

• Landing page: Missouri DOR Rulings Search
• Ruling: LR 8311

Original ruling text

Dear Applicant:

This is a letter ruling issued by the Director of Revenue under Section 536.021.10, RSMo, and Missouri Code of State Regulations 12 CSR 10-1.020, in response to your letter dated June 17, 2024.

The facts as presented in your letter ruling request are summarized as follows:

Applicant is a rental car service specializing in the rental of Tesla vehicles. As part of the rental process, Applicant offers a voluntary Collision Damage Waiver ("CDW") to renters. The CDW can be taken or declined. Applicant is currently being taxed on those CDW's, despite the fact that they appear to Applicant to be exempt from tax. The CDW is intangible property because it, has no independent value outside of the lease of the vehicle, cannot be independently acquired, and it is not valuable independent of the transaction.

ISSUE:

Is the Collision Damage Waiver offered, but not required by Applicant, subject to Missouri sales tax?

RESPONSE:

No. The collision Damage Waiver offered, but not required by Applicant, is not subject to Missouri sales tax.

Section 144.020, RSMo, imposes a tax on the sale of tangible personal property.  Section 144.021, RSMo, similarly imposes a tax on the privilege of engaging in the business, in this state, of selling tangible personal property on the gross receipts produced thereby. It also taxes the sale price of any services that are part of such sales.

To conclude that the Collision Damage Waiver is taxable it would be necessary to determine that it is part of the rental transaction for the motor vehicle. Such is not the case. The CDW is optional and many decline to accept and pay for it. Such a choice is a hallmark of the cost of the extra service, the CDW, not being a part of the underlying sale. Enterprise Leasing Co. of Kansas v. Director of Revenue, 1993 WL 476514 (Mo. Admin. Hrg. Com.) (1993).

This letter ruling is binding upon the Department of Revenue with respect to the Applicant for three (3) years from the date of this letter and is subject only to statutory changes by the General Assembly and to changes in the interpretation of law by the courts or administrative tribunals. If a change occurs, the taxpayer who relies upon an outdated interpretation may be subject to additional taxes, interest and penalties, which may be imposed prospectively from the date of the change. For this reason, the interpretation set forth above should be reviewed on a regular basis. Please note that any change in or deviation from the facts as presented will render this ruling inapplicable.

Should additional information be needed, please contact Senior Counsel, Kent L. Brown, General Counsel's Office, Post Office Box 475, Jefferson City, Missouri 65105-0475, phone (573) 751-0961,
e-mail [email protected].

Sincerely,

Wayne Wallingford