Does a car rental company owe New York sales tax and the special 5% passenger car rental tax on its separately stated optional charges for collision damage waiver, personal accident/effects insurance, supplemental liability protection, and its refueling charge for cars returned without a full tank?

Plain-English summary

ELRAC, Inc. rents cars short-term (30 days or less) without a driver in New York, and separately charges customers for several optional add-ons: Collision Damage Waiver (CDW — ELRAC simply agrees not to pursue the renter for vehicle damage; no actual insurance carrier is involved), Personal Accident Insurance (PAI), Personal Effects Coverage (PEC), and Supplemental Liability Protection (SLP) — the latter three all issued under an actual policy with a licensed insurance carrier. ELRAC also charges a per-eighth-of-a-tank refueling fee ($4.75, following industry guidelines with roughly a 33% markup) if the car comes back with less gas than it started with. ELRAC asked whether these charges are subject to the general sales tax and New York's special 5% tax on passenger car rentals.

The Department split its answer cleanly. PAI, PEC, and SLP are genuine insurance products issued under policies with licensed carriers — insurance charges simply aren't taxable under New York's sales tax scheme. CDW is different in substance (it's a contractual damage waiver, not insurance, since no carrier is involved) but the Department reached the same tax-free result for a different reason: a CDW charge isn't a sale of tangible property, and it doesn't fall within any of New York's specifically enumerated taxable services — so it escapes tax too, as long as it's separately stated on the customer's invoice (per an earlier Department ruling on the same point).

The fuel charge came out taxable. The Department reasoned that unlike the optional insurance products, the refueling charge isn't something the customer chooses to buy — it's a built-in term of the rental agreement that automatically applies if the car is returned with less gas than provided, functionally identical to an extra-mileage charge assessed at drop-off. Since "consideration" for a rental broadly includes any fee or charge the customer is required to pay under the rental agreement, the refueling charge is simply additional consideration for the taxable rental itself — making it subject to both the general sales tax and the separate 5% special tax on passenger car rentals under § 1160(a)(1).

What this means for you

Car and vehicle rental companies

Genuine optional insurance products, and non-insurance damage waivers that function similarly, can both be structured as tax-free add-ons — but only if they're separately stated on the customer's invoice and are truly optional purchases, not built-in terms of the rental itself.

Businesses distinguishing "optional purchase" charges from "rental term" charges

The line the Department drew here is instructive: a charge the customer affirmatively opts into (insurance, damage waivers) can be tax-free, but a charge that automatically triggers from a term of the underlying agreement (returning with less gas, exceeding a mileage cap) is treated as additional rental consideration and taxed the same as the base rental charge.

Accountants and tax professionals

This opinion is a clean, short precedent for distinguishing "optional insurance/waiver add-on" (potentially tax-free) from "penalty/adjustment built into the rental contract" (taxable as part of the rental) — useful for any rental-industry client (cars, equipment, etc.) structuring similar fee categories.

Common questions

Q: Is a Collision Damage Waiver (CDW) taxed the same as insurance?
A: It reaches the same tax-free result but for a different legal reason — CDW isn't actually insurance (no licensed carrier is involved), but it also isn't a taxable sale of property or an enumerated taxable service, so it escapes tax as long as it's separately stated.

Q: Why is the fuel/refueling charge taxable when the insurance charges aren't?
A: Because the fuel charge isn't an optional item the customer chooses to buy — it's a built-in penalty/adjustment term of the rental agreement, making it additional consideration for the taxable rental itself, similar to an extra-mileage fee.

Q: Does New York's special passenger car rental tax apply on top of the general sales tax?
A: Yes, for taxable portions of the rental — here, the taxable fuel charge is subject to both the general sales tax and the separate 5% special tax under Tax Law § 1160(a)(1).

Q: Does separately stating a charge on the invoice guarantee it's tax-free?
A: No — separate statement is necessary but not sufficient. The charge must also be for something (like genuine insurance or a non-enumerated service) that falls outside New York's taxable categories in the first place.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(5) (sale, selling or purchase)
• Tax Law § 1105(a) (retail sales tax), § 1105(c) (enumerated taxable services)
• Tax Law § 1132(a)(1) (tax collection requirement)
• Tax Law § 1160(a)(1) (special tax on passenger car rentals)
• 20 NYCRR § 526.7(b) (consideration definition)

Prior rulings referenced:

• Alamo Rent A Car, Inc., TSB-A-91(33)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2003.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a03_26s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-03(26)S
Sales Tax
June 12, 2003

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.S030110A

On January 10, 2003, the Department of Taxation and Finance received a Petition for
Advisory Opinion from ELRAC, Inc., 1550 Route 23 North, Wayne, New Jersey 07470.
The issue raised by Petitioner, ELRAC, Inc., is whether its separate charges for supplemental
insurance and fuel in conjunction with the charges for the rental of automobiles are subject to sales
tax imposed by section 1105 of the Tax Law and the special tax on passenger car rentals imposed
by section 1160 of the Tax Law.
Petitioner submitted the following facts as the basis for this Advisory Opinion.
Petitioner is in the business of renting motor vehicles on a short-term basis of 30 days or less
without a driver to customers in New York. In addition to the standard time and mileage rental
charges Petitioner separately charges for optional items. These optional charges include:
Collision Damage Waiver (CDW)
When a renter purchases CDW, Petitioner agrees, subject to terms, conditions and
limitations contained in the rental contract, to not pursue the renter for reimbursement of the
costs of physical damage to the rental vehicle. There is no insurance carrier involved.
Personal Accident Insurance (PAI)
PAI provides the renter and any passengers with accidental death and accidental medical
expense benefits subject to the terms, conditions and limitations contained in the rental
contract and insurance policy. The renter is covered for accidents during the rental period
whether or not the renter is actually in the rental vehicle. The passengers are covered only
for accidents occurring while they occupy the rental vehicle. Under this option, the renter
is an insured under an insurance policy with a licensed insurance carrier.
Personal Effects Coverage (PEC)
PEC is offered only in certain branches. When offered, it is sold in combination with PAI.
It provides protection against risk of loss or damage to the personal effects of the renter and
the renter’s immediate family traveling with the renter subject to the terms, conditions and
limitations contained in the rental contract and insurance policy. Loss or damage to personal
effects during the rental period is covered, whether or not the personal effects are in the
rental vehicle. Under this option, the renter is an insured under an insurance policy with a
licensed insurance carrier.

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June 12, 2003

Supplemental Liability Protection (SLP)
SLP provides the renter with liability protection against claims by a third party as a result
of bodily injury and property damage arising out of the use of the rental vehicle subject to
the terms, conditions and limitations contained in the rental contract and insurance policy.
The liability protection provided is equal to a combined single limit per accident equal to the
difference between the minimum financial responsibility set forth by New York State Law
and $1,000,000. Under this option, the renter is an insured under an insurance policy with
a licensed insurance carrier.
Fuel Charge
If the rental vehicle is returned with less gas than it had when it left, a fuel charge of $4.75
per 1/8th of a tank is charged. There is no fuel charge if the rental vehicle is returned with
the same amount or more gas. The fuel charge amount is determined consistent with
industry guidelines issued by the National Association of Attorneys General. The charge
represents the estimated cost of the gasoline plus a markup of approximately 33% for
refueling services. The amount charged fluctuates at times as the price of fuel fluctuates.
Applicable Law and Regulations
Section 1101(b)(5) of the Tax Law defines “sale, selling or purchase” as:
Any transfer of title or possession or both, exchange or barter, rental, lease
or license to use or consume (including, with respect to computer software, merely
the right to reproduce), conditional or otherwise, in any manner or by any means
whatsoever for a consideration, or any agreement therefor, including the rendering
of any service, taxable under this article, for a consideration or any agreement
therefor.
Section 1105 of the Tax Law provides, in part:
Imposition of sales tax.-On and after June first, nineteen hundred
seventy-one, there is hereby imposed and there shall be paid a tax of four percent
upon:
(a) The receipts from every retail sale of tangible personal property,
except as otherwise provided in this article.
Section 1105(c) of the Tax Law imposes tax upon the receipts from every sale, except
for resale, of certain enumerated services.
Section 1132(a)(1) of the Tax Law provides that:

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Every person required to collect the tax shall collect the tax from the
customer when collecting the price, amusement charge or rent to which it applies.
If the customer is given any sales slip, invoice, receipt or other statement or
memorandum of the price, amusement charge or rent paid or payable, the tax shall
be stated, charged and shown separately on the first of such documents given to him.
The tax shall be paid to the person required to collect it as trustee for and on account
of the state.
Section 1160(a)(1) of the Tax Law provides:
On and after June first, nineteen hundred ninety, in addition to any tax
imposed under any other article of this chapter, there is hereby imposed and there
shall be paid a tax of five percent upon the receipts from every rental of a passenger
car which is a retail sale of such passenger car.
Section 526.7(b) of the Sales and Use Tax Regulations provides, in part:
Consideration. The term consideration includes monetary consideration,
exchange, barter, the rendering of any service, or any agreement therefor. Monetary
consideration includes assumption of liabilities, fees, rentals, royalties or any other
charge that a purchaser, lessee or licensee is required to pay.
Opinion
Petitioner is in the business of renting motor vehicles on a short-term basis without a driver
to customers in New York. In addition to the standard time and mileage rental charges Petitioner
separately charges for optional items. The optional charges for Personal Accident Insurance (PAI),
Personal Effects Coverage (PEC) and Supplemental Liability Protection (SLP), pursuant to which
the customer is issued coverage under a policy with a licensed insurance carrier, are charges for
insurance which are not subject to State and local sales and use taxes. The optional charge for
Collision Damage Waiver (CDW), though similar in substance to insurance, is not provided to
customers under an insurance policy with a licensed insurance carrier, and in fact is not insurance.
However, the charge for CDW is not a charge for the purchase of tangible personal property and is
not a charge for any of the enumerated services subject to tax pursuant to section 1105 of the Tax
Law, and therefore is not subject to State and local sales and use taxes. Provided Petitioner
separately states the charges for PAI, PEC, SLP and CDW when billed to the customer, there will
be no sales tax due on these charges. See Alamo Rent A Car, Inc., Adv Op Comm T&F, April 15,
1991, TSB-A-91(33)S.
The customer rental agreement provides that if a rental vehicle is returned to Petitioner with
less gas than was provided when the customer rented the vehicle a fuel charge of $4.75 per 1/8th of

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June 12, 2003
a tank is charged. The definition of consideration in section 526.7(b) of the Sales and Use Tax
Regulations includes fees or any other charge that a purchaser is required to pay. When renting a
vehicle from Petitioner customers agree to the terms included in the rental agreement. The fuel
charge of $4.75 per 1/8th of a tank which is required for a rental vehicle that is returned with less
gas than was provided at the inception of the rental is one of the terms of the rental agreement with
the customers. This fee is not an optional purchase similar to the optional fees for additional
insurance discussed above but is similar in nature to additional mileage charges computed and
imposed upon the return of the vehicle. If the vehicle is returned having used more mileage than
allotted or with less fuel than provided, an additional charge is assessed. As such, the charge is a
part of the consideration for the rental of the vehicle, just as additional charges at the inception of
the lease for vehicle rentals with unlimited mileage or for return of the vehicle without a fueling
adjustment would be a part of the taxable receipt for the vehicle’s rental. The fuel charge, therefore,
is subject to State and local sales and use taxes and the 5% special tax on passenger car rentals.

DATED: June 12, 2003

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.