Vehicle Rental – Sales, Use, and Automobile Rental Tax
The rental of motor vehicles in Iowa is subject to sales / use tax. The rental may also be subject to the Iowa automobile rental tax.
Rental of a vehicle has occurred in Iowa when possession of a vehicle is transferred to a customer in Iowa. Transfer of possession of the vehicle must occur in Iowa; the contract for rental of the vehicle doesn’t need to be executed here. The tax is due when any lump-sum or periodic payment is paid in Iowa.
When both payment and transfer of possession occur in Iowa, sales tax is due regardless of whether the vehicle is subsequently used outside Iowa.
Example 1 – Customer A signs a rental contract with and takes possession of a rental car from an office of a rental agency located in Des Moines. A drives the car from Des Moines to Dubuque, Iowa, and back. In Des Moines, the rental agency collects $100 for the rental. The $100 is subject to sales tax. If the customer had driven the rental car from Des Moines to Madison, Wisconsin, and back to Des Moines, the rental would also be subject to tax.
Example 2 – Customer B enters into a contract to rent an automobile with a rental agency’s office located in Omaha, Nebraska. B takes possession of the car at the rental agency’s office in Council Bluffs, Iowa. B then drives the car from Council Bluffs to Dubuque and back. The rental is subject to Iowa sales tax since delivery and payment occurred in Iowa.
Example 3 – Customer C enters into a contract to rent and takes possession of a rented automobile in Des Moines. C drives the vehicle to California and returns the vehicle to the rental agency’s office in Los Angeles, and there pays a total charge for the rental of $300. No Iowa sales tax is due. Transfer of possession occurred here, but payment did not.
Example 4 – Customer D rents and takes possession of a truck in Des Moines. Before taking possession, D pays the rental agency a $500 deposit. Rental of the truck is on a mileage and per-day basis. Customer D drives the truck to Phoenix, Arizona. There it is discovered that the mileage and per-day charges add up to $600. Customer D pays the rental agency an additional $100 in Phoenix. Iowa sales tax is due on the $500 deposit paid in Des Moines, but not on the $100 paid in Phoenix. Only the payment made in Iowa is subject to tax.
Example 5 – Customer E rents a car in Chicago, Illinois, and drives it to Des Moines. In Des Moines E pays $200 for the use of the car. Although payment occurred in Iowa, transfer of possession of the vehicle did not take place here. This transaction is not subject to sales tax, but may be subject to use tax.
If a customer takes possession of a vehicle outside Iowa and the vehicle is later used within Iowa, rental payments are subject to Iowa use tax if those rental payments are made in Iowa.
Example 1 – Customer W signs a rental contract and takes possession of a rental car in Los Angeles. W drives the car to Des Moines and then pays a total charge for the rental of $300. This $300 payment is subject to Iowa use tax assuming that no tax was previously paid to another state.
Example 2 – Customer X rents and takes possession of a truck in Phoenix, Arizona. There customer X pays a $500 deposit to the rental agency. Rental of the truck is on a mileage and per-day basis. Customer X then drives the truck to Des Moines. The mileage and per-day charges add up to $600. Customer X pays the rental agency an additional $100. This $100 is subject to Iowa use tax.
Automobile Rental Tax
A 5% state excise tax is imposed on the rental of vehicles designed to carry nine or fewer passengers that are rented for a period of 60 days or less. This is in addition to the 6% state sales / use tax and any applicable local option sales tax. The automobile rental tax is not imposed on delivery trucks, motorcycles, and motorized bicycles.
This excise tax is reported and remitted on a quarterly basis electronically through eFile & Pay. No permit other than an Iowa sales or use tax permit is required to collect the automobile rental tax.
Rentals Exempt from Tax
The following are generally exempt from sales, use, and automobile rental tax:
Rental of a vehicle for more than 60 days. The customer must contract to rent for a single period exceeding 60 days and cannot accumulate these days.
Rental of vehicles registered for a gross weight of more than 13 tons.
Rental of a vehicle with a driver provided by the owner of the vehicle.*
*limousine service, towing service, and armored car service are subject to sales / use tax, but not to automobile rental tax.
Rental Price – Taxable & Non-taxable Items
The following are included in the rental price subject to tax:
Any other payment required as a condition of the rental.
The following are excluded from the rental price subject to tax:
Optional collision damage waiver fees.
Optional personal accident insurance fees.
Airport-imposed fees charged to a customer for the rental of a vehicle.
To be excluded from the taxable rental price, the charge must be separately stated, separately itemized, and the charge cannot be required as a condition of the rental.
Iowa One-Time Registration Fee (formerly called Motor Vehicle Use / Lease Tax)
The purchase / lease of vehicles subject to registration is exempt from sales tax. These vehicles are subject to a one-time registration fee at the rate of 5% on the sales or lease price. For purposes of the one-time registration fee, a lease is defined as an agreement for use of a vehicle for a period of 12 months or longer.
For more information on the one-time registration fee, including a potential exemption from the fee when vehicles are purchased for rental, please see our UT510 Manual.