What Are the Current Rules?
Until the end of 2024, lessors (those leasing tangible personal property) must pay sales tax upfront when they purchase property that will be leased or rented out. The tax is calculated based on the full value of the property. This means that even if the property is rented over several years, the tax liability is borne by the lessor at the time of purchase.
This approach simplifies tax collection but creates a significant upfront cost for lessors, as they are paying taxes before they’ve even begun to collect lease or rental income.
Key Changes Effective January 1, 2025
Starting on January 1, 2025, lessors in Maine will be able to purchase tangible personal property exempt from sales tax, provided they present a resale certificate. Here’s how it will work:
1. No Sales Tax on Initial Purchase: Lessors will no longer be required to pay sales tax when they purchase tangible personal property to lease or rent out. Instead, they will use a resale certificate to purchase the property exempt from sales tax.
2. Sales Tax on Lease Payments: Instead of paying the tax upfront, lessors will be responsible for collecting sales tax on each lease or rental payment they receive from their customers. This change aligns Maine’s rules more closely with how most other states handle sales tax on leases and rentals of tangible personal property.
3. Sourcing Rules for Taxation: The guidance also addresses sourcing rules, which determine how and where taxes are applied. The location of the leased or rented property, and potentially the location of the lessee, will play a role in determining where the tax is sourced.
What Does This Mean for Lessors?
For lessors, this legislative change offers some relief from the initial financial burden of paying sales tax when purchasing taxable property. However, it introduces ongoing responsibilities for collecting and remitting sales tax on each individual payment received from lessees.
It also means that lessors will need to keep meticulous records of their leases and rental payments to ensure they are properly collecting and remitting the correct amount of sales tax.
Lessors will also need to be familiar with Maine’s sourcing rules, which dictate how taxes are applied. This can be particularly important for businesses with operations or customers in multiple locations, as the sourcing rules may impact how sales taxes are reported.
Refund Opportunity for Tax Previously Paid by Lessors
An important provision in the guidance discusses a limited refund period for lessors who have already paid sales tax on property purchased before the new rules take effect. If a lessor paid sales tax under the old rules but starts collecting lease or rental payments on that same property, they may be eligible to apply for a refund. There will be a limited window to apply for this refund, so lessors should be proactive in reviewing their tax filings and rental agreements to determine if they qualify.
Preparing for the Changes
To ensure compliance with these new tax rules, lessors should take the following steps before January 2025:
1. Review Existing Contracts and Transactions: Analyze your current leases and rental agreements to determine how the new tax rules will impact your business operations.
2. Obtain a Resale Certificate: If you don’t already have one, apply for a resale certificate with Maine Revenue Services. This document will allow you to make sales tax exempt purchases of tangible personal property for leasing purposes.
3. Update Accounting and Tax Systems: Ensure that your accounting systems can track and calculate sales tax on lease and rental payments moving forward.
4. Consult a Tax Professional: Given the complexity of these changes, consulting with tax professionals familiar with Maine’s tax laws can help you navigate the transition and ensure compliance.
Contact Thompson Tax today for all your sales and use tax needs. We are always just a phone call away.
