Modernizing Rental Car and Peer-to-Peer Car Sharing Taxes for a Post-Pandemic Future

by Garrett Watson, Tax Foundation, April 21, 2021 (excerpts)

Key Findings

As the travel and hospitality industries recover from the coronavirus pandemic, policymakers have an opportunity to reevaluate and repeal discriminatory excise taxes imposed on rental car transactions.

Unlike other excise taxes, rental car excise taxes are not imposed to reduce a harm or ensure drivers are paying for infrastructure. Rather, the revenue is used for unrelated purposes and the taxes create a byzantine structure of taxes and fees that dissuade travelers from using rental cars. States relying on these taxes experience lower economic growth when travelers adjust their behavior to avoid the tax.

Efforts to impose rental car excise taxes onto peer-to-peer car sharing arrangements increases the harm of these taxes and will make it harder for the travel industry to recover from the pandemic.

Rather than extending rental car excise taxes, policymakers should ensure rental car and peer-to-peer car sharing services are within the state and local sales tax base and refine ways to reimburse sales tax paid on a vehicle purchased for personal use but also used for business purposes, such as car sharing or ridesharing.

Introduction

The coronavirus pandemic and related economic downturn impacted the travel, tourism, and hospitality industries hard in 2020. As demand fell for in-person services and government restrictions reduced the feasibility of travel, the need for transportation using rental cars or peer-to-peer car sharing services fell sharply last spring.[1]

As the economy rebounds this year and the public health situation improves, recreational travel, tourism, and business trips will return and with it, an improvement to the fortunes of both rental car firms and app-based methods of transportation like ridesharing and peer-to-peer car sharing.

At the same time, states may be more open to new and alternative sources of revenue after the pandemic abates. For instance, many are looking at ways to apply and reform excise taxes on items like sports betting, tobacco, and sugar, but it is key that these taxes are imposed in a principled manner.[2] Similarly, excise taxes on rental cars and the taxation of app-based industries in the transportation sector such as peer-to-peer car sharing are ripe for reform, which would ensure that the travel, tourism, and hospitality industries can experience a robust recovery post-pandemic.

This paper reviews the policy case against rental car excise taxes and their negative impact on state economies. It also explores key developments in attempts to extend rental car excise taxes to app-based alternatives like peer-to-peer car sharing and the challenges associated with incorporating these new economy transportation options into state sales tax systems. Finally, this paper will argue that excise taxes on car rentals should be repealed and the broader tax regime reformed to conform to the principles of sound tax policy to ensure a strong recovery for the travel sector post-pandemic.

Review of State and Local Car Rental Excise Taxes

Excise taxes on rental cars are a common source of revenue for states and localities seeking revenue that disproportionately comes from nonresidents. Excise taxes on rental cars are levied at the state-level in 44 states. Local governments at the county and municipal levels also levy separate excise taxes on rental cars (see Figure 1 and Appendix Table 1).

States using a flat-dollar surcharge may levy a one-time surcharge, such as in Massachusetts, or may charge a flat amount per-day, as Hawaii, New Jersey, and West Virginia do. Flat-dollar rates can create higher effective tax rates on less expensive rentals and lower tax rates on more expensive rentals….

Some jurisdictions have tried to go further by enacting car rental taxes that only affect nonresidents, though this tactic was struck down in 2017 when Chicago tried to do so.[18] Hawaii previously assessed a $3 per day fee for those with a Hawaii driver’s license, but a $5 per day fee for those without one.  As of July 1, 2019, Hawaii imposed a $5 per day fee for all rental car services, as the previous arrangement effectively levied a higher tax for nonresidents of Hawaii renting cars.[19] This posed a legal risk because of the discriminatory treatment based on  one’s place of residence….

States have also attempted to include peer-to-peer car sharing services within existing statutes. For example, Hawaii’s Department of Taxation adopted rules in February 2021 to levy the state’s rental car tax onto peer-to-peer car sharing by interpreting car sharing platforms as being the lessor of the vehicles on the marketplace.[30] It would be preferable for state legislatures to clarify the legal status of peer-to-peer car sharing, as regulatory guidance and temporary rules lack stability and may be challenged in court, creating uncertainty in the market.

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