Like other states, the Texas legislature is examining a proposal to extend the state’s 10 percent rental car excise tax onto peer-to-peer car-sharing firms. The proposal is creative in trying to resolve how sales taxes should apply to vehicles sold and used in peer-to-peer car-sharing arrangements but suffers from attempting to further extend an inefficient tax applied to car rental companies.
Texas levies a 10 percent state excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. on car rentals. Additionally, municipalities may levy a local-option rental car excise taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. of up to 6 percent to fund local stadiums, convention centers, and tourist development. There are restrictions on how localities can use the rental car excise tax revenue under Section 334 of Texas’ Local Government Code.
Texas House Bill 2872 would require peer-to-peer car-sharing firms—labeled “marketplace car rental providers” in the bill—to collect and remit the Texas excise tax on car rentals on behalf of private car owners. Car owners may also elect to remit the tax themselves if they notify the marketplace rental provider and the tax authority. In that case, the peer-to-peer car-sharing firm would send the collected tax to the car owner, who remits it to the tax authority.
The bill tries to solve a problem with how states’ sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. rules treat car purchases when the car is subsequently used in peer-to-peer car sharing. Unlike car rental companies, private vehicle owners pay sales tax when they purchase a vehicle not used for business purposes. Car rental companies, by contrast, have their vehicle fleets exempt from sales tax as they are business inputs. This is the proper tax treatment, as it prevents tax pyramidingTax pyramiding occurs when the same final good or service is taxed multiple times along the production process. This yields vastly different effective tax rates depending on the length of the supply chain and disproportionately harms low-margin firms. Gross receipts taxes are a prime example of tax pyramiding in action. , when the same economic value is taxed multiple times. The exemption prevents a rental car from being subject to sales tax when it is purchased and taxed again at the 10 percent car rental excise tax rate when it is rented to customers.
When a car owner shares their car on a peer-to-peer platform, the vehicle becomes a mixed-use asset. Unlike federal and state personal income taxes, state sales tax systems are not set up to pro-rate previously paid sales tax for mixed-use assets. House Bill 2872 proposes a simple fix, providing a tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. against the car excise tax liability for previously paid sales and use tax.
Ideally, sales tax would be rebated in proportion to the business use relative to the lifespan of the vehicle. For example, a vehicle with a 200,000-mile lifespan and 10,000 miles of business use would be entitled to a 5 percent sales tax rebate. However, that requires tracking vehicle use and creating a formula to impute the use relative to the vehicle’s total lifespan. Providing a tax credit for sales tax paid does not perfectly align with this calculation but is simpler for the state to administrate and for the owner to calculate. The sales tax credit also incentivizes car owners to remit the car rental excise tax themselves, as they are not eligible for the credit if the peer-to-peer car-sharing firm remits the tax on their behalf.
Despite the creativity of the state sales tax credit provision, Texas policymakers should reconsider the extension of the state’s car rental excise tax onto peer-to-peer car-sharing firms. Car rental excise taxes are inefficient and an economically costly way to raise revenue, and this may be an opportunity to reconsider how car rentals and peer-to-peer car sharing is taxed. For example, Texas exempts car rentals from the state’s 6.25 percent sales tax and 2 percent local-option sales tax in lieu of its 10 percent state excise tax and local-option car tax for car rental contracts shorter than 30 days. Levying the state’s sales taxes on rental cars and peer-to-peer car sharing would broaden the sales tax base. This would improve Texas’ tax structure and avoid a debate over who should be paying a tax that should not exist at the outset.
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