The Car Rental Sales Tax Swap Scam

Car rental corporate consolidation, funded by you.

Photo credit: Atomic Taco

This is Boondoggle, the newsletter about corporations ripping off our states, cities, and communities. If you’re not currently a subscriber, please click the green button below to sign up. Thanks!

Not-so-fun travel fact: Every time you rent a car, you are participating in a decades-old scam that lets rental car corporations dodge a bunch of taxes and foist the cost onto renters and local taxpayers. This backdoor subsidy entrenches the dominance of the big players in what is now a very concentrated industry — but a few states are starting to fix the problem, and more should get on the same road.

Here’s what happened: Starting in the 1970s and continuing through about 2000, dominant car rental corporations such as Enterprise convinced state governments to make a kind of tax swap. In exchange for being exempted from sales taxes or other taxes applied to the purchase of a vehicle, which everyone else who buys and owns one pays, car rental corporations started levying an excise tax on each rental of 6 to as high as 14 percent, depending on the state.

These swaps — where the same piece of legislation exempted car rental corporations from the sales tax or other related purchase taxes while creating a rental excise tax — occurred in 13 states: First in Texas in 1971, then Virginia, Maine, Illinois, Colorado, Kansas, Mississippi, New Mexico, Iowa, Washington, Maryland, and South Dakota, ending in West Virginia in 2000, according to research documents I received from a smaller competitor to the dominant rental car corporations.

Many other states do the same thing in some way, either via administrative or executive order, or via different pieces of legislation that weren’t passed at the same time. The details may be different, and I’m glossing over particulars that vary state to state (for instance, in Kansas car owners pay property tax on their vehicles, which car rental corporations are exempt from), but the end result is the same.

The big car rental corporations, in short, did a very good job sweeping across the country collecting what is a massive backdoor tax subsidy on the purchase of their main business asset.

There are three issues that this rental corporation subsidy causes. The first is that the car rental corporations simply slapped the excise tax onto every customer’s bill. So they avoid the taxes every car buyer pays on the front end, in favor of one that renters pay.

The rental car corporations argue they should be exempt from sales tax because their cars are “business inputs,” as they say, or because they aren’t the actual end users of the product. But they’re perfectly free to take normal business deductions on car purchases, and they do; they just also get a very specific exemption for themselves.

The second is that states are losing a lot of revenue on this deal, as rental car corporations purchase some 2 million vehicles annually. That lost revenue totals more than $3.5 billion, according to one study, including more than $100 million dollars each in states such as New Jersey, California, Illinois, Massachusetts, Ohio, Pennsylvania, and New York.

That’s significant money that could get put toward state needs, but instead subsidizes the car rental industry.

Third and finally, as mentioned, the car rental industry is very consolidated, and tax subsidies entrench both its economic and political power. Currently, just three corporations — Enterprise, Hertz, and Avis — hold 95 percent of the car rental market.

You may think you’re renting from other corporations when you land at the airport or somesuch, but nope, you’re just patronizing different brands from the big three: Enterprise owns Alamo and National, Avis owns Budget, Payless and Zipcar, and Hertz owns Thrifty and Dollar, for example.

These corporations explicitly don’t want competition now that they’ve successfully consolidated, so they’ve been lobbying state legislatures to apply excise taxes to rentals at upstarts like car-sharing companies — which is all well and good, except the people who share cars on those platforms very much paid the sales taxes and registration fees that the rental car corporations avoid. So it’s “tax thee and not me,” in order to maintain the big three’s dominance.

State policymakers, though, are working to fix this issue. In Oregon, for example, the state Department of Revenue won a court case affirming that the state’s vehicle sale tax should be applied when a rental car corporation purchases a car. North Dakota also repealed the exemption from sales tax that is applied to car rental corporations. Hawaii and Georgia partially ditched their exemptions, too.

In two states at the moment — Kansas and Massachusetts — there are bills before the legislature that would eliminate the car rental corporation tax exemption. In several other states, including New Jersey, Rhode Island, and Tennessee, an administrative change could even do the trick, because the sales tax exemption was never passed by the legislature, just applied by an agency or governor.

The road here is pretty clear: Stop the backdoor subsidizing of very dominant firms in a very concentrated industry. Elected officials just need to decide to take it.

---

ONE MORE THING: A couple of weeks ago I wrote about the Federal Trade Commission’s effort to ban noncompete agreements for workers. The next phase is a public comment period, so my colleagues have set up a handy way for you to tell the FTC your stories of noncompete-related woe.

Head here before March 20 to submit a comment. Public comments are a very important part of the regulatory process, so please share your story if you feel comfortable.

The FTC to noncompete agreements, basically.

---

Thanks for reading this edition of Boondoggle. If you liked it, please take a moment to click the little heart under the headline or below. And forward it to friends, family, or neighbors using the green buttons. Every click and share really helps.

If you don’t subscribe already and you’d like to sign up, just click below.

Thanks again!

— Pat Garofalo