Starting January 1, 2025, Maine is implementing significant changes to its sales tax laws, specifically affecting lease and rental transactions. These tax law changes attempt to streamline tax collection and ensure consistency across various types of transactions. Here’s what you need to know about these changes and how they might impact you.
Important Tax Update
The Bureau of Corporations, Elections, Commissions 2024-2025 regulatory agenda includes a new rule to be adopted by December 31, 2024, regarding rental and lease transactions. The new rule will provide definitions, explanations, and examples. The proposed rule will be posted on the Maine Revenue Services website under proposed new rules for a comment period before taking effect.
Key Changes in the Law
- Sales Tax on Lease and Rental Payments: Previously, lessors in Maine were required to pay sales/use tax upfront when purchasing property intended for lease or rental. The new law shifts this responsibility, allowing lessors to purchase such property tax-free using a resale certificate. Instead, sales tax will now be collected on each periodic lease or rental payment made by the lessee.
- Treatment of Lessors as Retailers: Under the new regulations, lessors are treated as retailers. This means each lease or rental payment is considered a taxable sale. As a result of this change, some lessors that were not previously required to register for sales tax may now be required to register.
- Sourcing Rules for Lease Payments: The amendments also clarify the sourcing rules for lease payments. The first month’s payment is sourced according to the standard retail sales rules, while subsequent payments are sourced to the primary property location.
- Refunds for Previously Paid Sales Tax: Businesses that paid sales tax upfront on property purchased for lease or rental between January 1, 2023, and January 1, 2025, can claim a refund. The refund is limited to the amount of sales tax collected and remitted on lease or rental payments from January 1, 2025, to January 1, 2027.
For businesses, this change means a shift in how sales tax is managed and reported. Lessors will need to ensure they are correctly collecting and remitting sales tax on lease and rental payments. This might require updates to accounting systems and processes to comply with the new rules.
Consumers leasing or renting property in Maine will now see sales tax applied to their periodic payments.
Planning Ahead
Failure to prepare and adapt to these new standards may mean that your business incurs unwanted and avoidable interest and penalties. The current interest rate for tax debts owed to the State of Maine is 10% as of November 2024, with penalties ranging from 10% – 25%.
To prepare for these changes, businesses should:
- Plan for the change. The changes to the new law create new refund provisions and a new sales tax exemption.
- Review and update accounting practices to ensure compliance with the new tax collection requirements.
- Educate staff about the new rules and how they affect lease and rental transactions.
- Communicate with customers about the changes and how they will impact their lease or rental agreements.
Stay Informed
Maine’s updated sales tax rules for lease and rental transactions represent a significant shift in tax policy. Both businesses and consumers should take steps now to understand and prepare for these changes to ensure a smooth transition. Contact a trusted tax advisor for more guidance and to make a plan that works for your business. ARB will continue to provide updates on this and other tax changes as they develop.
Rob Gould-Wetmore is a Senior Accountant at ARB specializing in auditing and financial compliance services for auto dealerships, construction companies, and financial institutions. His experience in sales and use tax helps clients navigate complex or unique situations to streamline regulatory compliance.
