Some lease transactions require the landlord to collect state Sales Tax, tourist and other local taxes.    Knowing when this obligation exists or does not exist is important.  For this article, we will refer to all these Taxes collectively as “Sales Tax”.             

WHEN IS THE LANDLORD REQUIRED TO COLLECT SALES TAX?              

If the original lease between the landlord or tenant is six months or less, a Sales Tax is triggered and should be collected on every rent payment made and the taxes remitted to the Department of Revenue.         

WHAT IF THE ORIGINAL LEASE EXCEEDS SIX MONTHS?      

A continuous lease of at least six months and a day will be exempt from a Sales Tax obligation.     

WHAT IF THE LEASE ALLOWS A TENANT TO BREAK A LEASE WITH NO PENALTY DURING THE FIRST SIX MONTHS OF THE TENANCY?      

If tenant has the right to break the lease without penalty during the first six months of the tenancy, then Sales Tax must be collected during the first six months of the lease, as the Department of Revenue does not consider this to be a “bona fide lease”.   

WHAT IF DURING THE TENANCY THE PARTIES AGREE IN WRITING TO EXTEND THE TENANCY BEYOND THE INITIAL SIX MONTHS?

At the point a written lease addendum is executed extending the initial tenancy beyond six months, the landlord can stop charging Sales Tax.

WHAT IF THE TENANT ORIGINALLY ON A LEASE OF SIX MONTHS OR LESS STAYS PAST SIX MONTHS WITH THE AGREEMENT OF THE LANDLORD AS MONTH-TO- MONTH OR WEEK-TO-WEEK?

After the first six months, no further Sales Tax must be collected; however, there is no retroactive refund of Sales Tax already collected.

WHAT IF THE INITIAL TENANCY BETWEEN LANDLORD AND TENANT IS A MONTH-TO-MONTH OR WEEK-TO-WEEK TENANCY?

The landlord will need to collect Sales Tax only during the first six months of the tenancy.       

WHAT IF THE TENANT HAS AN EARLY TERMINATION OPTION (“LIQUIDATED DAMAGES AGREEMENT”) IN A LEASE GREATER THAN SIX MONTHS?        

If the tenant chooses #1 (Liquidated Damages Amount”) that is beyond a nominal amount, then no Sales Tax will be triggered.     

WHAT IF I EVICT MY TENANT DURING THE FIRST SIX MONTHS OF THE TENANCY; WILL A SALES TAX BE RETROACTIVELY OWED?            

No Sales Tax will be owed.  

WHAT IF THE TENANT SKIPS PRIOR TO SIX MONTHS OUT ON A LEASE GREATER THAN SIX MONTHS?

No Sales Tax will be owed.

WHAT IF AN ADDITIONAL TENANT SIGNS ONTO THE LEASE TEN MONTHS INTO THE ORIGINAL ANNUAL LEASE TERM OR AFTER THE ORIGINAL LEASE HAS ALREADY EXPIRED?                 

No Sales Tax will be owed.     

 

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