A Significant Change to Maine’s Taxation of Tangible Personal Rental Property

By Nick Smetana December 12, 2024

Effective 1/1/2025, Maine is implementing a fundamental change to the way in which tangible personal property (TPP), including electronically downloaded software, is taxed when leased or rented. This is a departure from longstanding practice, but it brings Maine into alignment with most of the other U.S. states relative to the treatment of leased or rented TPP for sales tax purposes. Note – this law change does not apply to the lease or rental of real property.

OLD RULE:  Historically, lessors purchasing TPP for subsequent lease/rental in Maine would pay sales tax (or be assessed use tax) on the purchase cost at the time of acquisition from the vendor. The lease or rental stream would be exempt from sales or use tax when invoiced to the lessee for use in Maine.

NEW RULE:  Under the new rules, a lessor’s purchase of TPP for subsequent lease/rental in Maine will be exempt from sales tax upon presenting a resale certificate. However, the lessor will then be responsible for collecting and submitting Maine sales tax imposed on the rental charge – a cost undoubtedly to be passed along to the lessee as part of the periodic rental charge.  An exception, discussed below, applies to certain software.

What do I need to know?

• These changes apply to current and existing leases executed and in place prior to 1/1/2025 in addition to new leases executed after 1/1/2025.
• For businesses that purchase or own TPP for subsequent lease or rental in Maine, it is critical that the necessary internal structures are in place to properly account for the changes in purchase and rental tax treatments. Note that Maine allows for a limited window for lessors to claim refunds of sales tax paid under the previous rules on purchases of leased TPP with numerous restrictions. Specifically, businesses that purchased TPP between 1/1/23 and 12/31/24 for subsequent rental may apply for a refund of previously paid sales tax, but only during the period beginning 1/1/27 and ending 3/31/27.
• Businesses using leased or rented TPP within Maine will begin seeing sales tax included on invoices from vendors. If not, measures should be put into place to ensure use tax is properly assessed and remitted. Business owners should recognize that this tax law change will directly impact operating costs and margins, which could appear as a surprise because until this point, there was no use tax obligation on such expenses. This is also a good time for business managers to examine their record-keeping and scrutinize invoices to confirm that any rented TPP is accurately sitused to the state in which the property is used or placed into service. Maine has issued specific rules for different property types regarding where and how tax should be applied to rented property. In certain instances, it may fall to the lessee to inform its vendor/lessor that the property may be located temporarily or permanently outside of Maine so that any lease streams can be invoiced appropriately for tax purposes. (An example would relate to lease streams for property used in New Hampshire that could be incorrectly invoiced by vendors to a company headquartered in Maine.)
• This law change also cleans up Maine’s tax treatment of electronically downloaded software. Previously, Maine had some very wonky rules around licenses of electronically downloaded software, considering annual license renewals to be exempt leases of TPP and perpetual licenses to be taxable leases in lieu of purchase. Effective 1/1/2025, charges for electronically downloaded software are uniformly taxable if used in Maine. NOTE: Remotely hosted SaaS-type software remains exempt from sales tax in Maine.
• Certain property classes such as motor vehicles and other transportation equipment may be subject to somewhat different rules.
• Maine General Bulletin No. 114 describes these new rules and contains additional details including specific treatments for certain property classes such as motor vehicles and transportation equipment.

Takeaway

This is a notable change to the way both sides of the lease and rental process have been historically handled by Maine tax rules.  Longstanding Maine businesses involved in TPP lease or rental should become ready for this 1/1/25 change and also determine whether neutralization of prior taxes is available during the early 2027 refund application period (and mark their calendars accordingly!)

For more information, please contact Nick Smetana or your BNN tax advisor at 800.244.7444.