Legal Memorandum: Passing the Rental Tax Obligation to Lessee

Issue: Whether the inclusion of the word ‘tax’ in a lease agreement constitutes the necessary contractual pass-through language to pass the lessor’s rental tax obligation to the lessee in Alabama.

There have been no cases decided under Alabama law addressing the issue whether the  inclusion of the word “tax” in a lease agreement constitutes the necessary contractual pass-through language to pass the lessor’s rental tax obligation to the lessee.  A comprehensive review of cases from other jurisdictions turned up two relevant cases that support the position that the inclusion of the word “tax” in a lease agreement does not constitute the necessary pass-through language to pass the lessor’s rental tax obligation to the lessee.

In John Nottoli, Inc. v. Illinois Dep’t of Revenue, 651 N.E.2d 245 (Ill. App. Ct. 1995), a vehicle leasing company sought a refund of amounts paid under protest when deficiencies were assessed against it because of its method of billing rental customers for retailer occupation taxes incurred when it converted its trucks to rental.  Id. at 246.  Under Illinois law, people engaged in the business of renting vehicles are required to pay a five-percent retailer’s occupation tax upon conversion of a truck to rental.  Id.  The plaintiff paid that tax when it converted several rental trucks to rental.  Id.  As an accounting practice, the plaintiff sought to recoup the amount it paid by adding a five-percent “tax” on the rental statement.  Id. This five-percent “tax” was not forwarded to the Illinois Department of Revenue after it was collected or refunded to the renter.  Id.    

The Appellate Court of Illinois observed that the plaintiff’s lease […]