Legal ways to maximize revenues
QUESTION: I keep hearing about rental companies that charge their customers additional fees for things like environmental issues, refueling, cleaning and other services. The “Legally Speaking” article in October 2017 outlined refueling and transportation charges, but I’m wondering what other types of fees are being charged and whether doing so actually is legal. If it is, what do I have to do in order to make certain I’m doing so fairly and properly, and most importantly, legally?
Answer: There are a great many other charges that can and, in many cases, should be charged through to rental customers. Oen, they aren’t. Sometimes, it may be due to issues such as customer perception or the local competitive environment, but in my opinion, rental companies routinely leave many thousands of dollars on the table by not charging customers for costs and services the customers should rightfully pay for.
Following is a list of some of the more common pass-through charges, also referred to as surcharges, that can be charged to customers in many cases, but are commonly overlooked. In addition, you will find some notes regarding enforceability and legality in order to provide some perspective regarding how different charges and fees are dealt with in different areas, as they can vary considerably from jurisdiction to jurisdiction. These are presented in alphabetical order as there doesn’t appear to be any particular hierarchy in terms of relative importance.
Additional authorized user fees. In most states, rental companies must allow a customer’s spouse to operate a rented vehicle and probably small equipment in some cases — almost certainly not large or technical equipment — if he or she is licensed and at least 18 years old. Other licensed users can be authorized if expressly listed on the rental agreement. Rental companies are permitted to levy an extra charge for each additional operator in most states.
Administrative fees. Depending on the administrative issue, such as a rescheduling of rentals, these usually can be charged through if your contract permits it.
Age surcharges. Some rental operations assess surcharges for operators under 25 years of age, usually for those between age 21 and 24, and perhaps more if the operator is under 21. Michigan, New York and Quebec require this to be ages 18 to 24. Be careful to check the law as this may be viewed as unlawful age discrimination.
Attorneys’ fees. These usually are recoverable in the event of a default, though some states, particularly in the Midwest, reputedly make such recoveries dicult or impossible, particularly where specific recovery provisions are not included in contracts.
Cancellation/rescheduling. Cancellation or rescheduling fees oen are stated in terms of whole or partial “non-refundability” of deposits.
Cleaning. Cleaning charges are quite common, but oen lack enough specificity to be enforceable. Stating such charges in terms of hourly rates or per-item amounts, and doing so in separate statements of “rental policies” can be helpful.
Credit card surcharges. Surcharges of up to 4 percent of the transaction amount are legal in 39 states, but are currently illegal in 10 states and Puerto Rico.
Damage charges. Charges for damage to rented item(s), including physical damage and also damage(s) to electronics, soware, marks, stains, burns and more are generally recoverable.
Damage waiver/rental protection plan. The vast majority of rental companies maintain an optional “Damage Waiver” or “Rental Protection Plan” program, charging between 8 percent and 15 percent of the rent in exchange for the rental company’s agreement(s) to waive claims on a limited basis for physical damage, usually not including the. In some cases, rental companies, mostly in the on-road vehicle rental space, oer additional augmented protections, such as accident insurance, personal effects coverage, sickness protection and/or supplemental liability insurance.
Default-related expenses. Expenses arising in connection with customer defaults can vary considerably. Expense items that always should be chargeable under the contract include the scheduled rent and rental-related charges for the entire term, except as prohibited by applicable law, as well as out-of-pocket costs, interest, attorneys’ fees, court costs and collection costs.
Delivery/transportation. This is usually is stated as a simple per-mile charge, though some of the larger rental companies have created more elaborate models involving variable components for fuel costs, and fixed components for standing costs, running costs, depreciation, Tier 4 compliance and more.
Environmental fees. These fees are charged for management and disposal of potentially hazardous materials, such as fuel, oil, greases, solvents and batteries, and their waste by-products. These fees typically are not statutorily-mandated. Instead, larger rental companies began charging these fees a number of years ago in an effort to directly or indirectly oset the additional costs associated with environmental compliance. These fees have been the subject of some debate, particularly where they haven’t been tied to any specific environmental costs or programs. Nonetheless, they continue to proliferate and likely will expand further.
Hours/excess hours. Most rental companies charge additional prorated or periodic rent for late returns and for hours beyond a stated limit, usually eight hours per day, logged on an item’s hour meter.
Installation and setup. Installation and setup fees are common in certain industries, such as with events, electronics 99 and some portable power, where signicant amounts of manpower may be required.
Insurance. Most rental companies don’t sell or charge for insurance, the usual exception being insurance premiums charged through as breach-related damages resulting from a customer’s breach of the customer’s obligation to provide his/her/its own insurance.
Interest. Often forgotten, interest charges should begin accruing on unpaid amounts no later than 30 days aer the due date of each invoice. Maximum legal interest rates can vary widely from state to state, and some states imply a much lower rate in the absence of an express authorization. is makes it important to review this with an attorney and to include a usury savings provision limiting the maximum chargeable interest to the amount permitted under applicable law.
Licensing fees. Many states permit recovery from lessees of the cost of licensing equipment and vehicles required to be licensed under state law. Generally, fees must be separately stated in the contract, and lessors must make good faith efforts to avoid collecting more than their actual costs.
Loss of use. Some states, including Colorado, New Jersey, Wisconsin, Texas and California, have begun permitting rental companies to recover for “loss of use” — equipment downtime during repair or replacement period(s).
Maintenance. Maintenance charges, particularly for maintenance beyond provision of fluids and lubricants, have expanded significantly. As they’ve grown, the need for separate maintenance agreements that limit the lessor’s obligations to specifically identified services and waive specific service-related implied warranties and associated legal liabilities also has grown.
Mileage. Mileage charges for rented vehicles, whether for each mile driven or for miles in excess of a stated upper limit, have become popular in many areas.
NSF charges. Charges for checks returned unpaid are common, but also commonly overlooked. Most states limit such charges to a set amount — usually limited to between $20 and $30, depending on state, while it is $40 in Mississippi.
Other services/labor. Depending on the type of rental and services required, these fees can be significant. They also have become more common, particularly with respect to extraordinary delivery requirements, maintenance, repairs, replacements and equipment retrievals.
A number of states have enacted laws creating item- and/or transaction-specific charges.
Parts and consumables. Often included in the maintenance agreements referenced above, parts, filters, oils, greases, fluids and other consumables, as well as the contractual right to charge for them at cost plus a reasonable prot, should be included.
Fuel and refueling. The prepayment options for fuel so common in the car rental industry have made significant inroads in the equipment rental industry, as evidenced by prepay options now being offered by some of the larger equipment rental companies. One of the obvious benefits to lessors is the fact that no refunds are generally required, at least not as of yet, for fuel remaining in an item’s fuel tank upon return. e more common equipment rental industry charges for refueling equipment returned less than full also can add significantly to a rental company’s bottom line. Be careful, however, as lawsuits have been proliferating in this area. Also, some states statutorily limit these charges. For example, Hawaii caps them to 1.5 times the prevailing market price, while Maryland limits them to 1.35 times the market price. Among other things, this tends to make offering the prepay option relatively more appealing.
Restocking. For rental operators who sell items as well — such as belts, hats, boots, gloves and goggles as well as parts and consumables — charging a restocking fee can yield benefits, though in many cases more in terms of the disincentive for returns they create than for any profits they might generate.
Safety devices. Rental operations vary widely in terms of their willingness to charge for safety items, particularly harnesses and lanyards. Some provide them with every rental free of charge; others rent or sell them; and still others, mostly larger operators, insist on only selling them. Identifying the appropriate risk/reward balance is a company-specific determination, but the additional revenues generated by renting such items appear to well exceed the other options.
Taxes and surcharges. Sales and use tax always should be included in the amounts chargeable to lessees — subject to applicable law. Also, consider passing through charges for nes, fees, tolls, duties, impounds and other rental-related charges.
A number of states have enacted laws creating item- and/or transaction-specific charges. Following is a sampling of some of these charges and the laws that relate to them:
a. Alabama: Heavy equipment recovery fee of 1.5 percent on gross rental receipts. is is not mandatory; rental operators have the option to include it.
b. Arizona: Heavy equipment property surcharge of 1.5 percent. is is mandatory.
c. California: Estimated personal property tax reimbursement of 0.75 percent of base rent.
d. Connecticut: Machinery surcharge of 2.75 percent for rentals of less than 365 days. e old surcharge for motor vehicles and rental trucks was eliminated as of Jan.1, 2018.
e. Georgia: A 1.5 percent fee on heavy equipment, which is a permissive property tax reimbursement.
f. Hawaii: A mandatory excise tax of 4.166 percent or 4.712 percent, depending on location.
g. Illinois: Occupation and use tax of 6.25 percent on rental purchase agreements of four months or less on items rented for personal, family or household use. Be careful if you lease property into Illinois. Illinois charges use tax, but imposes it on the lessor, even if you’re out of state, rather than on the lessee. According to a Jan. 7, 2016, letter ruling from the Illinois Department of Revenue, lessors and lessees may make private contractual arrangements for reimbursement of such taxes to equipment lessors. Thus, the reimbursement obligation must be included in the rental agreement if an Illinois lessee is to be obligated to reimburse a rental company for these taxes.
h. South Carolina: Heavy Equipment rental fees of 2.5 percent are mandatory.
i. Texas: The Texas Emissions Reduction Plan (TERP) sales tax of 1.5 percent, down from 2 percent for leases entered into prior to Sept. 1, 2015, and Dealer’s Heavy Equipment Special Inventory (DHESI) tax, both of which are mandatory.
j. Local/city taxes: For example, county and city taxes — also mandatory in most cases.
Waiting time/delays. When a customer doesn’t show up at a delivery site, or other issues not the fault of the rental company result in additional time and expense, customers arguably should be charged for the associated costs, including employee waiting time as well as overtime.
Though much less prevalent, some other passthrough charges might be worth considering, depending on the nature of the rental(s) and/or rental operation(s), including:.
Drop-off charges: Additional charges for returns of rented items to alternate locations. Though more common in the car rental industry, equipment rental companies with multiple locations might find including such charges useful.
Training: If training is to be provided for certain items, such as cranes, hoists, forklifts, manlifts or other equipment, charging for such training not only seems reasonable but economically essential, particularly where the cost of providing such training is material and/or the training has significant value to the customer. Providing such training through a separate legal entity might be prudent given the potentially enormous “errors and omissions” liability.
GPS/telematics/toll charge monitors: These charges also are more common in the car rental industry, but charging for them might make sense in some circumstances, particularly where the technology itself might have significant value to customers, such as for job-site management.
Subleasing/re-renting: Some lessors charge a subleasing or re-rental fee in order to compensate for their administrative costs associated with investigating the proposed end-user and/or the viability of the re-rental, obtaining additional insurance certificates, among other things.
Premium service options: If additional or expedited service and/or maintenance might be required with respect to a given item, an additional charge for a premium plan might be considered in order to compensate the rental company for the additional time, planning and materials this will likely require.
Early return fees: More common in the car rental industry — larger car rental companies, including Dollar and riy, have instituted these — such fees are sometimes charged to compensate lessors for adjustments to schedules and their additional costs associated with spikes in returns and associated labor and carrying costs as well as lost rental revenues.
Out of area surcharge: Additional charges for taking rented equipment outside of stated radius surrounding the rental operation may be valid in some cases in order to compensate the rental company for its additional risk and maintenance/ service costs associated with permitting the equipment to be used more remotely.
Energy surcharges: Some rental companies have begun to institute these in an effort to oset the costs of utility charges, fuel, oil, grease and related costs. Though arguably as valid as any other surcharge, at some point one could be forgiven for beginning to wonder where ordinary costs of doing business end, and legitimate surcharges begin.
Disclose, disclose, disclose: Mandatory fees — those that every customer must pay as a condition of the rental — always should be disclosed upon or prior to the making of the reservation, in advertisements and in the rental contract. They also can be disclosed to telephone and walk-in customers orally and in the rental contract, though rental companies do well to also disclose them in signs or placards at or near rental counters and in separate statements of rental policies. Never attempt to hide, disguise or misrepresent a rental-related fee by, for example, portraying it as a state-mandated fee if it isn’t or combining it with other taxes or fees that are. Doing so is an invitation to plaintiffs’ lawyers to sue you for violation(s) of consumer protection statute(s) or deceptive/unfair trade practices laws and possibly for treble (triple) or punitive damages, as well as attorneys’ fees.
On the bright side, courts routinely find that full disclosure of the fees to be charged in connection with a rental on the rental contract as separate line items, even if the fees themselves might be arguably unfair or excessive, renders them sufficiently fair for purposes of these types of laws.
Adding surcharges, taxes and other charges has become the norm in the equipment rental industry, the issue now being what can/should/must be included. State legislatures have created a maze of regulations around this issue, making it perilous to include them and, in some cases, to exclude them without carefully researching the law.