Were mandatory bank documentation fees part of taxable automobile lease receipts?

Plain-English summary

An audit found a bank excluding $400 “bank documentation fees” from taxable automobile-lease receipts. Dealers found customers, obtained bank credit approval and prepared leases naming the bank as lessor. Vehicles were registered to the bank and lessees.

Drive-off costs included first-month rent, DMV fees, a capitalized-cost reduction and the documentation fee. The bank paid dealers for vehicles net of amounts dealers had already received and kept. It reported tax on first-month rent, cost reductions and later rent, but not the documentation fee. The lease and accounting records are absent.

California said the documentation fee was required under the lease and related to the taxable lease of the vehicle. If the dealer remitted the fee to the bank or the bank netted it from the vehicle payment, the fee was part of the bank's gross receipts.

Principal Tax Auditor Glenn Bystrom therefore agreed it belonged in taxable rental charges. He found no known exemption, noted other unnamed credit corporations charged similar untaxed fees and alerted all districts to investigate banks, credit companies, leasing companies and dealerships.

On May 20, 1996, Gary Jugum reviewed Bystrom's memorandum as a “Non-Attorney Opinion” and agreed with its conclusion. The live annotation substantially republishes that 1996 summary. No authority, completed adjustment or assessment appears.

Common questions

Did calling the amount a documentation fee exempt it?

No.

Why was it treated as lease receipts?

It was required under the lease, related to the taxable vehicle lease and was assumed to reach the bank lessor through remittance or netting.

Did the payment flow matter?

Yes. The conclusion assumed the bank received the fee directly or through netting.

What if the dealer retained the fee without remittance or netting?

The memoranda do not decide that fact pattern. Their conclusion expressly assumes remittance to or netting by the bank.

What other amounts did the bank already tax?

The source names first-month rent, capitalized-cost reductions and later monthly rent.

Was a statutory exemption analyzed?

No specific exemption or other legal authority is cited. The auditor asked whether an unknown reason existed and the principal auditor knew of none.

Was a final audit adjustment supplied?

No. The source omits the audit period, measure, tax, assessment, payment, claim, appeal and outcome.

Citations and references

• June 2, 1992 Joseph J. Cohen memorandum — audit question, identified but not reproduced
• Bank/dealer agreements and customer leases — described but not reproduced
• July 16, 1992 Glenn A. Bystrom memorandum — conditional taxable-gross-receipts conclusion and district alert
• May 20, 1996 Gary Jugum memorandum — reviewed and approved the prior non-attorney conclusion
• Official Annotation 330.1874.200 — substantially follows the 1996 review
• No statute, regulation, case or prior ruling is cited in the PDF

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.1874.200
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/330-1874-200.pdf

Original ruling text

State of California

Board of Equalization

Memorandum

To:

Mr. Glenn Bystrom

From:

Gary Jugum

Subject:

330.1874.200

Date:

May 20, 1996

Non-Attorney Opinions

I have reviewed your memorandum of July 16, 1992 to --- --- --We are in agreement with his conclusion, as follows: Bank Documentation Fees. A bank enters into agreements with various car dealers to lease vehicles to customers obtained by the various car dealers. The dealers secure approval of the potential lessees from the bank and prepare the lease contracts which show the bank as the lessor. The drive-off costs to a customer included the first month’s lease amount, DMV fees cap reduction, and a $400 bank documentation fee. The vehicles are registered in the name of the bank and the lessees. It was asked whether the bank documentation fees are included as part of the auto lease receipts subject to tax. The documentation fees appear to be charges required to be paid by the lessees under the term of the leases and are related to the taxable sales (leases) of tangible personal property. Assuming that the fees are remitted to the bank by the dealers (or netted by the bank from the payment for the vehicle to the dealers), it is concluded that the documentation fees should be included in the bank’s gross receipts and that the rental charges are subject to tax. 7/16/92

State of California

Board of Equalization

Memorandum

To:

Mr. Joseph J. Cohen
Hollywood – District Prinicpal Auditor

From:

Glenn A. Bystrom
Principal Tax Auditor

Subject:

330.1874.200

Date:

July 16, 1992

Bank Documention Fees

This is in response to your memorandum of June 2, 1992, regarding the application of tax to “bank documentation fees” charged by leasing companies. In your memorandum, you explained that an audit of --- --- --- disclosed that the bank was not including “bank documentation fees” as part of its auto lease receipts subject to tax. You explained that the bank enters into agreements with various car dealers to lease vehicles to customers obtained by the dealers. The dealers secure approval of the potential lessees from the bank and prepare the lease contracts which show the bank as the lessor. The drive-off costs to a customer include the first month’s lease amount, DMV fees, cap reduction, and a $400 bank documentation fee. The vehicles are registered in the name of the bank and the lessees. The bank remits payment of the vehicles to the dealerships less all monies already received and kept by the dealerships from the lessees. The bank reports tax on the first monthly lease payments, the cap reductions, and on subsequent monthly lease payments. No tax is collected nor remitted on the $400 bank documentation fees. You have also learned that other credit corporations such as --- --- --- and --- --- --- charge similar fees on their rental agreements without tax. You believe that such fees are includable in taxable gross receipts and ask if there is some reason, unknown to you, that would exempt these fees. The documentation fees appear to be charges required to be paid by the lessees under .the terms of the leases and are related to the taxable sales (leases) of tangible personal property. Assuming that the fees are remitted to the bank by the dealers (or netted by the bank from the payment for the vehicle to the dealers), I agree that the documentation fees should be included in the bank’s gross receipts and that the rental charges are subject to tax.

Mr. Joseph J. Cohen

-2-

July 16, 1992
330.1874.200

I was unaware that a problem existed in this area. Therefore, by copy of this letter, I am advising all districts to be aware of this possibility and to investigate this area in their audits of credit corporations, leasing companies and car dealerships. GAB:sls B-A809

cc:

Mr. Robert Nunes
Mr. Charles L. Cordell
District Administrators