Were automobile-manufacturer rebates paid to a leasing company for vehicles placed in lease service taxable lease income?

Plain-English summary

An absent October 7, 1968 Oakland Auditing memorandum said a redacted lessor acquired lease vehicles ex-tax with resale certificates and reported all lease income as its tax measure. Manufacturers paid rebates based on new vehicles placed in lease service: two paid $50 per vehicle and a third paid $10 to $100. Payments came directly or through the selling dealer.

In most transactions, the lessor credited rebates to lease income, gave the lessee no benefit and reported the amounts as taxable lease income. In others, it credited the lessee's deposit account, which entered the termination settlement after the vehicle was sold; additional charges or credits could then arise under the lease.

Tax Counsel qualified the analysis: “From your memo, it appears” the rebates arose from purchases for lease service, not leases to particular customers. On that stated premise, rebates retained for the lessor's use and rebates credited to deposit accounts both reduced acquisition cost rather than creating taxable lease income. A deposit credit also modified that lease's deposit-account provisions.

No numbered statute, regulation or case appears. The published source supplies no audit request, vehicle purchase or sale, rebate program, selling-dealer record, resale certificate, lease, account entry, reported return, deposit, settlement, audit adjustment or later outcome. Live Annotation 330.3620 matches the conditional cost-reduction conclusion but adds no evidence.

Common questions

Did booking a rebate to lease income make it taxable rent?

No. The source looked to why the manufacturer paid it, not the lessor's accounting label.

Did the lessee have to benefit for the rebate to be nontaxable?

No. Rebates retained entirely by the lessor were still cost reductions.

What if the rebate was credited to the lessee's deposit?

It remained a cost reduction while also modifying the deposit-account terms.

Why were the rebates different from rent?

They were tied to the lessor's purchase and placement of vehicles in lease service, not customer use payments.

How much were the rebates?

The request reportedly identified $50 per vehicle from each of two manufacturers and $10 to $100 per vehicle from a third.

Had the lessor already reported any rebates as taxable?

Yes. It reportedly booked and reported most of them as taxable lease income despite giving lessees no benefit.

What happened when a rebate entered a deposit account?

It affected the settlement after the vehicle was sold and could lead to an additional charge or credit; counsel also treated the credit as modifying the lease's deposit terms.

Were the request, leases or accounting records published?

No. The conclusion depends on their description in the Tax Counsel memorandum.

Citations and references

• No numbered statute, regulation or case citation appears in the supporting memorandum
• October 7, 1968 Oakland Auditing memorandum — stated facts and question, referenced but absent
• Resale certificates, lease agreements, lease-income and deposit-account records — described but absent
• Live Annotation 330.3620 — purchase-based cost-reduction result dated December 20, 1968
• Vehicles, purchases/sales, rebate programs, dealers, returns, deposits, settlements, audit, adjustment and later outcome — absent

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.3620
• Original supporting opinion: 330.3620 PDF

Original ruling text

State of California

Board of Equalization

Memorandum

To:

Oakland – Auditing (RLM)

330.3620

Date:

December 20, 1968

From: Tax Counsel (JKM)

This is in reply to your memo dated October 7, 1968.
You state that taxpayer is acquiring lease vehicles ex tax under resale certificates and reporting all lease income as the measure of tax. At the present time, automobile manufacturers are issuing rebates to taxpayer based upon the number of new vehicles placed in lease service. Taxpayer is receiving a rebate of $50 per vehicle from both “X” and “Y”, and from $10 to $100 per vehicle from “Z”. The rebates are issued by the manufacturer either directly to taxpayer or to the selling dealer who then issues them to taxpayer. In the majority of transactions, taxpayer has treated these rebates as additional lease income by crediting the amounts received directly to the lease income account with the lessees deriving no benefit therefrom. These amounts have been reported as taxable lease income. In other transactions, taxpayer has given lessees credit for rebates by applying the rebates to the lessees’ deposit account, an account taken into consideration in computing the lease termination settlement after a lease vehicle is sold. At that time additional charges or credits may be due under the lease agreement. You ask if these rebates should be treated as additional lease income subject to tax or if they should be treated as a reduction in the cost of the lease vehicles and not subject to tax. From your memo, it appears that taxpayer receives these rebates because of its purchases of vehicles for placement in lease service rather than because it leases the vehicles to certain customers. Under these circumstances, where taxpayer receives rebates and retains them for its own use, with the lessee deriving no benefit therefrom, or applies them to lessee’s deposit account, we would regard these rebates as reductions in taxpayer’s cost of acquiring the lease vehicles and not as additional lease income. Thus, these rebates would not be reported as taxable lease income and would not be subject to tax. In those cases where taxpayer gives lessees credit for the rebates by applying them to lessees’ deposit account, taxpayer is, in effect, modifying the lease agreements by altering the provisions relating to the deposit account.

JKM:ss

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