Can a trade-in allowance reduce the taxable gross receipts on a lease, and when does the trade-in count?

Plain-English summary

The question was how a trade-in allowance is applied when tangible personal property (such as a vehicle) is leased. Kansas taxes "the gross receipts from the service of renting or leasing of tangible personal property" under K.S.A. 79-3603(h).

The Department drew a line based on ownership:

• A taxpayer may not take credit in reported gross receipts for a trade-in allowance on property that is currently under lease, because the lessee has no ownership in the leased vehicle.
• If the person about to lease owns the property that will be traded in, the trade-in can be applied. In that case the person does not necessarily have to negotiate the new lease with the same lessor, and the lessor must be in a position to resell the traded-in property.
• When the customer owns the trade-in, the new lease must be contracted for and controlled by one document, agreement, or contract.

In closing, the Department said it looks to who has title to the property in determining ownership.

What this means for you

If you lease vehicles or other tangible personal property in Kansas, the tax base is the lease's gross receipts — and a trade-in reduces that base only when the customer genuinely owns the item being traded in.

• Customer owns the trade-in: the allowance can offset the new lease, the trade-in and lease should be documented as one transaction, and you (the lessor) must be able to resell the trade-in.
• The "trade-in" is still under an existing lease: no credit — the lessee doesn't own it, so there is nothing to trade.
• Title controls. The Department resolves ownership questions by looking at who holds title to the property.

Structuring the deal correctly (one contract, verified ownership/title) is what determines whether the trade-in lawfully reduces the taxable lease receipts.

Common questions

Can a trade-in lower the sales tax on a lease in Kansas?
Yes, but only if the customer owns the item being traded in and the trade-in and new lease are handled as a single documented transaction.

What if the item I want to "trade in" is still under an existing lease?
Then you can't take a trade-in credit — as lessee you don't own that property, so the Department allows no reduction in gross receipts.

Do I have to lease from the same company I traded with?
No. If you own the trade-in, the ruling says you do not necessarily need to negotiate the new lease with the same lessor, though the lessor must be able to resell the trade-in.

How does the Department decide who owns the property?
It looks to who holds title.

Citations and references

• K.S.A. 79-3603(h) — imposes sales tax on "the gross receipts from the service of renting or leasing of tangible personal property."

Source

• Original ruling (DOCX): https://www.ksrevenue.gov/pildocs/rulings/P-1998-43.docx
• Kansas Policy Information Library: https://www.ksrevenue.gov/prpil.html

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

May 4, 1998

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Dear Ms. TTTTTT:

We wish to acknowledge receipts of your letter dated March 23, 1998, regarding the application of Kansas Retailers’ Sales tax.

K.S.A. 79-3603(h) imposes a sales tax upon: “the gross receipts from the service of renting or leasing of tangible personal property. . .”

Please be advised that a taxpayer may not take credit in the report of gross receipts for an amount equal to the allowance given for the trade-in of property currently under lease, since the lessee has no ownership in the leased vehicle. Further, if the to-be lessee owns the property that will be traded in, he does not necessarily need to negotiate the new lease with the same lessor. Additionally, the lessor must be in a position, as such, that he or she would be able to resell the property that was traded in.

If the to-be lessee owns the property that will be traded-in, the new lease must be contracted for and controlled by one document, agreement or contract.

In closing, the department of revenue looks to who has title to the property in determining ownership.

If I may be of further assistance, please contact me at your earliest convenience at (785) 296-7776.

Sincerely yours,

Thomas P. Browne, Jr.
Tax Specialist

TPB

Date Composed: 05/12/1998 Date Modified: 10/10/2001

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