When a car dealership signs a long-term lease with a customer and immediately assigns it to a separate leasing company, who is the 'original lessor' responsible for collecting the up-front sales tax, and is a trade-in credit applied to the lease taxable?

Plain-English summary

BMW Financial Services and a related trust operate a common auto-leasing structure: independent dealerships across the country negotiate and sign long-term (over 12 months) motor vehicle leases with customers using the finance companies' standard lease forms, and the finance companies set the minimum lease rates. At the moment the lease is signed, the dealer actually holds title to the vehicle. Immediately afterward, the finance companies buy the vehicle from the dealer and the lease is assigned to them as the new lessor -- though they can refuse to accept any lease that doesn't meet their standards. Separately, dealers often take a customer's trade-in vehicle, apply its equity value as a "capitalized cost reduction" (essentially a down payment that lowers future lease payments), and then resell the trade-in themselves; the finance companies reimburse the dealer for the vehicle's purchase price, net of what the dealer already collected from the customer (including the trade-in credit).

The finance companies asked three related questions. First, who counts as the "original lessor" -- the dealer or the finance company? The Department said it's the dealer: the dealer negotiates the lease, executes it while holding title, and only afterward assigns it to the finance company, which makes the dealer the true original lessor under these facts. Second, and following directly from that, the dealer -- not the finance company -- is legally responsible for collecting the sales tax due at the lease's inception (New York taxes long-term vehicle leases all at once, up front, on the full stream of payments) and remitting it with its own sales tax return. The Department did flag that the finance company could become liable too, but only if it actually ends up collecting sales tax from the customer itself.

Third, on the trade-in question: the capitalized cost reduction based on the customer's trade-in equity is not subject to sales tax. This is the same "trade-in exclusion" that applies whenever a customer trades in a vehicle they own on a straight purchase -- the value of property accepted in trade, when the dealer intends to resell it, doesn't count as part of the taxable receipt. Because the dealer here genuinely takes the trade-in with intent to resell it and applies its value directly against the lease consideration, the trade-in credit reduces the taxable base rather than being taxed itself.

What this means for you

Auto dealers who assign leases to finance/leasing companies

If you sign the lease with the customer while holding title, and only assign the lease and sell the vehicle to the finance company afterward, you -- not the finance company -- are the original lessor responsible for collecting and remitting the up-front sales tax on the full lease term at signing.

Auto finance and leasing companies buying assigned leases

Simply purchasing an already-executed lease and stepping in as the new lessor doesn't make you liable for the original up-front tax collection, as long as the dealer was the one who actually negotiated and executed the lease with the customer while holding title. You could still become liable in the narrower case where you yourself actually collect sales tax from the customer.

Dealers and finance companies structuring trade-in credits into leases

A trade-in's equity value, applied as a capitalized cost reduction against a lease (rather than as part of a straight purchase), gets the same tax-free trade-in treatment as an ordinary vehicle sale trade-in -- as long as the dealer genuinely accepts the trade-in with intent to resell it, following the Department's prior Mercedes-Benz Credit Corporation opinion on the same issue.

Accountants and tax professionals

The "who is the original lessor" analysis turns on the sequencing and title-holding facts at the moment of signing (per Tax Law § 1111(i)(A)), not on which entity's paper the lease agreement uses or who ultimately owns the lease stream. The trade-in exclusion analysis is a straightforward application of 20 NYCRR §§ 526.5(f) and 527.15(c)(5) to the leasing context.

Common questions

Q: If a dealer signs a lease and immediately assigns it to a finance company, who has to collect the up-front sales tax?
A: The dealer, since it's the original lessor who negotiated and executed the lease while holding title to the vehicle -- the assignment to the finance company happens only after that.

Q: Could the finance company ever become liable for sales tax on these leases?
A: Yes, but only if the finance company itself actually collects sales tax from the customer -- otherwise the collection obligation rests with the dealer as original lessor.

Q: Is a trade-in credit applied to a lease's payments taxable?
A: No, as long as the dealer accepts the trade-in with the intent to resell it and applies its value as a capitalized cost reduction against the lease -- this mirrors the ordinary trade-in exclusion that applies to a straight vehicle purchase.

Q: Can another dealer or leasing company rely on this exact result?
A: No. This advisory opinion binds the Department only for the petitioners on the facts described, though it applies the Department's general lease-taxation and trade-in rules, following the same result reached in its earlier Mercedes-Benz Credit Corporation opinion.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(3) (definition of "receipt"; trade-in exclusion)
• Tax Law § 1111(i)(A) (special rules for long-term motor vehicle leases)
• 20 NYCRR § 526.5(f) (trade-in allowance excluded from taxable receipt)
• 20 NYCRR § 527.15(a) (motor vehicle lease tax due up front at inception)
• 20 NYCRR § 527.15(c)(5) (trade-in value excluded from lease receipts)

Prior rulings referenced:

• Mercedes-Benz Credit Corporation, Adv Op Comm T&F, March 22, 1996, TSB-A-96(19)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2000.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a00_37s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-00(37)S
Sales Tax
October 5, 2000

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S000502E

On May 2, 2000, the Department of Taxation and Finance received a Petition for Advisory
Opinion from BMW Financial Services NA, Inc., and Financial Services Vehicle Trust, 300
Chestnut Ridge Road, Woodcliff Lake, NJ 07675.
The issues raised by Petitioners, BMW Financial Services NA, Inc., and Financial Services
Vehicle Trust, regarding the computation and payment of New York sales tax on long term motor
vehicle leases and based on the facts stated below, are as follows:
1) Is an automobile dealer rather than the leasing company considered to be the original
lessor.
2) Is the dealer rather than the leasing company liable for and responsible for collecting and
remitting the sales tax.
3) Is a capitalized cost reduction representing the equity in a customer’s traded vehicle
subject to New York State sales tax.
Petitioners submit the following facts as the basis for this Advisory Opinion.
Petitioners are Delaware corporations with headquarters in New Jersey. Petitioners are not
dealers. Petitioners are leasing companies which are in the business of leasing motor vehicles to
customers throughout the United States. Petitioners do not have offices in New York.
Petitioners offer long-term lease programs through independently owned and operated motor
vehicle dealerships throughout the United States. All of the lease programs are for terms in excess
of twelve months. Petitioners provide the lease customer (the lessee) with an option to purchase the
motor vehicle at the end of the lease for the residual value. The residual value represents an estimate
of the expected fair market value of the vehicle at the end of the lease.
A dealership negotiates the lease of the motor vehicle with a customer. Petitioners set the
minimum rates for customer leases.
The dealer completes and executes Petitioners’ standard lease agreements with the lessee.
At the time the lease is executed, the dealer holds title to the leased vehicle. It is understood that
upon execution of the lease agreement, Petitioners will purchase the vehicle from the dealer and the
lease agreement will immediately be assigned to Petitioners as the lessor. Petitioners have the right
to refuse assignment of any lease not adhering to Petitioners’ standards.

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TSB-A-00(37)S
Sales Tax
October 5, 2000

The dealer will accept the lessee’s personally owned vehicle as a trade-in. The equity from
the trade-in will be applied to the lease agreement as a capitalized cost reduction. A capitalized cost
reduction is similar to an advance payment which reduces the amount of each future lease payment.
Title to and possession of the trade-in vehicle will be passed to the dealer who will resell the vehicle.
Petitioners give the dealer the purchase price of the vehicle less any funds collected by the
dealer from the lessee, including the first payment, paid acquisition fees and capitalized cost
reductions. Petitioners capitalize and depreciate the full purchase price of the vehicle.
All future payments are made directly to Petitioners by the lessee.
Applicable Law & Regulations
Section 1101(b)(3) of the Tax Law defines receipts as follows:
The amount of the sale price of any property and the charge for any service
taxable under this article, valued in money, whether received in money or otherwise,
including any amount for which credit is allowed by the vendor to the purchaser . .
. but excluding any credit for tangible personal property accepted in part payment and
intended for resale . . . .
Section 1111(i)(A) of the Tax Law provides, in part:
Notwithstanding any contrary provisions of this article or other law, with
respect to any lease for a term of one year or more of . . . a motor vehicle, as defined
in section one hundred twenty-five of the vehicle and traffic law, with a gross vehicle
weight of ten thousand pounds or less . . . or an option to renew such a lease or a
similar contractual provision, all receipts due or consideration given or contracted to
be given for such property under and for the entire period of such lease, option to
renew or similar provision, or combination of them, shall be deemed to have been
paid or given and shall be subject to tax, and any such tax due shall be collected, as
of the date of first payment under such lease, option to renew or similar provision,
or combination of them, or as of the date of registration of such property with the
commissioner of motor vehicles, whichever is earlier. . . .
Section 526.5(f) of the Sales and Use Tax Regulations provides, in part:
Trade-in. Any allowance or credit for any tangible personal property accepted
in part payment by a vendor on the purchase of tangible personal property or services
and intended for resale by such vendor shall be excluded when arriving at the receipt
subject to tax. Only the net sale price of tangible personal property or the charge for
services would be subject to tax.

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TSB-A-00(37)S
Sales Tax
October 5, 2000

Section 527.15(a) of the Sales and Use Tax Regulations provides:
Section 1111(i) of the Tax Law provides special rules for the payment of sales
and use tax on certain leases of motor vehicles, vessels and noncommercial aircraft.
Rather than the tax being due upon each periodic lease payment, the Tax Law
provides that with respect to the leases described in this section the tax is due at the
inception of the lease on the total amount of the lease payments for the entire term
of the lease.
Section 527.15(c)(5) of the Sales and Use Tax Regulations provides:
Where the lessor accepts tangible personal property for resale as a trade-in on
a lease agreement, the total receipts do not include the value of the trade-in.
Opinion
In this case, dealers enter into lease agreements with customers for the lease of motor
vehicles. The dealer negotiates and accepts in part payment of the purchase price a customer trade-in
with the intent of reselling the trade-in. The dealer receives the first lease payment from the
customer. Based upon the facts presented, the dealer is considered the original lessor, who then
assigns the lease to Petitioners after the lease agreement is executed. Upon completion of the lease
documentation, Petitioners purchase the lease and the leased vehicle from the dealer. Accordingly,
the dealer is responsible for collecting, at the time of receiving the first lease payment due from the
lessee, the sales tax due on the lease pursuant to Section 1111(i) of the Tax Law and remitting such
tax to the Department with its sales tax return. It should be noted that Petitioners could be liable for
sales tax if they actually collected sales tax from customers.
Pursuant to section 1101(b)(3) of the Tax Law and sections 526.5(f) and 527.15(c)(5) of the
Sales and Use Tax Regulations, the capitalized cost reduction relating to the lessee’s trade-in is not
subject to sales tax since the dealer accepts the lessee’s vehicle as a trade-in with the intent of
reselling the vehicle and applies the amount of the capitalized cost reduction against the
consideration due under the lease for the vehicle. See Mercedes-Benz Credit Corporation, Adv Op
Comm T & F, March 22, 1996, TSB-A-96(19)S.

DATED: October 5, 2000

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist III
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.