In a motor-vehicle leasing like-kind exchange under IRC § 1031, does the Qualified Intermediary that holds the escrow funds have to register as a New York sales tax vendor?

Plain-English summary

To qualify motor-vehicle exchanges for tax-free like-kind exchange treatment under IRC § 1031 (a federal income tax provision), a vehicle lessor retains a "Qualified Intermediary" to handle the money side of trading in an old leased vehicle ("Relinquished Property") for a new one ("Replacement Property"). At the end of a lease, the lessor sells the old vehicle and assigns its right to receive the sale proceeds to the Qualified Intermediary, which deposits the money in a "Qualified Escrow Account." The lessor then finds a new vehicle to buy and directs the Intermediary to pay the seller out of that escrow account. Throughout this process, the lessor — not the Intermediary — actually signs and delivers title to each vehicle; the vehicles are delivered directly between the lessor and the buyer/seller without ever passing through the Intermediary's hands. The Intermediary just manages the escrow funds and earns a commission for that service.

New York only requires someone to register and collect sales tax if they're a "vendor" — generally, someone making sales of taxable tangible personal property or services. Because the Qualified Intermediary never takes title to or possession of any vehicle, and never itself transfers title or possession to a buyer, it isn't making a "sale" in the tax sense at all — it's just providing a financial facilitation service. So the Qualified Intermediary isn't a vendor and doesn't need to register for sales tax purposes. The lessor remains the vendor responsible for collecting and remitting New York sales tax on the underlying vehicle sale (or for supplying a proper resale certificate if it's buying the replacement vehicle exclusively for leasing). One practical wrinkle: if sales tax dollars do end up passing through the Intermediary's escrow account, both the Intermediary and the lessor become jointly and severally liable for those specific tax dollars, even though the Intermediary itself never had to register as a vendor.

What this means for you

Leasing companies and finance businesses using like-kind exchange structures

Setting up an IRC § 1031 like-kind exchange with a Qualified Intermediary for tax deferral purposes doesn't create a new sales-tax vendor out of the Intermediary, as long as the Intermediary's role stays limited to managing escrow funds rather than actually taking title or possession of the underlying property. The lessor keeps all of its usual sales tax collection and resale-certificate obligations exactly as before.

Qualified Intermediaries and escrow agents

Even though you're not required to register as a vendor, be careful about handling actual sales tax dollars through your escrow account — if that happens, you can become jointly and severally liable for that tax right alongside the lessor, despite never having vendor status yourself.

Accountants and tax professionals

This opinion is narrowly limited to a facilitation role with no title or possession of goods passing through the Intermediary — it's not a blanket rule that all IRC § 1031 intermediaries in every industry are automatically outside New York's vendor definition. Confirm the actual mechanics of title transfer and possession in any similar structure before relying on this reasoning, and flag the joint-and-several-liability wrinkle (per E. Parker Brown, II, TSB-A-00(13)S) if sales tax proceeds pass through the escrow account.

Common questions

Q: Does using a Qualified Intermediary for a like-kind exchange change who's responsible for collecting New York sales tax?
A: No. The lessor remains the vendor with the usual collection and remittance responsibilities; the Intermediary doesn't take on vendor status just by managing the escrow funds.

Q: Could the Qualified Intermediary ever become liable for sales tax?
A: Yes, in a limited way — if sales tax amounts pass through its escrow account, it becomes jointly and severally liable for those amounts alongside the lessor, even without ever being a registered vendor.

Q: Can other Qualified Intermediaries in different industries rely on this ruling?
A: No. This advisory opinion binds the Department only for the petitioner's described facts — a motor-vehicle leasing exchange where the Intermediary never takes title or possession. A different fact pattern (e.g., an intermediary that does take title) could be analyzed differently.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(4) (definition of "retail sale")
• Tax Law § 1101(b)(5) (definition of "sale, selling or purchase")
• Tax Law § 1101(b)(8) (definition of "vendor")
• Tax Law § 1131(1) (persons required to collect tax)
• Tax Law § 1132(a)(1) (collection of tax as trustee for the state)
• Tax Law § 1133(a) (personal liability for tax collected)
• 20 NYCRR § 526.7(a), (c) (sale, selling, purchase; rentals and leases)

Prior rulings referenced:

• E. Parker Brown, II, Adv Op Comm T&F, Feb. 29, 2000, TSB-A-00(13)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_49s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-00(49)S
Sales Tax
November 20, 2000

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S981103B

On November 3, 1998, the Department of Taxation and Finance received a Petition for
Advisory Opinion from PricewaterhouseCoopers LLP, 1301 Avenue of the Americas, New York,
New York 10019.
The issue raised by Petitioner is whether the activities of a Qualified Intermediary, as
described below, require it to register as a vendor for sales and use tax purposes.
Petitioner submitted the following facts as the basis for this Advisory Opinion.
The Internal Revenue Service has ruled that exchanges of rental property by a corporation
through the use of a qualified intermediary (hereinafter referred to as “Qualified Intermediary”)
and/or a qualified escrow account (hereinafter referred to as “Qualified Escrow Account”) can
qualify under Internal Revenue Code (hereinafter referred to as “IRC”) Section 1031 as tax-free like­
kind exchanges, for federal income tax purposes. The transactions at issue in this Petition concern
the manner in which a motor vehicle is purchased, leased and sold in order for those transactions to
meet the requirements of IRC Section 1031. While Petitioner describes below the course of action
to be followed in order to comply with the requirements of IRC Section 1031, this opinion does not
address any income tax provisions of the Internal Revenue Code.
During the course of a motor vehicle leasing transaction, events can be segmented into three
categories; the acquisition of the property by the lessor, the leasing of the property, and finally the
disposition of the property by the lessor at the conclusion of the lease term or terms. In a typical
scenario (not an IRC Section 1031 transaction), when a lease purchase option is exercised the lessor
sells the motor vehicle and collects the purchase price paid from the lessee. Or, if the motor vehicle
is sold to a dealer or other reseller, the lessor obtains a resale certificate from the dealer and collects
the purchase price paid from the dealer. In either case, title to the motor vehicle is then transferred
from the lessor to the purchaser. Typically, when a lessor purchases a motor vehicle from a seller
for purposes of leasing to an individual, the lessor supplies a valid resale certificate to the seller,
makes payment for the vehicle and receives title to the motor vehicle.
It is presumed in this Advisory Opinion that for purposes of making the transactions
described above meet the requirements of IRC Section 1031, a Qualified Intermediary is retained by
the lessor. The lessor in this case is registered under Article 28 of the Tax Law. At the conclusion
of the lease term, the lessor wants to sell the motor vehicle (“Relinquished Property”) and purchase
another motor vehicle of the same kind (“Replacement Property”) for leasing purposes. Either the
lessee will exercise an option to purchase the Relinquished Property or, when a lessee declines to
exercise such an option, the motor vehicle will typically be sold by the lessor to a third party, such
as a dealer. In the agreement between the lessor and the Qualified Intermediary, the lessor assigns

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November 20, 2000

to the Qualified Intermediary the lessor’s rights to receive payments under its agreement with the
purchaser. The lessor will execute and deliver title to the motor vehicle to the purchaser, and the
motor vehicle is delivered directly by the lessor to the purchaser. The purchaser will remit its
payment to the Qualified Intermediary for deposit in a Qualified Escrow Account.
The lessor then identifies Replacement Property (another motor vehicle) it wishes to purchase
from a seller. The lessor enters into an agreement with the seller to purchase the motor vehicle. The
lessor directs the Qualified Intermediary to pay the seller from the funds in the Qualified Escrow
Account. The seller executes and delivers title to the motor vehicle to the lessor and the motor
vehicle is delivered directly by the seller to the lessor. The subsequent lease of the motor vehicle
will remain unchanged, and the lessor will collect and remit sales tax on the lease transaction
receipts.
The Qualified Intermediary’s involvement is primarily limited to the receipt, management
and subsequent distribution of funds in the Qualified Escrow Account. The Qualified Intermediary
does not obtain title to, or possession of, the motor vehicle in the transactions described above. The
role of the Qualified Intermediary is to provide a necessary service to the lessor which enables the
lessor to obtain the IRC Section 1031 like-kind exchange treatment. The Qualified Intermediary
receives a commission for the performance of this service.
Applicable Law and Regulations
Section 1105(a) of the Tax Law imposes a tax on the “receipts from every retail sale of
tangible personal property. . . .”
Section 1101(b) of the Tax Law provides, in part:
When used in this article for the purposes of the taxes imposed by
subdivisions (a), (b), (c) and (d) of section eleven hundred five and by section eleven
hundred ten, the following terms shall mean:
*

*

*

(4) Retail sale. (i) A sale of tangible personal property to any person for any
purpose, other than (A) for resale as such. . . .
(5) Sale, selling or purchase. Any transfer of title or possession or both,
exchange or barter, rental lease or license to use or consume . . . conditional or
otherwise, in any manner or by any means whatsoever for a consideration, or any
agreement therefor, including the rendering of any service, taxable under this article,
for a consideration or any agreement therefor.
*

*

*

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(8) Vendor. (i) The term “vendor” includes:
(A) A person making sales of tangible personal property or services, the
receipts from which are taxed by this article. . . .
Section 1131(1) of the Tax Law defines “[p]ersons required to collect tax,” in part, as “every
vendor of tangible personal property or services. . . .”
Section 1132(a)(1) of the Tax Law provides, in part:
Every person required to collect the tax shall collect the tax from the
customer when collecting the price, amusement charge or rent to which it applies .
. . . The tax shall be paid to the person required to collect it as trustee for and on
account of the state.
Section 1133(a) of the Tax Law provides, in part:
Except as otherwise provided in section eleven hundred thirty-seven, every
person required to collect any tax imposed by this article shall be personally liable
for the tax imposed, collected or required to be collected under this article. . . .
Section 526.7 of the Sales and Use Tax Regulations provides, in part:
(a) Definition. (1) The words sale, selling or purchase mean any transaction
in which there is a transfer of title or possession, or both, of tangible personal
property for a consideration. (Emphasis added)
(2) Among the transactions included in the words sale, selling or purchase
are exchanges, barters, rentals, leases or licenses to use or consume tangible personal
property.
*

*

*

(c) Rentals, leases, licenses to use. (1) The terms rental, lease and license to
use refer to all transactions in which there is a transfer for a consideration of
possession of tangible property without a transfer of title to the property. . . .
(2) Where a lease (other than one described in section 527.15 of this Title)
with an option to purchase has been entered into, and the option is exercised, the tax
will be payable on the consideration given when the option is exercised, in addition
to the taxes paid or payable on each lease payment.

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November 20, 2000

Opinion
Section 1131(1) of the Tax Law provides that the term “person required to collect any tax
imposed by this article” includes every vendor of tangible personal property. Section
1101(b)(8)(i)(A) of the Tax Law provides that the term “vendor” includes “[a] person making sales
of tangible personal property or services, the receipts from which are taxed by this article.” In the
transactions described by Petitioner, the Qualified Intermediary manages the payment of the purchase
price in an escrow account pending the completion of the transactions. The Qualified Intermediary
does not take title to any of the motor vehicles or receive possession of any of the vehicles, and does
not transfer title or possession to the purchasers. Rather, it merely provides services that facilitate
the sales.
Therefore, the Qualified Intermediary is not a vendor in the transactions described by
Petitioner. Accordingly, the Qualified Intermediary is not required to register to collect sales tax in
the transactions described by Petitioner. The lessor in these transactions is the vendor and it is
registered under Article 28 of the Tax Law. The lessor is the party responsible to collect and remit
New York State and local sales tax from the purchaser unless it obtains a properly completed
exemption certificate, such as Form ST-120, Resale Certificate, within 90 days of the date of
delivery. If the lessor purchases motor vehicles exclusively for leasing (resale), it, rather than the
Qualified Intermediary, should furnish a properly completed Resale Certificate to the person from
whom it purchases the motor vehicles.
It is noted that although the Qualified Intermediary in the transactions at issue does not have
the responsibility of a vendor to collect sales taxes, if amounts received by the Qualified
Intermediary contain payment for New York State sales tax, both the Qualified Intermediary and the
lessor become jointly and severally liable for the taxes collected (see E. Parker Brown, II, Adv Op
Comm T&F, February 29, 2000, TSB-A-00(13)S).

DATED: November 20, 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.