In a long-term car lease where the dealer sells and assigns the lease to a leasing company, who is responsible for collecting New York sales tax -- the dealer or the leasing company?

Plain-English summary

UBVL Auto LT is a Massachusetts business trust that runs a long-term vehicle lease program through independent dealerships nationwide. A dealer negotiates and signs the lease directly with the customer (naming the dealer as the original lessor, with UBVL preprinted as assignee), holds title to the vehicle, and collects the customer's first lease payment — then immediately sells the vehicle to UBVL, which is simultaneously assigned the lease as the new lessor for all future payments. Dealers also routinely accept a customer's trade-in vehicle, crediting its equity against the lease as a "capitalized cost reduction" that lowers future monthly payments — and UBVL pays the dealer the vehicle's purchase price minus whatever the dealer already collected (first payment, fees, and the trade-in credit).

New York taxes long-term motor vehicle leases (12+ months, vehicles under 10,000 lbs.) differently from most sales: instead of taxing each monthly payment, the ENTIRE lease payment stream is deemed paid — and taxed — all at once, at the earlier of the first lease payment or vehicle registration. Since the dealer is the one who signs the lease, holds title, and collects that first payment before UBVL ever enters the picture, the Department concluded the DEALER is the original lessor and bears responsibility for collecting and remitting the full upfront sales tax on the lease — not UBVL, even though UBVL becomes the lessor for the life of the lease immediately afterward. UBVL only becomes liable for tax later if it actually collects tax itself, or when it collects money on a lease-end purchase option or lease extension.

On the trade-in: because the dealer accepts the customer's traded-in vehicle with intent to resell it, and applies its value as a capitalized cost reduction against the lease, that trade-in equity is excluded from the taxable lease receipts entirely — the same trade-in credit treatment as an ordinary vehicle purchase.

What this means for you

Motor vehicle dealers running assigned/securitized lease programs

If you sign the lease, hold title momentarily, and collect the first payment before assigning the lease to a finance/leasing company, you are the "original lessor" for sales tax purposes and you owe the FULL upfront sales tax on the lease at that first-payment moment — assigning the lease afterward doesn't shift that collection obligation to the assignee.

Leasing and finance companies that purchase assigned dealer leases

You generally aren't liable for the upfront lease tax the dealer should have already collected, but you do need to collect tax later if a lessee exercises a purchase option or extends the lease, or if you end up actually collecting tax from lessees yourself.

Accountants and tax professionals

This ruling is a clean template for any dealer-originates/assigns-to-lender leasing structure: identify who signs the lease and collects the first payment (that's the taxable "original lessor" moment under section 1111(i)) independent of who ultimately holds the lease long-term, and remember the trade-in credit works the same way in a lease as in an outright purchase.

Common questions

Q: In an assigned lease program, who collects the upfront sales tax -- the dealer or the leasing company?
A: The dealer, as the original lessor who signs the lease and collects the first payment, before the lease is assigned to the leasing company.

Q: Is a customer's trade-in vehicle equity taxable when applied to a lease?
A: No — a capitalized cost reduction representing trade-in equity is excluded from the taxable lease receipts, just like a trade-in credit on an outright purchase.

Q: Does the leasing company ever owe sales tax on this type of lease?
A: Yes, if it actually collects tax from lessees, or when a lessee exercises a purchase option or extends the lease.

Q: Can another dealer or leasing company rely on this Advisory Opinion?
A: No. It binds the Department only for the petitioner and facts described; another program's lease-assignment structure should be checked against its own facts.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(3) (receipt; trade-in credit)
• Tax Law § 1111(i)(A) (upfront tax on long-term motor vehicle leases)
• 20 NYCRR 526.5(f), 527.15(a), (c)(5)

Prior rulings referenced:

• BMW Financial Services NA, Inc. and Financial Services Vehicle Trust, TSB-A-00(37)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2006.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a06_24s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-06(24)S
Sales Tax
October 19, 2006

Office of Tax Policy Analysis
Technical Services Division
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S050726A

On July 26, 2005, the Department of Taxation and Finance received a Petition for
Advisory Opinion from UBVL Auto LT, 111 Huntington Avenue, Suite 400, Boston, MA
02199-8001.
The issues raised by Petitioner, UBVL Auto LT, regarding the computation and payment
of New York sales tax on long-term motor vehicle leases are:

1. Whether the motor vehicle dealer, not the company that purchases the lease (the
   leasing company) from the dealer, is considered to be the original lessor.
2. Whether the motor vehicle dealer, not the leasing company, is liable for and
   responsible for collecting and remitting the sales tax.
3. Whether a capitalized cost reduction, representing the equity in a customer’s traded-in
   vehicle, is subject to New York State sales tax.
   Petitioner submitted the following facts as the basis for this Advisory Opinion.
   Petitioner is a business trust with its headquarters in Boston, Massachusetts, and with no
   offices in New York. Petitioner offers a long-term lease program through local independent
   motor vehicle dealerships throughout the United States. All leases are for terms in excess of 12
   months and provide the customer (the lessee) with an option to purchase the motor vehicle at the
   end of the lease.
   A motor vehicle dealership (dealer) negotiates the lease of a motor vehicle with a lessee
   using Petitioner’s program. All negotiations between prospective lessees and dealers take place
   at the dealer’s locations. A dealer completes and executes a standard Petitioner lease agreement
   with the lessee. The lease agreement does not use Petitioner’s name as the lessor, but rather the
   dealer is named the original lessor, and Petitioner’s name is preprinted as the assignee. At the
   time the lease is executed, the dealer holds title to the leased vehicle and the dealer receives the
   first lease payment from the lessee. Under Petitioner’s program, Petitioner purchases the leased
   vehicle from the dealer upon execution of the lease agreement, and the lease agreement is
   immediately assigned to Petitioner as the lessor. Petitioner has the right to refuse assignment of
   any lease not adhering to Petitioner’s standards.
   In the normal course of business, 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

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Sales Tax
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capitalized cost reduction. A capitalized cost reduction is similar in effect to an advance
payment that reduces the amount of each future lease payment. The dealer, who will resell the
trade-in vehicle, receives title to and possession of the vehicle.
Petitioner pays the dealer the purchase price of the leased vehicle, reduced by any funds
collected by the dealer from the lessee, including the first lease payment and acquisition fees,
and capitalized cost reductions. The lessee makes all future lease payments directly to Petitioner.
Applicable law and regulations
Section 1101(b)(3) of the Tax Law defines receipt 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.
Section 527.15(a) of the Sales and Use Tax Regulations provides:

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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
Under the circumstances presented by Petitioner, motor vehicle dealers enter into lease
agreements with customers (lessees) for the lease of motor vehicles. The dealer negotiates the
lease and accepts, as partial payment, a lessee’s trade-in vehicle with the intent of reselling it.
The dealer also receives the first lease payment from the lessee. Petitioner then purchases the
vehicle and is assigned the lease agreement.
Based upon the facts presented, the dealer is the original lessor, who then sells the vehicle
and assigns the lease to Petitioner after the lease agreement is executed and after it has received
the first lease payment. Under section 1111(i) of the Tax Law, the entire payment due under a
long-term lease of a motor vehicle with a gross vehicle weight of 10,000 pounds or less for a
term of one year or more is deemed to have been paid and is subject to sales tax as of the date of
first payment under the lease or the date of registration of the motor vehicle, whichever is earlier.
Accordingly, pursuant to section 1111(i), the dealer is responsible for collecting the sales tax due
on the lease at the time of receiving the first lease payment from the lessee and remitting such tax
to the Tax Department with its sales tax return. It should be noted that Petitioner could be liable
for sales tax if it actually collected sales tax from lessees. See BMW Financial Services NA, Inc.
and Financial Services Vehicle Trust, Adv Op Comm T&F, October 5, 2000, TSB-A-00(37)S.
The dealer accepts trade-ins of lessee owned vehicles. The lessee’s equity in the traded
vehicle is applied as a capital cost reduction in computing the amount of the lessee’s periodic
lease payments. 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 representing
the value of a 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 for the leased vehicle. See BMW
Financial Services NA, Inc. and Financial Services Vehicle Trust, supra.

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It should be noted that Petitioner will be responsible for collecting and remitting any sales
tax that is due on the option purchase price when a lessee exercises the purchase option or on any
amount paid by the lessee on any extensions of the lease.

DATED: October 19, 2006

NOTE:

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

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