Can a bike-share operator buy all its equipment tax-free for resale, or only the bikes it actually rents to riders?

Plain-English summary

The Petitioner operates a bike-share program for the NYC Department of Transportation -- thousands of bikes at hundreds of stations. It buys and owns all the bikes and station equipment (the bike stations, pay-station kiosks, and bike docks) and lets riders access bikes under a rental agreement (24-hour pass, 7-day pass, or annual membership). Riders unlock a bike, ride it for a set interval, and re-dock it; overtime and lost-bike fees apply. The Petitioner already collects sales tax on all rider charges. It asked whether all of its equipment purchases are exempt as purchases for resale.

The Office of Counsel split the answer:

• Bikes = exempt purchase for resale. A "sale" includes a rental (Tax Law 1101(b)(5)), and property bought for resale isn't a taxable retail sale (1101(b)(4)(i)(A)). When the rider takes a bike, all three attributes of a transferred possession are present (20 NYCRR 526.7(e)(4)): the rider has custody/possession, the right to possession, and the right to use/control/direct the bike during the rental. So the Petitioner is renting (reselling) the bikes, and its bike purchases are exempt.
• Stations, kiosks, docks = taxable. The Petitioner argued the bike and station are one inseparable unit rented together. The Department disagreed: the bike and station are separate equipment. The station is the Petitioner's own means of securing, delivering, and tracking the bikes; it holds many bikes and the Petitioner retains control of it at all times. To the rider, the station is just how they pay for and obtain the bike -- the rider isn't renting the station. So the Petitioner owes sales/use tax on the station equipment.

What this means for you

Rental businesses buying equipment

You can buy the items you actually rent out tax-free for resale -- but only those items. Equipment you use to run the business (dispense, secure, track, or process payment) is your own taxable property, even if customers touch it. The test is whether the customer truly takes possession, control, and the right to direct use of that specific item.

"It's all one rental" usually fails for back-end gear

Arguing that fixed infrastructure is "rented together" with the mobile item generally won't work when you keep control of the infrastructure and it serves many customers. Expect to pay tax on kiosks, docks, lockers, racks, and similar fixtures.

Resale certificates

For the items you do rent (the bikes), give your suppliers a resale certificate so you buy them exempt; account for tax on the back-end equipment you consume.

Common questions

Q: I run a rental program -- can I buy everything tax-free for resale?
A: Only the items you actually rent to customers (here, the bikes). Equipment you keep and control to operate the program (stations, kiosks, docks) is taxable to you.

Q: My agreement says the customer "rents" the kiosk/dock too. Does that control?
A: No. The label isn't conclusive. If you retain control and the equipment is just how the customer obtains the rental item, the customer isn't really renting it.

Q: Do I still charge my customers tax on the rental?
A: Yes -- the rental of the bikes to riders is taxable; buying the bikes for resale just avoids double tax on your purchase.

Citations and references

• Tax Law section 1105(a) (sales tax on tangible personal property)
• Tax Law section 1101(b)(5) (definition of sale; includes rental)
• Tax Law section 1101(b)(4)(i)(A) (purchase for resale excluded from retail sale)
• 20 NYCRR section 526.7 (rental, lease, license to use; transfer of possession)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2014.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a14_21s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Counsel
Advisory Opinion Unit

TSB-A-14(21)S
Sales Tax
June 13, 2014

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S130926A

The Department of Taxation and Finance received a Petition for Advisory Opinion from
Redacted Redacted Redacted Redacted Redacted Redacted Redacted (Petitioner). Petitioner asks
whether all of the equipment it purchases for the operation of a bicycle rental service is exempt
from State and local sales and use taxes as purchases for resale.
We conclude that the purchases of the bikes are exempt, but the purchases of other
equipment are subject to sales and use taxes.
Facts
Petitioner has entered into a contract with the City of New York Department of
Transportation (NYCDOT) to operate a bicycle rental program (Program). The Program
provides Users with access to thousands of bikes located at hundreds of stations in and around
New York City. Petitioner purchases and retains title to all bikes and bike station equipment but
allows the users access to the equipment under a specific rental agreement.
The equipment of the bike rental service consists of: bicycle stations (“Station”),
automated pay station kiosks (“Pay Stations”), separate stands that allow the docking of bicycles
(“Bike Docks”), and bicycles (“bikes”). The Pay Station, and Bike Docks are part of the Bike
Station. The bikes attach and lock to the Bike Station at the Bike Dock. The bike relays
information through the Bike Dock with a network of cabling connecting all of the other Bike
Docks and running through the Bike Station to the Pay Station.
A User may access a bike by purchasing a 24-hour pass, a 7-day pass, or an annual
membership. In the case of the 24-hour pass and the 7-day pass, the User provides a credit card
at the Pay Station in order to gain access to the system. The User then receives an access code
that must be entered at the Bike Dock to release the bike from the Bike Station. The User is
allowed to use the bike for a 30 minute interval without any additional charge. Every customer
is subject to overtime fees for failure to return the bike to the Bike Station within the 30 minute
usage period. An annual member is granted use of a bike for a 45 minute interval without
incurring overtime fees. An annual member also receives a coded plastic “key” to access bikes
from the Bike Station. A User returns the bike by properly docking the bike at the Bike Station
so the bike’s information can be read by the system and logged in as “returned.” If the bike is
not returned within 24 hours, it is deemed lost or stolen and the User is charged a lost/stolen bike
fee.

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TSB-A-14(21)S
Sales Tax
June 13, 2014

Before renting a bike, the User must agree to the “Bicycle Rental Agreement, Liability
Waiver, and Release” (hereinafter, the “Agreement”). An annual member must sign the
agreement at the time he or she purchases the annual membership. A User who obtains a 24hour or 7-day pass must acknowledge acceptance of the Agreement by selecting “Agree” at the
Pay Station and electronically signing the Agreement. The Agreement explicitly states that, in
addition to renting the bike, the User is also renting, and has full access to, the Bike Stations, Pay
Stations, and the Bike Docks.
The Petitioner collects New York sales tax on all fees and charges paid by its Users,
including the 24-hour and 7-day access passes, the Annual Membership fees, all overtime fees
and charges, a lost access key charge, and the lost/stolen bike fee.
Analysis
Article 28 of the New York Tax Law imposes a tax on the receipts from every retail sale
of tangible personal property, unless otherwise exempted. See Tax Law § 1105(a). The term
“sale” means “any transfer or title, possession or both . . . for a consideration” and includes a
rental. See Tax Law § 1101(b)(5). Property purchased for resale is not considered a “retail sale”
and is not subject to sales tax. Tax Law § 1101(b)(4)(i)(A). The statute does not define the term
“resale,” but the Court of Appeals has deemed its definition coextensive with the term “sale.”
See Echostar Satellite Corp. v. Tax Appeals Tribunal, 20 N.Y.3d 286 (2012). Tax Department
Law and Regulations define the terms “rental, lease and license to use” to include all transactions
in which there is a transfer for a consideration of possession of tangible personal property
without a transfer of title to the property. 20 NYCRR § 526.7(c)(1). Whether a transaction is a
“sale” or a “rental, lease or license to use” shall be determined in accordance with the provisions
of the agreement. Id. However, the characterization of an agreement as a lease will not be
conclusive if the true nature of the transaction indicates otherwise. See Greene & Kellogg, Inc.
v. Chu, 134 A.D.2d 755 (3d Dep’t 1987). “Transfer of possession” with respect to a rental, lease
or license to use means that one of the following attributes of property ownership has been
transferred:
(i) custody or possession of the tangible personal property, actual or constructive;
(ii) the right to custody or possession of the tangible personal property;
(iii) the right to use, or control or direct the use of, tangible personal property. 20
NYCRR § 526.7(e)(4).
We conclude that Petitioner is renting the bike to the User. A User pays a fee to remove
the bike from the Bike Station. During the rental period, the User has actual custody and
possession of the bike, has dominion and control over the bike, and directs how it is used during
the rental period. This satisfies all three attributes of property ownership that can be transferred
in a lease. Therefore, the Petitioner’s purchase of the bike is exempt from State and local sales
and use taxes as a purchase for resale.

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TSB-A-14(21)S
Sales Tax
June 13, 2014

We further conclude that Petitioner is not renting the various parts of the Bike Station to
the User, and, therefore, its purchase of the Bike Station does not qualify as a purchase for resale.
Petitioner asserts that the bike and Bike Station are one single piece of equipment with multiple
components, and that each component is effectively useless without the other. Petitioner
characterizes the lease agreement as the simultaneous rental of all components.
We disagree with Petitioner’s characterization of the User’s access to the Bike Station
equipment as a rental. The bike and Bike Station are separate pieces of equipment fully capable
of being separated, both literally and figuratively. The User is paying a fee to rent the bike for a
set interval of time. The Bike Station is Petitioner’s means of securing the bike, delivering the
bike to the User and tracking the use of the bike. The Bike Station holds numerous bikes and the
Petitioner retains control over the Bike Station at all times. To the extent that the User operates
any part of the Bike Station (e.g., the Pay Station), he or she does so according to directions
established by Petitioner. To the User, the Bike Station is merely the means of paying for and
obtaining the rental of the bike. The user is not actually renting the Bike Station or the Pay
Station or Bike Docks that are part of the Bike Station.
Based on the foregoing, Petitioner must pay State and local sales or use tax on its
purchase of the Bike Station equipment. However, the Petitioner is exempt from sales and use
taxes on the purchase of the bikes as a purchase for resale.

DATED: June 13, 2014

NOTE:

/S/
DEBORAH R. LIEBMAN
Deputy Counsel

An Advisory Opinion is issued at the request of a person or entity. It is limited to the
facts set forth therein and is binding on the Department only with respect to the
person or entity to whom it is issued and only if the person or entity fully and
accurately describes all relevant facts. An Advisory Opinion is based on the law,
regulations, and Department policies in effect as of the date the Opinion is issued or
for the specific time period at issue in the Opinion. The information provided in this
document does not cover every situation and is not intended to replace the law or
change its meaning.