Does the owner of school buses have to collect sales tax when leasing them to a transportation company that will use them to serve exempt schools?

Plain-English summary

Barry Arnold owns school buses and wanted to lease them to a New York transportation corporation. That corporation would use the buses to provide transportation services to New York City schools and other tax-exempt organizations, and it — not the exempt organizations — would pay Arnold. He asked whether he had to collect sales tax on the lease.

The Department held the lease is taxable and Arnold must collect the tax.

• A lease is a "sale." Section § 1101(b)(5) defines a sale to include any transfer of possession by rental or lease for consideration; 20 NYCRR 526.6(a) confirms a retail sale is a sale of tangible personal property for any purpose except as specifically excluded.
• Leasing the buses is a taxable retail sale. Under § 1105(a), receipts from the lease of tangible personal property are subject to sales tax.
• The intermediary is the customer — and it isn't exempt. Arnold's customer is the transportation corporation, which pays him; the exempt schools are one step removed. So Arnold must collect sales tax on the lease. The buses' ultimate use in serving exempt organizations does not exempt the lease to the for-profit intermediary.

What this means for you

A lease is a sale, and you generally collect tax on it. If you rent or lease equipment or vehicles in New York, the lease payments are taxable receipts. You (the lessor) must collect sales tax from your lessee, just as on any other retail sale.

Exempt status belongs to the buyer in your transaction — it doesn't flow up the chain. The question is who your customer is. Leasing to a for-profit company is taxable even if that company then uses the property to serve schools, governments or charities. Only a lease to the exempt organization itself (with a proper exemption certificate) is exempt.

Structure matters if exemption is the goal. Here, if the exempt organizations had leased the buses directly (and given exemption certificates), the analysis would differ. Interposing a taxable transportation corporation as the lessee made the lease taxable.

Common questions

Q: The buses serve exempt schools — why is my lease taxable?
A: Because your customer is the transportation corporation, not the schools. A lease is a taxable sale under §§ 1101(b)(5) and 1105(a), and the lessee here isn't an exempt organization.

Q: Would it be exempt if the schools leased the buses from me directly?
A: A lease directly to an exempt organization that furnishes a proper exemption certificate would be treated differently. The problem here is the for-profit intermediary lessee.

Q: Does it matter that the transportation corporation, not the schools, pays me?
A: Yes — that identifies your customer. You're making a taxable lease to that paying corporation, so you must collect the tax.

Citations and references

Statutes and regulations:

• Tax Law § 1105(a) — tax on receipts from every retail sale of tangible personal property
• Tax Law § 1101(b)(5) — "sale" includes a rental or lease
• 20 NYCRR 526.6(a) — definition of retail sale

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1981.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a81_38s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-81(38)S
Sales Tax
October 23, 1981

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S810728D

On July 28, 1981 a Petition for Advisory Opinion was received from Barry Arnold, 51
Marian Lane, Jericho, New York 11753.
The issue raised is whether sales tax must be collected on the lease of school buses to a
transportation service corporation which will use the buses to fulfill contractual obligations to
New York City schools and other tax exempt organizations.
Petitioner owns school buses and wishes to lease the vehicles to a transportation
corporation located in the State of New York. This corporation will use these buses to render
transportation services for certain exempt organizations. Petitioner will be paid by the
transportation corporation and not by the exempt organizations.
Section 1105(a) of the Tax Law imposes a tax on: "The receipts from every retail sale of
tangible personal property, except as otherwise provided in this article." The Sales and Use Tax
Regulations defines the terms "retail sale" or "sale at retail" as: "the sale of tangible personal
property to any person for any purpose except as specifically excluded." 20 NYCRR 526.6(a).
Section 1101(b)(5) of the Tax Law defines the terms "sale, selling or purchase" as: "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."
Accordingly, Petitioner must collect sales tax on the lease of school buses to a customer
who will use such buses to render transportation services.

DATED: October 7, 1981

JAMES H. TULLY, JR., COMMISSIONER
TP-8 (4/80)

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau

LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR