If a lessor buys mass-commuting vehicles to lease to the exempt MTA with a nominal purchase option, is any sales, use or excise tax due on the purchase, the lease, or the buyout?

Plain-English summary

The Metropolitan Transportation Authority (MTA) asked about a financing arrangement for mass commuting vehicles. A purchaser (a lessor) would buy the vehicles — from a manufacturer or as part of a sale-leaseback — and lease them to a municipality, public authority or public benefit corporation (here the MTA, the New York City Transit Authority, or their subsidiaries), with an option for the lessee to buy the vehicles at the end of the lease for nominal consideration. The MTA asked whether any sales, use or excise tax would be due on the purchase, the lease, or the eventual buyout.

The Department held no tax is due at any stage.

• Buying to lease is a purchase for resale. Section § 1105(a) taxes retail sales, but a "retail sale" excludes sales for resale (§ 1101(b)(4)(i)), and a lease counts as a "sale" (§ 1101(b)(5)). So a lessor who buys the vehicles in order to lease them is buying for resale — the purchase is not a taxable retail sale.
• The lease is a retail sale, but to an exempt lessee. The leasing of the vehicles is itself a retail sale, yet no tax arises because the lessee is an entity exempt under § 1116(a)(1) (the State, its agencies, instrumentalities and public corporations).
• The nominal buyout is also untaxed. When the exempt entity later exercises its option to purchase at the end of the term, there is likewise no tax due, because the purchaser is exempt.
• All layers of tax. The Department said this applies to the State and all locally imposed sales taxes, including the New York City tax.

What this means for you

Leasing to an exempt government entity can clear tax at every level of a sale-leaseback. Because a lease is a "sale," a lessor's purchase of the leased asset is a purchase for resale, and the lease to an exempt public entity is itself untaxed.

The lessee's exempt status is what carries the lease and the buyout. The lease and the nominal-price option purchase escape tax because § 1116(a)(1) exempts the public-authority lessee — not because leases are generally exempt.

Document the resale and the exemption. A lessor relying on the purchase-for-resale treatment should hold the appropriate resale documentation, and the exempt lessee its exemption documentation, to support the no-tax result.

Common questions

Q: Does the lessor owe use tax on buying the vehicles it will lease out?
A: No. Buying to lease is a purchase for resale (§ 1101(b)(4)(i)), so the purchase isn't a taxable retail sale.

Q: Is the lease to the transit authority taxable?
A: The lease is a retail sale, but no tax is due because the lessee is exempt under § 1116(a)(1).

Q: What about the nominal-price purchase at the end?
A: No tax. The exempt entity's exercise of the buyout option is untaxed, and the result covers the State, local and New York City taxes.

Citations and references

Statutes:

• Tax Law § 1105(a) — tax on retail sales of tangible personal property
• Tax Law § 1101(b)(4)(i) — "retail sale" excludes sales for resale
• Tax Law § 1101(b)(5) — "sale" includes a rental or lease
• Tax Law § 1116(a)(1) — exemption for the State, its agencies and public corporations

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_69s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-81(69)S
Sales Tax
April 6, 1982

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

PETITION NO. S811215A

On November 7, 1981, a Petition for Advisory Opinion was received from Metropolitan
Transportation Authority, 347 Madison Avenue, New York, New York 10017.
The issue raised is whether sales, compensating use or excise tax is payable by the purchaser
of any property which constitutes equipment, facilities, a transportation facility or a transit facility
as such terms are defined in §§1200 and 1261 of the Public Authorities Law, if in connection with
such purchase either from a manufacturer or as part of a sale-leaseback transaction, the purchaser
leases the same to any municipality, public authority, or public benefit corporation for its use, and
such lease contains an option to the lessee to purchase such property upon the scheduled expiration
of such lease for a nominal consideration; and whether any such tax would be payable by such lessor
upon the purchase of such property by such municipality, public authority or public benefit
corporation pursuant to such option or agreement. The property referred to above consists of certain
mass commuting vehicles.
Section 1105(a) of the Tax Law imposes the State sales tax on the receipts from retail sales
of tangible personal property. The term "retail sales" is defined so as to exclude sales for resale as
such. Tax Law, §1101(b)(4)(i). The term "sale" is defined so as to include a rental or lease. Tax Law,
§1101(b)(5).
Section 1116(a)(1) of the Tax Law provides for an exemption from the sales tax with respect
to purchases by the "State of New York or any of its agencies, instrumentalities, public corporations.
. . or political subdivisions. . . ." The lessees involved herein are exempt entities by virtue of such
provision. They are the Metropolitan Transportation Authority and the New York City Transit
Authority and their subsidiaries.
Under the circumstances outlined above, a sale of a mass commuting vehicle to a person
purchasing the same for the purpose of thereupon leasing the vehicle constitutes a purchase for resale
as such, and not a retail sale. Such sale is accordingly not subject to sales tax. The leasing of the
vehicles constitutes a retail sale, but no tax liability would arise herein because the lessee in each
case would be an entity exempt from tax pursuant to section 1116(a)(1) of the Tax Law.
Similarly, there would be no tax due on the exercise by an exempt entity of an option to
purchase, at the termination of the lease term. Finally, the foregoing is also applicable with respect
to all State and locally imposed sales taxes, including the New York City sales tax.

DATED: December 15,1981

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

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau
LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR