At the end of an open-end vehicle lease, are extra charges (or refunds) for actual depreciation and maintenance subject to sales tax?

Plain-English summary

Auto Rental Corporation leases motor vehicles under open-end leases. Each monthly payment includes amounts for projected depreciation and maintenance, and the lessee agrees to pay the actual depreciation and maintenance costs over the life of the lease. The company collects sales tax on each monthly payment. At the end of the term it reconciles: if the vehicle sells for less than its depreciated value, or maintenance ran over, it bills the lessee for the shortfall; if the vehicle sells for more, or maintenance ran under, it credits or refunds the lessee. It asked how sales/use tax applies to these end-of-lease adjustments.

The Department held the extra charges are taxable and the refunds carry a tax refund.

• Every lease payment is taxable. Section § 1105(a) taxes receipts from sales including rentals of tangible personal property, so tax is due on each payment — including the portions for projected depreciation and maintenance.
• Additional end-of-term charges are taxable. Extra amounts billed at the conclusion of the lease for excess maintenance costs or depreciation are part of the sale price and are also subject to tax.
• Refunds and credits reverse the tax. Where the lessor instead refunds or credits the lessee (vehicle sold above depreciated value, or maintenance under budget), the customer is entitled to a refund of the sales tax on that amount.
• Two ways to give the tax back. The lessor may refund the tax to the customer and claim a credit on its sales tax return; or, if the tax was already remitted and no direct refund is made, the customer may file a refund claim.

What this means for you

Open-end lease reconciliations run through sales tax both ways. The end-of-lease "true-up" isn't outside the tax. Extra depreciation or maintenance you bill the lessee is more taxable rent; a refund or credit you give is a reduction that entitles the customer to the tax back.

Charge tax on the depreciation and maintenance components too. These aren't separate nontaxable service items — they're part of the taxable rental receipt. Collect tax on the full monthly payment and on any additional end-of-term charge.

Have a clean mechanism to return over-collected tax. When a reconciliation favors the customer, either refund the tax and credit it on your return, or point the customer to a refund claim for tax already remitted. Keep the paperwork so the credit/claim is supportable.

Common questions

Q: We bill a lessee at lease-end for extra depreciation or maintenance. Is that taxable?
A: Yes. Those charges are part of the sale price of the rental and are subject to sales tax under § 1105(a), just like the monthly payments.

Q: What if the reconciliation results in a refund to the lessee?
A: The customer is entitled to a refund of the sales tax on the refunded amount. You can refund the tax and take a credit on your return, or the customer can file a refund claim for tax already remitted to the State.

Q: Is the depreciation/maintenance portion of each monthly payment taxable?
A: Yes. Tax is due on the full lease payment, including the amounts representing projected depreciation and maintenance.

Citations and references

Statutes:

• Tax Law § 1105(a) — sales tax on receipts from sales, including rentals, of tangible personal property

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1983.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a83_25s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-83(25)S
Sales Tax
June 17, 1983

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

PETITION NO. S821008A

On October 8, 1982 a Petition for Advisory Opinion was received from Auto Rental
Corporation, Gold Star Blvd. @ Milbrook, Worcester, Massachusetts 01613.
The issue raised is whether certain billing adjustments occurring at the termination of a long
term lease of a motor vehicle are subject to sales and use taxes.
Petitioner is in the business of leasing motor vehicles to its customers. When Petitioner leases
a vehicle under an open end lease, the lease payments include amounts representing projected
depreciation and maintenance expenses. Under the terms of the lease agreements, the lessees agree
to pay for the actual depreciation and maintenance expenses incurred during the life of the lease.
Petitioner collects from the lessee sales tax on the amount of each monthly lease payment, including
amounts representing projected depreciation and maintenance costs.
If, upon termination of the lease, Petitioner sells the vehicle for less than its value after
depreciation, Petitioner bills the lessee for the difference between such value and the selling price.
If Petitioner sells the vehicle for more than its value after depreciation, Petitioner issues a credit or
refund to the lessee for the difference between such value and the selling price.
If at the end of the lease term maintenance expenses actually incurred turn out to have
exceeded the amount paid therefor by the lessee, Petitioner bills the lessee for the excess. If the
actual expenses turn out to have been less than the amount paid by the lessee, Petitioner issues the
lessee a credit or refund for the difference.
Section 1105(a) of the Tax Law imposes the State sales tax on the receipts from sales
(including rentals) of tangible personal property. Accordingly, tax must be collected on each payment
under the lease, including those portions attributable to depreciation and projected maintenance
expenses. Additional charges made at the conclusion of the lease term for excess maintenance costs
or depreciation are part of the sale price and are also subject to tax. Where, on the other hand,
Petitioner makes a refund or gives a credit under the circumstances described above, the customer
is entitled to a refund of the sales tax on such amounts. Petitioner may make the refund to the
customer and claim a credit on its sales tax return, or, where the sales tax has been remitted to the
State Tax Commission and Petitioner does not make a direct refund to the customer, the customer
may file a claim for refund of taxes paid.

DATED: May 27, 1983

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

s/FRANK J. PUCCIA
Director
Technical Services Bureau
GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR