When a car buyer trades in an old vehicle to the dealer but leases the new one from a separate finance company, can the trade-in value reduce the lease amount subject to New York sales tax?

Plain-English summary

Marine Midland Automotive Financial Corp. is a New York company that leases cars to consumers. It works through car dealers who act as its agents: a dealer finds a customer who wants to lease, gets Marine Midland's approval, sells the car to Marine Midland, and delivers it to the customer under the lease. When Marine Midland buys the car from the dealer, the price is the MSRP adjusted for any dealer markup/discount or for a trade-in — so a customer's trade-in reduces what the dealer charges Marine Midland.

Marine Midland asked whether it should collect tax on its actual lease receipts, or on those receipts plus the amount the lease was reduced because of the trade-in.

The Department held: tax the full lease price — the trade-in reduction does not come out.

• A trade-in only reduces tax when it's with the same vendor. Under Tax Law § 1101(b)(3) and 20 NYCRR § 526.5(f), a "trade-in" credit is excluded from the taxable receipt only when a vendor accepts property in part payment on a purchase from that same vendor.
• Here there are two separate transactions. The customer trades the old car to the dealer, but leases the new car from Marine Midland — a different party. So it isn't a trade-in against the lease at all.
• What's taxed: The old vehicle going to the dealer isn't taxed (assuming the dealer takes it for resale). But the entire lease price — every lease payment PLUS the value of the traded-in vehicle that reduced the price — is subject to tax. As lessor, Marine Midland must collect sales tax on that full lease price.

What this means for you

A "trade-in" only cuts your sales tax when you trade with the same business you're buying from. New York's trade-in rule lets a vendor subtract the value of property taken in part payment — but only on a purchase from that same vendor. Trade the old item to Party A while buying/leasing the new one from Party B, and the two deals are separate; the trade-in can't shrink the taxable price on the B side.

In three-party auto leasing, the lessor taxes the whole lease. Because the dealer (not the finance company) takes the trade-in, the finance company's taxable base is the full lease price, including the value the trade-in knocked off. Structuring the sale so the dealer buys the car for less doesn't reduce the tax the customer ultimately pays on the lease.

Lessors collect the tax. The leasing company, as the vendor of the lease, is responsible for collecting New York sales tax on the full lease receipts.

Common questions

Q: I traded in my old car and leased a new one — why is tax charged on more than my payments?
A: Because you traded the old car to the dealer, but you lease from a separate finance company. That's not a trade-in against the lease, so the value of the trade-in that lowered the price stays in the taxable lease amount.

Q: When does a trade-in actually reduce New York sales tax?
A: When the same vendor you're buying from accepts your old property in part payment and intends to resell it. Then only the net price is taxed (Tax Law § 1101(b)(3); 20 NYCRR § 526.5(f)).

Q: Is the customer taxed on handing the old car to the dealer?
A: No — that transfer isn't taxed, assuming the dealer takes the vehicle for resale.

Q: Who collects the tax on the lease?
A: The lessor (here Marine Midland), on the full lease price.

Citations and references

Statute and regulation:

• Tax Law § 1101(b)(3) — defines "receipt" as the sale price valued in money, including amounts for which the vendor allows credit, but excluding a credit for taxable personal property accepted in part payment and intended for resale
• 20 NYCRR § 526.5(f) — a trade-in allowance or credit accepted by a vendor in part payment on a purchase from that vendor, and intended for resale, is excluded from the taxable receipt; only the net sale price is taxed

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1988.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a88_32s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-88(32)S
Sales Tax
June 8, 1988

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S880309B

On March 9, 1988, a Petition for Advisory Opinion was received from Marine Midland
Automotive Financial Corp., P.O. Box 7050, Buffalo, New York 14270-9201.
The issue raised is whether Petitioner should charge sales tax on the actual amounts of its
lease payment receipts or on such receipts plus the amount by which the lease payments have been
reduced for trade-in automobiles.
Marine Midland Automotive Financial Corporation ("Petitioner"), a New York corporation,
is engaged in the business of leasing automobiles to consumers. The leasing transactions are arranged
for Petitioner by automobile dealers who act as agents of Petitioner with respect to the leasing
transaction. The dealers identify potential lessees from among their customers. If a customer selects
an automobile and wants to enter a lease with respect to the automobile, the dealer will attempt to
find a third-party lessor such as Petitioner that will extend credit to the customer. Most dealers have
arrangements with several third-party lessors and will attempt to provide their customers with the
best competitive lease price for the leased automobile.
An automobile dealer is authorized by Petitioner to execute a lease on Petitioner's behalf
pursuant to a standard agreement Petitioner enters with such dealer ("Dealer Agreement"). A dealer
must present Petitioner with the proposed terms of the transaction, credit information and any other
information regarding the potential lessee requested by Petitioner. Petitioner will advise the dealer
of a lease approval number if it approves of the transaction. The dealer will then execute the lease
on Petitioner's behalf. Pursuant to the Dealer Agreement, execution of the lease by the dealer
constitutes the sale of the automobile by the dealer to Petitioner and an assignment of all of the
dealer's rights under the lease or other documents executed in connection with the transaction. The
dealer is then authorized to deliver the automobile to the customer-lessee on Petitioner's behalf.
If Petitioner approves a lease, the dealer sells the automobile to Petitioner for an agreed-upon
price. This price is the Manufacturer's Suggested Retail Price ("MSRP"), adjusted upwards or
downwards for any markup or discount negotiated by the dealer, or for a trade-in. Thus, the dealer
reduces the price to Petitioner by any trade-in allowance.
Section 1101(b)(3) of the Tax Law defines receipt as "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 its vendor to the
purchaser. . . but excluding any credit for taxable personal property accepted in part payment and
intended for resale . . . . "
Section 526.5(f) of the sales tax regulations defines the term "trade-in" as follows:
RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-88(32)S
Sales Tax
June 8, 1988
(f) 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. (Emphasis supplied)
Since the customer does not trade the vehicle with the same vendor from whom the customer
is leasing the new vehicle, the transaction does not involve a trade-in, but, instead, clearly involves
two separate transactions. Accordingly, the transfer of the vehicle from the customer to the
automobile dealer is not subject to tax (assuming that the dealer acquires such vehicle for purposes
of resale). However, the full amount of the lease price of the vehicle (i.e. all payments under the
lease plus the value of the vehicle transferred to the dealer) is subject to tax. The value of the vehicle
transferred to the automobile dealer may not be used to reduce the full lease amount subject to tax.
Additionally, Petitioner as the lessor is responsible for collecting sales tax on the full price of the
lease described herein.

DATED: June 8, 1988

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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