May a car distributor pay use tax on resale-inventory vehicles that officers and employees also drive using the 2%-per-month depreciation method, and are showroom demonstrators a taxable use?

Plain-English summary

BMW of North America, Inc. is the sole authorized U.S. importer-wholesaler of BMW automobiles, holding cars in inventory for resale to independent dealerships. Some of those cars are registered by BMW and given to New York officers and employees to drive for business and personal use — typically about 7,500 miles — before being wholesaled to dealers. Others are shipped to BMW's BMW Gallery in New York City purely for demonstration and viewing by prospective customers. BMW currently computes use tax by dividing each car's total cost by twelve to get a monthly figure. It asked (1) whether it may instead use a 2%-per-month depreciation method, and (2) whether the Gallery display cars are a taxable use.

The Department's answers:

• Mixed-use vehicles qualify for the 2% method. A car held in inventory for resale but used occasionally for business or personal purposes is a "mixed-use vehicle." Under Tax Law § 1110 and 20 NYCRR § 531.3(a)(2) (resale property diverted to a taxable use), and the Department's memoranda TSB-M-83(13)S and TSB-M-87(2)S, use tax may be paid on depreciation — 2% of total cost per month (any part of a month counts as a whole month) — rather than on full dealer cost.
• The time and mileage limits. The 2% method applies if the car is in mixed use for six months or less (no mileage limit), or for more than six months but not more than twelve months with no more than 9,000 miles. If mileage exceeds 9,000 between six and twelve months, or the car is used more than twelve months, use tax is due on the dealer's total cost, plus penalty and interest from when the first return was due, with credit for tax paid under the 2% method. The dealer also can't take a trade-in allowance or investment tax credit on such a car, must register it in the dealership's name unless it runs on dealer plates, and must keep the records listed in TSB-M-87(2)S.
• Gas, oil, parts, and supplies are always taxable. Items used to operate a mixed-use (or demonstrator) vehicle, including items withdrawn from inventory, are subject to tax.
• The current method may overpay — refund available. Because dividing total cost by twelve can exceed the actual 2%-method liability, BMW may claim a refund or credit on Form AU-11, filed within three years after the tax was payable.
• Gallery demonstrators are not a taxable use. Cars shipped to the BMW Gallery exclusively for demonstration and customer viewing are not put to a taxable use (though tax is still due on gas, oil, parts, and supplies to operate them).

What this means for you

Cars you sell but sometimes drive: tax the use, not the whole car

When a resale-inventory vehicle is occasionally driven by the dealership's people, you don't owe tax on the full purchase price. You owe use tax on the value of the use, measured as 2% of total cost for each month (or part month) the car is in mixed use — provided you stay within the time and mileage limits.

Watch the six-month / twelve-month / 9,000-mile cliffs

Blow past six months and 9,000 miles (or twelve months at all) and the tax base jumps to the full dealer cost, with penalty and interest running from the first missed return — you get credit for what you already paid, but the cheap depreciation treatment is gone. Registration in the dealership's name and the TSB-M-87(2)S records are conditions, not suggestions.

Pure showroom demonstrators aren't a taxable use — but their fuel is

A car used only to demonstrate to and be viewed by customers isn't a taxable use of the vehicle itself. You still pay tax on the gas, oil, parts, and supplies consumed running it, including anything pulled from your own inventory.

If you've been overpaying, claim it back

If you've been taxing full cost divided by twelve (or otherwise overpaying), file Form AU-11 within three years to recover the overpayment.

Common questions

Q: Can we pay use tax on depreciation instead of full cost for demo/loaner cars we'll resell?
A: Yes, if they're mixed-use vehicles within the limits — 2% of total cost per month, so long as it's six months or less, or up to twelve months and 9,000 miles.

Q: What happens if a car stays in mixed use too long or racks up too many miles?
A: Use tax becomes due on the dealer's total cost, plus penalty and interest from when the first return was due, with credit for tax already paid under the 2% method.

Q: Are our New York City showroom display cars a taxable use?
A: No — cars used exclusively for demonstration and viewing aren't a taxable use, though the fuel, oil, parts, and supplies to operate them are taxable.

Q: We've been dividing cost by twelve and may have overpaid — can we get it back?
A: Yes. File Form AU-11 for a refund or credit within three years of when the tax was payable.

Citations and references

Statutes and regulations:

• Tax Law § 1110 — compensating use tax on the use of tangible personal property purchased at retail
• 20 NYCRR § 531.3(a)(2) — use tax on property bought for resale or exempt use and diverted to a taxable use

Cited Department guidance and authority:

• TSB-M-83(13)S (May 24, 1983), revised by TSB-M-87(2)S (Jan. 16, 1987) — taxability of dealer-used motor vehicles; "demonstrator" vs. "mixed-use vehicle," the 2% depreciation method, time/mileage limits, and recordkeeping
• Crestview Cadillac, Inc., Adv Op T & F, April 16, 1987, TSB-A-87(16)S
• Form AU-11 — Application for Credit or Refund of State and Local Sales or Use Tax (three-year filing limit)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1990.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a90_19s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-90 (19)S
Sales Tax
April 16, 1990

Taxpayer Services Division
Technical Services Bureau

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S891215A

On December 15, 1989, a Petition for Advisory Opinion was received from BMW of North
America, Inc., 300 Chestnut Ridge Road, Woodcliff Lake, New Jersey, 07675.
The issues raised by Petitioner, BMW of North America, Inc., are:
1.
Whether Petitioner should compute use tax on new vehicles provided to
officers and employees for business and personal purposes by applying the state and local sales tax
rate to an amount equal to 2% per month of the dealer's cost of such vehicles.
2.
Whether Petitioner is liable for use tax on motor vehicles displayed at
Petitioner's BMW Gallery located in New York City for demonstration purposes and for viewing by
prospective customers.
Petitioner is the sole authorized importer wholesaler of BMW automobiles in the United
States. Petitioner coordinates the importing and subsequent wholesaling of these automobiles to
independently owned and operated dealerships throughout the United States. The automobiles
wholesaled to dealerships are inventory held exclusively for resale. Such automobiles, while in
inventory, are occasionally used for demonstration purposes and for business and pleasure by officers
and employees of BMW.
The vehicles shipped to Petitioner's BMW Gallery located within New York City are used
for demonstration purposes and for viewing by prospective customers.
The vehicles used by employees and officers residing in New York are registered by
Petitioner. After registering and tagging (licensing) the automobiles, Petitioner provides the vehicles
to certain employees and officers, residing within New York State, for their business and personal
use. Such vehicles are generally used for approximately 7,500 miles and subsequently are wholesaled
to dealerships. The length in time of use for an automobile will depend on the amount of driving an
individual does in order to reach 7,500 miles or the sales demand for the particular automobile being
driven.
Petitioner presently determines the amount of use tax due by dividing the total cost of the
vehicle by twelve months to arrive at a monthly cost. Such monthly cost is then multiplied by the
applicable tax rate, resulting in the tax due and paid on the sales return for the applicable period in
which such use occurs.
TP-9 (9/88)

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TSB-A-90 (19)S
Sales Tax
April 16, 1990

Section 1110 of the Tax Law imposes a use tax "for the use within this state ... of any
tangible personal property purchased at retail".
Section 531.3(a)(2) of the Sales and Use Tax Regulations states in part:
"The compensating use tax is due upon the use of tangible personal
property which was purchased for resale or an exempt use and is
subsequently ... diverted to a taxable use by the purchaser ..." (20
NYCRR 531.3(a)(2)).
Additional rules publicized by the Department of Taxation and Finance in two Technical
Services Bureau Memoranda on the taxability of motor vehicles used by dealers, (TSB-M-83(13)S,
May 24, 1983, revised by TSB-M-87(2)S, January 16, 1987), require differentiation between the
various uses of such vehicles depending on whether they are "demonstrators" or "mixed-use
vehicles".
"Demonstrators" refers to vehicles held for sale, which are used with dealer plates for
demonstration to prospective customers. The use of vehicles exclusively as demonstrators is not
taxable. However, tax is due on gas, oil, parts and supplies used for their operation.
"Mixed-use vehicles" are vehicles intended for sale, but used occasionally for business or
personal purposes by the dealer or his officers or employees. Since such vehicles will usually be used
in this manner for only a short period of time and since no purchase, sale or trade, occurs at the
beginning or end of taxable use, the dealer may pay use tax based on depreciation rather than on
dealer cost. The taxable amounts must be reported under "purchases subject to use tax" on the sales
tax returns which cover the period of use.
The rate of depreciation is 2% per month or any part thereof, computed on the total invoiced
cost to the dealer including delivery ("total cost") for any vehicle purchased new and on the purchase
price or trade allowance plus the value of repairs for any vehicle purchased used or taken in trade.
Prior to June 1, 1986, this method of taxation was applicable only to vehicles kept in mixed
use for six months or less. Once a vehicle had been so used for more than six months, additional use
tax became due in an amount equal to total cost multiplied by the tax rate, less use tax paid on
depreciation. Technical Service Bureau Memorandum TSB-M-87(2)S, January 16, 1987, extends
the six month limitation applicable to the period June 1, 1983, through May 31, 1986, to twelve
months without imposing a mileage restriction.
As of June 1, 1986, the new departmental policy allows application of the 2% depreciation
method ("2% method") to a qualifying vehicle if:
(1)

The vehicle is kept in mixed use for six months or less (no mileage limitation
applies), or

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TSB-A-90 (19)S
Sales Tax
April 16, 1990

(2)

the vehicle is retained in mixed use for more than six months, but not more than one
year, and the mileage does not exceed 9000 miles for the entire period of mixed use.

If mileage exceeds 9000 miles between six months and twelve months of use, or if the
vehicle is used by the dealer for more than twelve months, use tax is due based on the dealer's total
cost of the vehicle plus penalty and interest computed from the date that a return for the occasion of
first mixed use would have been due. Credit for tax paid under the 2% method will be allowed.
These additional guidelines apply when a vehicle is taxed under the 2% method:
(1)

A dealer may not seek a trade-in allowance on a vehicle which is taxed under this
method.

(2)

A dealer may not depreciate the vehicle or take an investment tax credit while
computing use tax under the 2% method.

(3)

A "mixed use" vehicle, unless operated with dealer plates, must be registered in the
dealership's name.

(4)

A dealer must maintain records as described in Technical Services Bureau
Memorandum TSB-M-87(2)S.

If a dealer does not comply with any of these requirements, use tax is due on the dealer's total
cost of the vehicle, plus penalty and interest computed from the date that a return for the occasion
of first use would have been due, less credit for use tax paid under the 2% method.
The above guidelines no longer apply once use tax has been paid on the total cost or the fair
market value of a vehicle, with the exception that the dealer may not take a trade-in allowance on
replacement of a vehicle which has been used with dealer plates or registered in the dealer's name,
whether the dealership operates as a single or more than one business entity.
Purchases of gas, oil, parts and supplies for operating mixed-use vehicles are taxable. Any
such items withdrawn from the dealer's inventory are subject to use tax.
Use tax due on the mixed-use vehicle is computed by multiplying total cost by the 2%
depreciation rate, the result by the number of months the vehicle was used (use in any part of a
month counts as a whole month) in a quarterly filing period, and the resulting taxable amount by the
State and applicable local tax rate.
Effective January 16, 1987, the issuing date of TSB-M-87(2)S, the records listed in that
publication must be kept for every vehicle placed in mixed use. For the period from June 1 through
December 31, 1986, records not so maintained must be reconstructed from source documents.

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TSB-A-90 (19)S
Sales Tax
April 16, 1990

Crestview Cadillac, Inc., Adv Op T & F, April 16, 1987, TSB-A-87(16)S).
Accordingly, if a vehicle is held in inventory exclusively for resale while being used
occasionally for business or personal purposes, it will be considered a mixed use vehicle. As such,
dependent on whether it is so used for up to 6 months (no mileage limitation applies), or for more
than 6 months, but not more than one year (mileage not to exceed 9000 miles for entire period),
Petitioner will be subject to use tax on such vehicle based on an amount calculated under the 2%
method. If the mileage exceeds 9000 miles between six months and twelve months or if the vehicle
is used by the dealer for more than twelve months, Petitioner will owe use tax based on dealer's total
cost of the vehicle plus penalty and interest computed from the date that a return for occasion of first
mixed used would have been due. Credit for tax paid under the 2% method or any other method will
be allowed.
The use of a vehicle shipped by Petitioner to its BMW Gallery in New York City exclusively
for demonstration to prospective customers or for viewing by such customers is not considered to
be a taxable use.
It is noted that the method presently used by Petitioner to compute use tax due on the mixed
use vehicles may result in an overpayment of the actual use tax due under the 2% method.
Accordingly, Petitioner may request a refund or credit of any overpayment of use tax by submitting
a completed form AU-11, Application for Credit or Refund of State and Local Sales or Use Tax.
The application for credit or refund must be filed within three years after the date the tax was payable
by the claimant. The application should be mailed to State of New York Department of Taxation and
Finance, Central Office Audit Bureau - Sales Tax, W.A. Harriman Campus, Albany, N.Y. 12227.

DATED: April 16, 1990

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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