When a leased car is stolen or totaled, does the lessor collect sales tax on the insurance buyout, and can the lessee get back tax already paid on the lease?

Plain-English summary

Norstar Auto Lease Inc. leases cars long-term (24–60 months), keeping title and collecting sales tax on the monthly payments. When a leased car is stolen or totaled, Norstar quotes the insurer the amount to release title; the insurer pays that buyout (billing the lessee for any shortfall) and takes title. Norstar asked whether it must collect sales tax on the unpaid lease balance in that situation, and whether the insurer's settlement should include sales tax.

The Department held:

• No sales tax on the insurance buyout or shortfall. Sales tax is not imposed on insurance-claim proceeds, nor on "turn-in damage" or collision-damage charges to a lessee (citing Olin Rent-A-Car, TSB-H-86(16)S, and Kincar Leasing, TSB-H-78(39)S). So Norstar is not required to collect sales tax from the lessee in these circumstances, and no sales tax is due on the difference between the car's value and the insurance payment that the lessee may owe.
• But long-term leases are taxed up front — with no refund if the car is later lost. Effective June 1, 1990, § 1111(c) provides that for a lease of one year or more of a motor vehicle, all receipts for the entire lease term are deemed paid and the tax is collected as of the first payment or DMV registration, whichever is earlier. (This does not apply to leases in existence before the amendment.)
• No refund provision. §§ 1119 and 1139 contain no provision to refund sales tax properly paid on a one-year-or-longer lease even if the leased car is later lost, stolen, or destroyed. So a lessee on a lease entered into on or after June 1, 1990 cannot claim a refund or credit of the up-front tax when the car is totaled and the lessor is reimbursed by insurance.
• Whether the insurer pays back that tax is a policy matter. Nothing in the Tax Law requires the § 1111 tax to be included in the insurer's settlement; that depends on the insurance policy's own terms.

What this means for you

Insurance payouts on a totaled lease aren't taxed

When a leased vehicle is stolen or destroyed, the money changing hands — the insurer's buyout and any lessee shortfall — is not a taxable receipt. The lessor should not collect sales tax on it.

On a post-June-1990 long-term lease, the tax was already fully due at signing

New York accelerated the tax on long-term motor-vehicle leases: the whole term's tax is imposed at the first payment or registration. The practical consequence for a lessee is harsh — if the car is later totaled, there's no refund of that up-front tax, because the refund statutes don't cover tax properly paid on a long-term lease. Factor that into gap-coverage and lease decisions.

Whether you get the tax back from insurance depends on your policy, not the tax law

If you want the originally paid sales tax reflected in a total-loss settlement, that has to come from your insurance policy's terms. The Tax Law neither requires nor provides it.

Common questions

Q: My leased car was totaled. Does the leasing company charge sales tax on the insurance buyout?
A: No. Insurance proceeds and turn-in/collision-damage charges are not subject to sales tax (Olin Rent-A-Car; Kincar Leasing).

Q: Can I get back the sales tax I paid up front on my long-term lease if the car is destroyed?
A: No. For a lease of one year or more entered into on or after June 1, 1990, tax is imposed up front under § 1111(c), and §§ 1119 and 1139 provide no refund of tax properly paid on such a lease.

Q: Will my insurer reimburse that sales tax in the settlement?
A: That depends on your insurance policy; the Tax Law does not require the § 1111 tax to be included in the settlement.

Citations and references

Statutes and prior decisions:

• Tax Law § 1111(c) — for a motor-vehicle lease of one year or more (eff. June 1, 1990), all receipts for the entire term are taxed as of the first payment or DMV registration; not applicable to pre-amendment leases
• Tax Law § 1101(b)(5) — definition of "sale," including a lease
• Tax Law §§ 1119 and 1139 — refund/credit provisions (no refund of tax properly paid on a long-term lease when the property is later lost)
• Olin Rent-A-Car of New York, Inc., TSB-H-86(16)S; Kincar Leasing Corp., TSB-H-78(39)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1991.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a91_36s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-91 (36)S
Sales Tax
April 29, 1991

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S901221A

On December 21, 1990 a Petition for Advisory Opinion was received from Norstar Auto
Lease Inc., 1450 Western Avenue, Albany, New York 12203.
The issue raised by Petitioner, Norstar Auto Leases Inc., is whether sales tax should be
collected on the unpaid balance of an automobile lease when the leased vehicle is stolen and lost or
totaled in an accident; and if so, should the insurance company's settlement payment include sales
tax.
Petitioner leases automobiles on a long-term basis of 24 to 60 months. The lease may or may
not require the lessee to purchase the auto at the end of the lease term. Title remains in the name of
Petitioner. Sales tax is paid on the monthly rental payments.
If an insurance claim is made, Petitioner quotes the insurance company the amount necessary
to give up title to the automobile. The insurance company pays Petitioner all or part of the quoted
buyout and the lessee is billed for any shortage. The insurance company then takes title to the
automobile. Insurance companies tend to exclude sales tax from the settlement amount paid to the
insured.
Section 1101(b)(5) of the Tax Law defines sale as "Any transfer of title or possession or both,
. . .rental or lease. . .for a consideration. . . ."
Sales tax is not imposed upon the receipts from the proceeds of an insurance claim, nor is
the tax imposed on "turn-in damage" or charges imposed on a lessee for collision damages. (See:
Olin Rent-A-Car of New York, Inc. Dec St Tx Comm, April 30, 1976, TSB-H-86(16)S; Kincar
Leasing Corp. Dec St Tx Comm March 29, 1978, TSB-H-78(39)S). Therefore Petitioner is not
required to collect sales tax from the lessee under the circumstances described.
However, it should be noted that Section 1111 of the Tax Law, amended effective June 1,
1990, states in part, as follows:
(c)(1) Notwithstanding any contrary provisions of this article or other law, with
respect to any lease for a term of one year or more of (1) a motor vehicle, as defined
in section one hundred twenty-five of the vehicle and traffic law, with a gross vehicle
weight of ten thousand pounds or less, ... or an option to renew such a lease for a

-2­
TSB-A-91 (36)S
Sales Tax
April 29, 1991

period of one year or more or a similar contractual provision, the exercise of which would extend
the term of such a lease for a period of one year or more, all receipts due or consideration given or
contracted to be given for such property under and for the entire period of the lease, option or similar
provision, or combination of them, shall be deemed to have been paid or given and shall be subject
to tax, and any such tax due shall be collected, as of the date of first payment under the lease, option
or similar provision, or combination of them, or as of the date of registration of such property with
the commissioner of motor vehicles, whichever is earlier. (Emphasis supplied)
The above provision does not apply to any lease in existence prior to the effective date of the
amendment.
Sections 1119 and 1139 of the Tax Law describes situations and transactions in which a
refund or credit of sales tax is applicable. There are no provisions in said sections for a refund of
sales tax that was properly paid on an automobile lease for one year or more even though the leased
property was subsequently lost, stolen or destroyed.
Therefore the lessee of an automobile from Petitioner cannot claim a credit or refund of sales
tax paid on a lease entered into on or after June 1, 1990 even though the car is subsequently stolen,
lost or totaled and the lessor is reimbursed by the insurance company for all or a part of the value of
the automobile. However, no sales tax would be due on the amount representing the difference
between the value of the automobile and the amount received from the insurance company that the
lessee may be required to pay to the lessor under the terms of the lease.
Whether or not an insurer includes the sales tax originally paid on the lease in the amount
of the settlement paid to the insured is determined by the terms and conditions of the applicable
insurance policy. There is no provision in the Tax Law that requires the sales tax paid pursuant to
Section 1111 of the Tax Law to be included in the amount of the settlement.

DATED: April 29, 1991

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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