Is a manufacturer's rebate that a car lessee assigns to the dealer as a 'capitalized cost reduction' still part of the taxable receipt on the lease?

Plain-English summary

Morris Shane leased a 1992 Lincoln Continental. When he signed the lease he had to pay several up-front items to the dealer (Hempstead Lincoln Mercury). One of them, $1,000, was labeled a "Capitalized Cost Reduction." He funded that $1,000 by endorsing over to the dealer a $1,000 draft the car manufacturer had sent him as an incentive to lease. A separate item on the lease was $85.00 of sales tax on that $1,000. He asked whether the $1,000 was really part of the receipt subject to sales tax.

The Department said yes, it is taxable. Under Tax Law § 1101(b)(3), the "receipt" is the full sale price the vendor charges, and a lease is a taxable "sale" under § 1101(b)(5). A rebate paid by the manufacturer — who is not a party to the lease — is an incentive that ultimately lowers the customer's out-of-pocket cost, but it does not reduce the receipts the dealer (lessor) collects or the price the lessee pays the dealer. So the manufacturer's rebate check is not a reduction of the lease price. Even though the lessee assigns the rebate to the dealer as part of his down payment, the $1,000 is part of the taxable receipt, and the dealer must collect sales tax on it under §§ 1105(a) and 1132(a).

What this means for you

Car shoppers and lessees

A manufacturer's rebate or incentive does not cut your sales tax on a lease. If you sign the rebate over to the dealer, it counts as part of what you're paying for the vehicle, and sales tax is figured on that full amount. This is different from a dealer's own price discount, which does reduce the receipt. The key question is who is giving up the money: a third-party manufacturer rebate stays in the tax base; a reduction the dealer itself grants does not.

Dealers and leasing companies

When a customer funds part of a lease with a manufacturer's rebate assigned to you, treat that amount as part of the taxable receipt and collect sales tax on it. Labeling it a "capitalized cost reduction" does not remove it from the tax base — the substance is that the manufacturer's incentive is being applied to the customer's obligation to you.

Accountants and tax professionals

The opinion follows the settled distinction between a third-party (manufacturer) rebate, which does not reduce the vendor's receipt, and a vendor price reduction, which does. It relies on the § 1101(b)(3) definition of "receipt" and the earlier Opinion of Counsel of February 10, 1975 (Let 75-3).

Common questions

Q: Does a manufacturer's rebate lower the sales tax on my leased car?
A: No. A rebate from the manufacturer is treated as part of what you pay the dealer, so sales tax is calculated on the full price including the rebated amount.

Q: What if the lease calls the rebate a "capitalized cost reduction"?
A: The label doesn't matter. The Department looked at the substance — a manufacturer's incentive applied to your lease — and held the amount is part of the taxable receipt.

Q: Would a discount from the dealer be treated the same way?
A: No. A price reduction the dealer itself gives reduces the receipt the dealer collects. This ruling is specifically about a rebate paid by the manufacturer, who is not a party to the lease.

Q: Can another taxpayer rely on this opinion?
A: No. An advisory opinion binds the Department only as to the petitioner and the facts described; another taxpayer with different facts cannot rely on it.

Citations and references

Statutes and authorities:

• Tax Law § 1101(b)(3) (definition of "receipt")
• Tax Law § 1101(b)(5) (definition of "sale," including rental and lease)
• Tax Law § 1101(b)(8)(i) (definition of "vendor")
• Tax Law § 1105(a) (tax on receipts from retail sales of tangible personal property)
• Tax Law § 1132(a) (vendor must collect the tax when collecting the price)
• Opinion of Counsel, February 10, 1975 (Let 75-3)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1992.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a92_69s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-92 (69) S
Sales Tax
October 2, 1992

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S920603A

On June 3, 1992 a Petition for Advisory Opinion was received from Morris Shane, 82
Whitney Street, Westbury, NY 11590.
The issue raised by Petitioner, Morris Shane, is whether a charge described as a "capitalized
cost reduction" on an automobile lease is a part of the receipt subject to sales tax.
Petitioner entered into a lease with Hempstead Lincoln Mercury Mtrs Corp to lease a 1992
Lincoln Continental. Pursuant to the terms of the lease Petitioner was required to make a payment
for certain items to the lessor at the time he entered into the lease. One of these items, in the sum of
$1000.00, was entitled a "Capitalized Cost Reduction" Petitioner paid this sum to the lessor by
endorsing over to the lessor a $1000.00 draft received by him from the motor vehicle manufacturer
as an incentive to enter into the lease. Another of the items, in the sum of $85.00, was the sales tax
due on the $1,000 "Capitalized Cost Reduction".
Section 1101(b)(3) of the Tax Law defines the term "Receipt" as "The amount of the sale
price of any property ... taxable under this article, valued in money, whether received in money or
otherwise, including any amount for which credit is allowed by the vendor to the purchaser, .... "
Section 1101(b)(5) of the Tax Law defines sale as "Any transfer of title or possession or both,
.... rental, lease or license to use or consume, conditional or otherwise, in any manner or by any
means whatsoever for a consideration, or any agreement therefor ... "
Under section 1101(b)(8)(i) of the Tax Law, the term "Vendor" includes "A person making
sales of tangible personal property or services, the receipts from which are taxed by this article ...
"
Section 1105(a) of the Tax Law imposes a tax on "The receipts from every retail sale of
tangible personal property, except as otherwise provided in this article."
Section 1132(a) of the Tax Law requires every vendor to " ... collect the tax from the
customer when collecting the price ... "
Although a bonus or rebate paid by a manufacturer, who is not privy to or a party in interest
in the lease, effectuates an ultimate reduction in the cost to the retail leasee, it does not reduce the
receipts received by the lessor upon which the tax is computed, paid and collected, nor the price paid
by the retail lessee to the lessor, and the tax when collected and paid is not erroneously, illegally or
unconstitutionally collected and paid. The rebate check received from an automobile manufacturer
by a lessor is not a reduction of the lease price of the automobile leased at retail from the dealer.
TP-9 (9/88)

-2­
TSB-A-92 (69) S
Sales Tax
October 2, 1992

Therefore sales tax must be paid to and collected by the lessor on an amount equal to the rebate
payment in accordance with the provisions of Sections 1101(b)(3), 1101(b)(5), 1101(b)(8)(i),
1105(a) and 1132(a) of the Tax Law. (See Opinion of Counsel, February 10, 1975, Let 75-3)
Accordingly the $1000.00 rebate entitled as a "Capitalized Cost Reduction" paid directly to
the Petitioner by the manufacturer does not represent a reduction in the cost of the lease even though
the Petitioner may assign the rebate to the dealer as part of his downpayment on the lease and thus
said sum is part of the receipt subject to sales tax.

DATED: October 2, 1992

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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