Is a company that operates school buses under contract with a school district providing a taxable rental of the buses, or an exempt transportation service?

Subject

, is whether, for purposes of sales tax, the service being rendered by Petitioner's client constitutes a transportation service or the rental of vehicles.

What this means for you

A company operating a fleet of school buses under contract with a school district asked whether it was providing a taxable rental of vehicles or an exempt transportation service. The district's contract was detailed -- specifying equipment type and age, inspection intervals, driver/personnel qualifications (hired from a district-provided list), routes, exact bus-stop locations and times, and final destinations.

Despite that level of specification, New York's test for rental vs. service doesn't turn on how much the customer dictates operational details -- it turns on who retains "dominion and control" over the vehicle itself. A transaction involving a vehicle plus a driver is presumed to be a transportation service (not a taxable rental) where the vehicle's owner/lessor: doesn't transfer possession/control/use of the vehicle to the customer, keeps the right to hire and fire the drivers, uses its own discretion in performing the work, retains operational responsibility, and pays all operating expenses (wages, insurance, fuel).

Here, the bus operator never transferred possession or control of the buses to the school district, kept the right to hire/fire drivers and other personnel (even though it had to select from a district-provided list), and paid all wages, insurance, and fuel. That satisfied every element of "dominion and control" retained by the operator, so the Department found the operator was providing an exempt transportation service, not a taxable rental.

Q&A

Q: Our customer's contract specifies our equipment, routes, and even which drivers we can hire -- does that make it a taxable rental?
A: Not automatically. The controlling question is whether YOU (not the customer) retain dominion and control -- possession of the vehicle, hire/fire authority over drivers, discretion in day-to-day performance, and responsibility for operating costs. A customer specifying contractual terms (equipment specs, routes, timing) doesn't itself shift control to the customer.

Q: What would flip this into a taxable rental instead?
A: If the customer took actual possession, custody, or the right to direct the vehicle's use -- for example, if the customer's own staff drove the vehicle, or the customer controlled day-to-day operational decisions and paid the driver directly -- the arrangement would look more like a rental with separately-stated (and taxable) equipment charges.

Q: Does it matter that the drivers had to be selected from a list the school district provided?
A: No -- the opinion treats the operator's retained right to actually hire and fire (even from a district-approved candidate pool) as sufficient; the district doesn't directly employ or control the individual drivers.

Citations

• Tax Law § 1105(a) -- imposes sales tax on sales (including rentals) of tangible personal property.
• Tax Law § 1101(b)(5) -- defines "sale" to include rental, lease, or license to use.
• 20 NYCRR 526.7(e)(4) -- defines "transfer of possession" for rental/lease/license purposes (custody, right to custody, or right to control use).
• 20 NYCRR 541.2(p) -- presumes a vehicle-plus-driver transaction is a service (not a rental) where the owner/lessor retains dominion and control per a five-factor test.
• Buckley Funeral Homes v. City of NY, 199 Misc 195 (Sup Ct 1948), affd 277 AD 1096 (1st Dept 1950) -- an auto-rental agency supplying cars and drivers to a funeral director, under the director's control, is a rental.
• Grand Island Transit Corporation, Dec St Tx Comm, March 9, 1984, TSB-H-84(29)S -- an owner retaining control over vehicle operation, routes, and drivers is providing a transportation service, not a taxable transfer of possession.
• TSB-M-84(7)S, April 19, 1984 -- a bus company retaining dominion and control over a chartered bus is providing an exempt transportation service.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1995.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a95_13s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-95 (13)S
Sales Tax
April 25, 1995

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S941227B

On December 27, 1994, a Petition for Advisory Opinion was received from Morton L. Coren,
P.C., 638 Meadow Court, Westbury, NY 11590-5925.
The issue raised by Petitioner, Morton L. Coren, P.C., is whether, for purposes of sales tax,
the service being rendered by Petitioner's client constitutes a transportation service or the rental of
vehicles.
Petitioner represents a corporation that is engaged in business in New York. Petitioner's
client operates school busses for a school district which is an instrumentality of the State of New
York.
Petitioner's client operates a fleet of busses. Petitioner's client is responsible for operating
expenses such as employee wages, insurance and fuel. The busses are driven by employees of
Petitioner's client. Petitioner's client maintains the right to hire and fire drivers and other employees.
The contract with the school district specifies the following:
1.

The type and age of the equipment to be used.

2.

That the equipment types used by Petitioner's client may not be changed without the
school district's approval.

3.

The interval between inspections of the vehicles used is specified by the school
district.

4.

The qualifications the bus drivers must hold and that drivers must be hired from a list
provided by school district.

5.

The qualifications other personnel used on the busses must hold and that such
personnel must be hired from a list provided by school district.

6.

The general route that the busses must follow, including the exact location of each
bus stop and the times the busses must appear at each stop.

7. The final destinations of each bus run.
   Section 1105(a) of the Tax Law imposes sales tax on the receipts from sales (including
   rentals) of tangible personal property.

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Sales Tax
April 25, 1995
Section 1101(b)(5) of the Tax Law defines the term "sale" to mean "[a]ny transfer of title or
possession or both, exchange or barter, rental, lease or license to use or consume. . .for a
consideration. . . ."
Section 526.7(e)(4) of the Sales and Use Tax Regulations provides, in part, as follows:
(4) "Transfer of possession" with respect to a rental, lease or license to use,
means that one of the following attributes of property ownership has been transferred:
(i)

custody or possession of the tangible personal property, actual or
constructive;

(ii)

the right to custody or possession of the tangible personal property;

(iii)

the right to use, or control or direct the use of tangible personal property.
*

*

*

(5) It is not essential for a transfer of possession to include the right to move
the tangible personal property which is the subject of a rental, lease or license to use.
Section 541.2(p) of the Sales and Use Tax Regulations provides as follows:
(p)
Rental, lease and license to use. (1) The terms "rental, lease, and
license to use" refer to all transactions in which there is a transfer of possession of
tangible personal property without a transfer of title to the property.
(2) For the purposes of this Part, when a rental, lease or license to use a
vehicle or equipment includes the services of a driver or operator, such transaction
is presumptively the sale of a service, rather than the rental of tangible personal
property, where dominion and control over the vehicle or equipment remain with the
owner or lessor of the vehicle or equipment. Dominion and control remain with the
owner or lessor of the vehicle or equipment when pursuant to an agreement or
contract the lessor:
(i)
does not transfer possession, control and/or use of the equipment or
vehicle to the lessee during the term of the agreement or contract;
(ii) maintains the right to hire and fire the drivers and operators;
(iii) uses his own discretion in performing the work (even though the
lessee may designate the area where material is to be picked up and delivered) and
generally selects his own routes;

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Sales Tax
April 25, 1995
(iv) retains responsibility for the operation of the equipment or vehicle; and
(v) directs the work, pays all operating expenses, including drivers' and/or
operators' wages, insurance, tolls and fuels.
Whether a transaction is a sale (license to use, rental, or lease) of a vehicle or
equipment or is the sale of a service, such as a transportation service, must be
determined in accordance with the facts and circumstances of the particular
transaction and provisions of the agreement between the contractor and his customer.
Example 6: A company enters into an agreement to lease a crane, together
with the services of the operator of the crane. The operator will take instruction from
the company's foreman, and the company determines the working hours and
locations. The operator's wages are separately stated. This transaction is within the
definition of sale, as the transfer of possession has occurred by reason of the company
foreman's right to direct and control the operator's use of the equipment. The
separately stated operator's wages are excludable from the taxable receipts.
(emphasis added)
In Buckley Funeral Homes v. City of NY, 199 Misc 195 (Sup Ct 1948), affd 277 AD 1096
(lst Dept 1950) the Court held that an agreement entered into between a funeral director and an auto
rental agency that supplied automobiles and drivers for funeral processions constituted a rental since
the funeral procession was under the direction and control of the funeral director.
In Grand Island Transit Corporation, Dec St Tx Comm, March 9, 1984, TSB-H-84(29)S the
Tax Commission held that where the owner of a vehicle retains control over and responsibility for
the operation of the vehicle, including the selection of routes and drivers, there is no taxable transfer
of possession of the vehicle, but rather the transaction constituted a transportation service.
Technical Service Bureau Memorandum, TSB-M-84(7)S, April 19, 1984, entitled Bus
Company Transactions, Transportation Service vs. Equipment Rental provides, in pertinent part, that
"[w]here a bus company charters a bus to a group, and the bus company retains dominion and control
over the bus, the bus company is engaged in providing a transportation service and, therefore, the
charges are exempt from sales tax. A chartering party's rights are limited to boarding the bus and
riding to the agreed destination."
In the instant case, Petitioner's client does not transfer possession, control and/or use of the
busses to the school district during the term of the contract. Petitioner's client's employees are
responsible for the operation of the busses. In addition, Petitioner's client maintains the right to hire
the drivers and other personnel used on the busses from a list of perspective candidates provided by
the school district. Further, Petitioner's client maintains the right to fire any drivers or other
personnel used on the busses. Moreover, Petitioner's client is responsible for paying operating
expenses such as employee wages, insurance and fuel. Accordingly, pursuant to Section 541.2(p)
of the Sales and Use Tax Regulations, supra, and TSB-M-84(7)S, supra, since Petitioner's client

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April 25, 1995
retains dominion and control over the busses operated for the school district, Petitioner's client is
providing a transportation service and not a rental service pursuant to Sections 1105(a) and
1105(b)(5) of the Tax Law, Section 526.7 of the Sales and Use Tax Regulations, and Buckley
Funeral Homes v. City of New York, supra.

DATED: April 25, 1995

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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