When a customer trades in their old vehicle as part of leasing a new one, does the trade-in reduce the amount subject to New York sales tax -- even when the lease is actually financed and owned by a separate leasing company rather than the dealer?

Subject

, is whether the customer in the automobile leases described in the following hypothetical situations is entitled to a credit for the value of its trade-in when calculating the receipts subject to sales and use taxes.

What this means for you

Motor vehicle leases in New York are taxed up front: sales tax is due on the entire lease's receipts as of the earlier of the first lease payment or vehicle registration (not spread out over the lease term). A trade-in vehicle can reduce that taxable amount -- but only if it's genuinely accepted as a trade-in by the party doing the selling/leasing (with intent to resell it), not just handed over in a separate transaction to a dealer who has no stake in the lease itself.

A statewide dealers' association asked about four common lease structures where the dealer signs up the customer but then assigns or sells the deal to a separate leasing company:

• Situation 1 -- dealer is only agent for paperwork: The dealer executes the lease documents as the leasing company's agent, but has not been appointed to accept trade-ins on the leasing company's behalf. Result: the trade-in and the lease are treated as two separate transactions (following a 1988 opinion, Marine Midland Automotive Financial Corp.), so the full lease price is taxable with no trade-in credit.
• Situation 2 -- dealer is also agent for trade-ins: Same facts, but the dealer is also appointed as the leasing company's agent for accepting trade-ins (intending resale). Result: the trade-in value can be excluded from the taxable lease receipts.
• Situation 3 -- rolling over "equity" from an expiring 1992 lease: A customer's older lease (with a $10,000 purchase option) is about to expire, and the vehicle's trade-in value is now $12,000 -- a $2,000 "equity." The customer trades in that equity toward a new 1995 lease through the same dealer, who again is the leasing company's agent for both paperwork and trade-ins. Result: assuming the purchase option is exercised, that $2,000 equity can be excluded from the new lease's taxable receipts. (The customer will separately owe sales tax on the $10,000 option price when exercising it.)
• Situation 4 -- dealer is the actual lessor, later assigns the lease: The dealer itself leases the vehicle to the customer (as lessor) and accepts the trade-in directly, then later assigns the lease to the leasing company. Result: since the dealer itself is the one accepting the trade-in for resale, the trade-in value can be excluded from the taxable lease receipts.

Q&A

Q: Our dealership just handles the paperwork for a leasing company -- does the customer's trade-in reduce the sales tax on the lease?
A: Not unless your dealership has also been specifically authorized as the leasing company's agent to accept trade-ins (with intent to resell them), not merely to execute lease documents. Without that authority, the trade-in and the new lease are two separate transactions for tax purposes, and sales tax applies to the full lease price.

Q: If we are authorized to accept trade-ins as the leasing company's agent, does that also work for "equity" rolled over from an expiring earlier lease?
A: Yes -- the opinion treats equity in an about-to-expire lease (the gap between its purchase-option price and current trade-in value) the same as a conventional trade-in, as long as the dealer is accepting it as the leasing company's agent with intent to resell.

Q: When exactly is sales tax due on a motor vehicle lease?
A: Under Tax Law § 1111(i), tax on the entire lease term's receipts is due as of the earlier of the first lease payment or the vehicle's registration with the DMV -- it isn't collected gradually as each monthly payment comes in.

Q: Does exercising a purchase option at the end of a lease get taxed separately?
A: Yes -- the customer separately owes sales tax on the option purchase price when exercising it, on top of whatever tax applied to the lease payments.

Citations

• Tax Law § 1101(b)(3) -- defines "receipts" subject to tax, excluding any credit for tangible personal property accepted in part payment and intended for resale.
• Tax Law § 1111(i) -- requires sales tax on the entire lease term's receipts up front, due as of the earlier of the first payment or vehicle registration.
• 20 NYCRR 526.5(f) -- excludes a trade-in credit from taxable receipts when the vendor accepts it in part payment intending resale.
• 20 NYCRR 527.15(c)(5) -- a lessor accepting tangible personal property for resale as a lease trade-in excludes its value from total taxable receipts.
• Marine Midland Automotive Financial Corp., Adv Op Comm T&F, June 8, 1988, TSB-A-88(32)S -- a trade-in with a vendor other than the one leasing the new vehicle is a separate transaction; its value can't reduce the taxable lease price.

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_31s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-95 (31)S
Sales Tax
August 8, 1995

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S950215A

On February 15, 1995, a Petition for Advisory Opinion was received from New York State
Automobile Dealers, Inc., 37 Elk Street, P.O. Box 7347, Albany, New York 12224-0347.
The issue raised by Petitioner, New York State Automobile Dealers, Inc., is whether the
customer in the automobile leases described in the following hypothetical situations is entitled to a
credit for the value of its trade-in when calculating the receipts subject to sales and use taxes.
Situation 1: A motor vehicle dealer in New York State (the "Dealer") leases a motor vehicle
to a Customer for thirty-six months utilizing lease forms provided by a leasing company (the "Lease
Company"). The lease documentation names the Lease Company as the lessor and the Customer as
the lessee.
As part of the transaction, the Customer "trades in" the Customer's used vehicle and receives
a reduction in the capital cost used in computing the lease payment under the lease. Title to the
"trade-in" is transferred from the Customer to the dealer. The lease is between the Lease Company
and Customer. Title to
the leased vehicle is transferred from the Dealer to the Lease Company.
After completion of the transaction, periodic lease payments are made by the Customer to
the Lease Company. The Dealer in this transaction has been appointed as the Lease Company's agent
for executing the lease documents.
Situation 2: Assume the same facts as Situation 1 except that the Dealer has, in addition,
been appointed the Lease Company's agent for accepting the trade-in as well as for executing the
lease documents.
Situation 3: Assume the same facts as Situation 2. However, also assume that the lease
transaction described in Situation 2 took place in 1992 and that the lease (the "Original Lease")
contained a purchase option in favor of the Customer in the amount of $10,000. Further assume that
in 1995, the Original Lease is about to expire and that the fair market value of the automobile
involved in the Original Lease for trade-in purposes is $12,000, i.e., there is an "equity" in the
Original Lease in favor of the Customer in the amount of $2,000.
The Customer now wishes to "trade-in" this equity of $2,000 and to lease a 1995 vehicle
from the same Dealer acting as an agent for the Lease Company for the purpose of both executing
the lease documents and accepting trade-ins. The Dealer reduces the agreed upon cost of the 1995
vehicle to the Lease Company by the $2,000 value inherent in the Customer's purchase option.

-2­
TSB-A-95 (31)S
Sales Tax
August 8, 1995
Situation 4: The Dealer leases a vehicle to the Customer on forms provided by the Leasing
Company. Under the terms of the forms, the Lessor is the Dealer. The Customer "trades-in" his or
her vehicle to the Dealer and the capital cost of the leased vehicle in the lease is reduced by the value
allocated to the trade-in.
At the time of execution of the lease between the Dealer and the Customer, the leased vehicle
is owned by the Dealer and the trade-in is transferred to the Dealer.
Subsequent to the completion of that transaction, the Dealer assigns the lease to the Lease
Company and receives the agreed upon value of the new vehicle leased to the Customer (less the
value of the trade-in) which has been used in the computation of the lease payment. Periodic lease
payments are made to the Lease Company.
Section 1101(b)(3) of the Tax Law defines receipts as "[t]he 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 tangible personal property accepted in part payment and
intended for resale . . . ."
Section 1111(i) of the Tax Law provides, in part, as follows:
(i) 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 or a
similar contractual provision, 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 term, 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
the 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.
Section 526.5(f) of the Sales and Use Tax Regulations provides, in part, as follows:
(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.

-3­
TSB-A-95 (31)S
Sales Tax
August 8, 1995
Example 1: A motor vehicle dealer allows a customer $850.00
for a used automobile, accepted in part payment against the sale price
of $3200.00 for a new automobile. The used automobile is for resale.
The customer is billed as follows:
New automobile . . . . . . . . .$3200.00
Trade-in . . . . . . . . . . . . . . . . . 850.00
Due . . . . . . . . . . . . . . . . . . .$2350.00
Receipt subject to tax is $2350.00.
Section 527.15(c)(5) of the Sales and Use Tax Regulations provides that "[W]here the lessor
accepts tangible personal property for resale as a trade-in on a lease agreement, the total receipts do
not include the value of the trade-in."
In Marine Midland Automotive Financial Corp., Adv Op Comm T&F, June 8, 1988, TSB-A­
88(32)S the Commissioner advised that where a customer trades a vehicle with a vendor from whom
the customer is not leasing a new vehicle, the transaction is not 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 automobile dealer) is subject to tax. Thus, the
value of the vehicle transferred to the automobile dealer may not be used to reduce the full lease
amount subject to tax.
In Situation 1, the dealer has been appointed as the Lease Company's agent for the purpose
of executing the lease document(s). The dealer has not been appointed as the Lease Company's agent
for the purpose of accepting trade-ins. Pursuant to Marine Midland Automotive Financial Corp.,
supra, where a customer does not trade-in a vehicle with the same vendor from whom the customer
is leasing the new vehicle, the transaction involves two separate transactions and the value of the
vehicle transferred may not be used to reduce the lease payments subject to sales tax.
Accordingly, pursuant to Section 1101(b)(3) of the Tax Law and Marine Midland
Automotive Financial Corp., supra, the full amount of the lease price of the vehicle, without regard
to any trade-in allowance, is subject to sales tax.
It is noted that pursuant to Section 1111(i) of the Tax Law, sales tax must be collected as of
the date of the first payment due under the lease, option or similar provision, or combination of them,
or as of the date of registration of such vehicle with the commissioner of motor vehicles, whichever
is earlier.
With respect to Situation 2, the Dealer has been appointed as the Lease Company's agent for
the purpose of accepting trade-ins as well as for executing the lease document(s). Accordingly,
assuming the trade-in is being accepted by the dealer as agent for the Lease Company with the intent
of resale, pursuant to Section 1101(b)(3) of the Tax Law and sections 526.5(f) and 527.15(c)(5) of

-4­
TSB-A-95 (31)S
Sales Tax
August 8, 1995
the Sales and Use Tax Regulations the value of such trade-in may be excluded when arriving at the
receipts subject to sales tax.
Pursuant to Section 1111(i) of the Tax Law sales tax must 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 vehicle with the commissioner of motor vehicles, whichever is earlier.
Concerning Situation 3, the automobile involved in the Original Lease in 1992, has a trade-in
value in 1995 of $12,000. Accordingly, assuming the trade-in is being accepted by the Dealer as
agent for the Lease Company with the intent of resale, and assuming that the purchase option on the
1992 vehicles is exercised, pursuant to Section 1101(b)(3) of the Tax Law and sections 526.5(f) and
527.15(c)(5) of the Sales and Use Tax Regulations the value of such trade-in ($12,000) may be
excluded when arriving at the receipts subject to sales tax.
Pursuant to Section 1111(i) of the Tax Law sales tax must 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 vehicle with the commissioner of motor vehicles, whichever is earlier.
As for Situation 4, the Dealer leases new vehicles to customers and accepts their vehicles as
trade-in as part payment toward the lease of the new vehicle. Accordingly, assuming the trade-in is
being accepted by the Dealer with the intent of resale, pursuant to Section 1101(b)(3) of the Tax Law
and sections 526.5(f) and 527.15(c)(5) of the Sales and Use Tax Regulations the value of such trade­
in may be excluded when arriving at the receipts subject to sales tax.
It is noted that pursuant to Section 1111(i) of the Tax Law sales tax must 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 vehicle with the commissioner of motor vehicles, whichever is
earlier.
It is further noted that the customer will owe sales tax on the option purchase price when he
exercises the option.

DATED: August 8, 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.