New York Advisory Opinion TSB-A-96(19)S: On a long-term Mercedes-Benz auto lease originated by a dealer and then assigned to a leasing company, who owes the sales tax -- the dealer or the leasing company -- and is a customer's trade-in equity credited against the lease taxable?

Plain-English summary

Mercedes-Benz Credit Corporation ("Petitioner") is a leasing company -- not a dealer -- that offers long-term (over 12 months) automobile lease programs through independent local Mercedes-Benz dealerships. Under Petitioner's business model, the dealership negotiates the lease terms with the customer using Petitioner's program rates and signs a standard lease agreement with the customer; even though that agreement is preprinted with Petitioner's name, the document itself names the dealer as the original lessor, and the dealer still holds title to the vehicle when the lease is signed. Only afterward does Petitioner purchase the vehicle from the dealer and the lease is immediately assigned to Petitioner, which becomes the new lessor going forward. In the normal course of business, dealers also accept a customer's trade-in vehicle, crediting its equity (market value minus any unpaid loan) against the lease as a "capitalized cost reduction" that lowers future lease payments -- title to the trade-in passes to the dealer, who resells it.

Petitioner asked three questions: who is the "original lessor" (the dealer or Petitioner); who owes the sales tax; and whether the trade-in-equity credit is taxable. The Department ruled that because the dealer -- not Petitioner -- actually contracts with the customer, accepts the trade-in for resale, and collects the first payment (with nothing in the facts suggesting the dealer acts as Petitioner's agent), the dealer is the original lessor. Under Tax Law § 1111(i)(A), sales tax on a motor-vehicle lease of a year or more (10,000 lbs. gross vehicle weight or less) is due up front, on the full stream of lease payments for the entire term, as of the first payment or registration date -- so the dealer, as original lessor, is the one responsible for collecting and remitting that tax. The capitalized cost reduction from the trade-in, however, is excluded from the taxable receipt entirely: because the dealer accepts the trade-in with the intent to resell it, both Tax Law § 1101(b)(3) and the trade-in regulations (20 NYCRR §§ 526.5(f), 527.15(c)(5)) exclude that value from the sales-tax base. Once the lease is assigned, Petitioner becomes responsible for any sales tax due on later lease extensions or on a purchase-option exercise. The ruling applies only to leases taxed under § 1111(i) -- for short-term leases (under a year) or vehicles that don't meet that section's definitions/weight limit, tax is instead collected on each individual rental payment.

What this means for you

Captive/affiliated auto leasing companies

If your leasing programs work through independent dealers who sign the actual lease paperwork and accept trade-ins before assigning the lease to you, the DEALER -- not your company -- is generally the "original lessor" responsible for the upfront sales tax on the lease under Tax Law § 1111(i). Your responsibility as assignee kicks in only for tax on later lease extensions or purchase-option exercises.

Dealers arranging leases for a leasing company

If you sign the lease agreement with the customer and accept trade-ins before assigning it, expect to be the party legally responsible for collecting and remitting the upfront sales tax on the full lease term -- even if the paperwork is branded with the leasing company's name and the vehicle is later sold off to that company.

Anyone leasing a vehicle with a trade-in

A trade-in's equity value, credited against a new lease as a "capitalized cost reduction," is excluded from the sales tax base just like a trade-in credit on an outright purchase -- as long as the party accepting the trade-in intends to resell it.

Common questions

Q: Why does it matter whose name is preprinted on the lease form?
A: It doesn't control the outcome here -- what matters is who actually signs as lessor and holds title at the moment the lease is executed with the customer, not whose name appears on the boilerplate contract form.

Q: Does this ruling cover short-term leases too?
A: No -- it applies only to leases taxable under Tax Law § 1111(i) (generally a term of a year or more, vehicle 10,000 lbs. gross weight or less). For shorter leases or vehicles outside that definition, sales tax is instead collected on each periodic rental payment, and the ruling notes Petitioner would be responsible for that collection.

Q: What happens to sales tax responsibility after the lease is assigned to the leasing company?
A: The dealer's responsibility as original lessor covers the tax due at lease inception. Once Petitioner (the leasing company) takes over as assignee, it becomes responsible for collecting any sales tax due on subsequent lease extensions or on the customer's exercise of a purchase option.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(3) (definition of receipts, excluding trade-in credit)
• Tax Law § 1111(i)(A) (special rule for motor-vehicle leases of a year or more)
• 20 NYCRR 526.5(f) (trade-in exclusion)
• 20 NYCRR 527.15(a) (special lease-tax rules)
• 20 NYCRR 527.15(c)(5) (trade-in exclusion in lease context)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1996.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a96_19s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-96 (19)S
Sales Tax
March 22, 1996

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.S950508A

On May 8, 1995 a Petition for Advisory Opinion was received from Mercedes-Benz Credit
Corporation, 201Merritt 7, Suite 700, Norwalk, Connecticut 06851.
The issues raised by Petitioner, Mercedes-Benz Credit Corporation, regarding the
computation and payment of New York sales tax on long term automobile leases and based on the
facts stated below, are whether:
1)

the dealer, not the leasing company, is considered to be the original lessor;

2)

the dealer, not the leasing company, is liable and responsible for remitting New York sales
tax; and

3)

a capitalized cost reduction representing the equity in a customer's traded vehicle is subject
to New York sales tax.
Petitioner makes the following submission of facts.

Petitioner is a Delaware corporation with headquarters in Connecticut. Petitioner is not a
dealer. Petitioner is a leasing company which is in the business of leasing Mercedes-Benz
automobiles to customers throughout the United States. Petitioner has regional offices in other states
but does not have an office in New York. Petitioner does business in the following manner.
1) Petitioner offers long-term lease programs through local independent automobile dealerships. All
the lease programs are for terms in excess of 12 months. Petitioner's leases provide the lease
customer (the lessee) with an option to purchase the automobile at the end of the lease for the
residual value. The residual value represents an estimate of the expected fair market value of the
vehicle at lease maturity.
(2) The dealership negotiates the lease of a Mercedes-Benz automobile with the customer (lessee)
using Petitioner's program rates.
(3) The dealer completes and executes a standard Petitioner lease agreement with the lessee.
Although the lease agreement is preprinted with Petitioner's name, the original lessor indicated on
the agreement is the dealer. At the time the lease is executed, the dealer holds title to the leased
vehicle. It is understood that upon execution of the lease agreement, Petitioner will purchase the
leased vehicle from the dealer and the lease agreement will immediately be assigned to Petitioner
as the lessor. Petitioner has the right to refuse assignment of any lease not adhering to Petitioner's
standards.

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TSB-A-96 (19)S
Sales Tax
March 22, 1996

In the normal course of business, dealers will accept the lessee's personally owned vehicle as a trade­
in. The equity from the trade-in (market value less any unpaid loan balance) will be applied to the
lease agreement as a capitalized cost reduction. A capitalized cost reduction is analogous to an
advance payment and will reduce the amount of each future periodic lease payment. Title to, and
possession of, a trade-in vehicle will be passed to the dealer, who will resell the vehicle.
(4) Petitioner gives the dealer the purchase price of the vehicle less any funds collected by the dealer
from the lessee, including the first lease payment, acquisition fees and capitalized cost reductions.
Petitioner records as income all payments including the first lease payment, paid acquisition fees and
capitalized reductions. Petitioner capitalizes and depreciates the full purchase price of the vehicle.
(5) All future lease payments are made directly to Petitioner by the lessee.
Section l101(b)(3) of the Tax Law defines receipts as follows:
[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 the vendor to the purchaser. . . but excluding any credit for
tangible personal property accepted in part payment and intended for
resale ....
Section 1111(i)(A) of the Tax Law provides, in part, as follows:
(A)
Notwithstanding any contrary provisions of this article or
other law, with respect to any lease for a term of one year or more of
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 such lease, option to renew 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 such lease, option to renew 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. . .

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TSB-A-96 (19)S
Sales Tax
March 22, 1996

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. (Emphasis supplied)
Section 527.15(a) of the Sales and Use Tax Regulations provides as follows:
Section 1111(i) of the Tax Law provides special rules for the payment
of sales and use tax on certain leases of motor vehicles, vessels and
noncommercial aircraft. Rather than the tax being due upon each
periodic lease payment, the Tax Law provides that with respect to the
leases described in this section the tax is due at the inception of the
lease on the total amount of the lease payments for the entire term of
the lease.
Section 527.15(c)(5) of the Sales and Use Tax Regulations provides as follows:
Where 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. (Emphasis added)
In this case, dealers enter into lease agreements with customers for the lease of motor
vehicles. These agreements state that the dealer is the lessor and the customer is the lessee. The
dealer negotiates and accepts in part payment of the purchase price (i.e., the lease consideration) a
customer trade-in with the intent of reselling the trade-in. The dealer accepts the first lease payment
from the customer. The facts presented by Petitioner do not indicate that dealers act as the agents of
Petitioner in these lease transactions. Based upon the factual presentation, the dealer is considered
the original lessor, who will assign the lease to Petitioner after the lease agreement is executed. Upon
completion of the lease documentation, Petitioner purchases the lease and vehicle from the dealer.
Accordingly, the dealer is responsible for collecting and remitting the New York sales tax due on
the lease pursuant to section 1111(i) of the Tax Law.

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TSB-A-96 (19)S
Sales Tax
March 22, 1996

Pursuant to section l101(b)(3) of Tax Law and sections 526.5(f) and 527.15(c)(5) of the Sales
and Use Tax Regulations, the "capitalized cost reduction" is not subject to the New York sales tax,
since the dealer accepts the lessee's vehicle as a trade-in with the intent of reselling the vehicle and
applies the amount of the "capitalized cost reduction" against the consideration due under the lease
for the vehicle.
Petitioner would be responsible for collecting any sales tax that is due on any extensions of
the lease and on lease purchase options.
This opinion only applies to leases taxable under Section 1111(i) of the Tax Law. In the case
of short term leases of less than one year or leases of motor vehicles which are not defined in Section
125 of the Vehicle and Traffic Law or which have a gross weight in excess of 10,000 pounds,
Petitioner would be responsible to collect sales tax on each rental payment.

DATED:

March 22, 1996

/s/
DORIS S. BAUMAN
Director
Technical Services Bureau

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