New York Advisory Opinion TSB-A-96(25)S: A driving school that switches from renting road-test cars to buying its own vehicles asks whether it now owes sales tax on those purchases (and on repair parts), and whether it can get a credit for the 25% of its student fee that's allocated to "providing the car."

Plain-English summary

Model Auto Driving School, Inc. teaches people to drive and arranges for them to take their New York State written and practical driving tests. Its fee is split: 75% is allocated to the driving lessons, and 25% is allocated to providing the car for the practical road test. The school has long charged, collected, and remitted sales tax on that 25% "vehicle" portion, consistent with the Department's decades-old position (dating to a 1966 Sales Tax Information Letter) that supplying a car for a road test is a taxable license to use or rental of the car -- not something merely incidental to instruction. Historically, the school rented its test cars from other companies and paid sales tax on those rental payments. Starting January 1, 1996, it switched to buying its own vehicles outright and will also buy parts to repair them. It asked the Department three things: are the vehicle purchases taxable, are the parts purchases taxable, and if so, can it claim a 25% credit against those taxes (matching the taxable-rental share of its own fee)?

The Department answered yes to the first two and no to the third. Even though "renting" a car counts as a taxable sale, the resale exclusion in the sales tax law only applies to property purchased EXCLUSIVELY for resale. Because the school's vehicles are used for BOTH driving lessons (a non-resale use) and providing cars for road tests (the taxable rental portion), the vehicles aren't purchased exclusively for resale -- so the school's vehicle purchases are ordinary taxable retail purchases, and the same reasoning taxes its purchases of parts used to repair those vehicles. As for a credit: the Department reviewed the Tax Law's credit and refund provisions (§§ 1119, 1132, 1139, and the accompanying regulations) and found no provision authorizing a credit or refund for sales tax properly paid on a vehicle or parts that are only partly used in a taxable rental -- so the school can't claim a 25% credit for the taxable-rental share of its own student fee, even though it's now paying sales tax twice in a sense (once on the vehicle purchase, again when it collects tax from the student on the 25% rental portion).

What this means for you

Driving schools and similar businesses that both instruct AND provide equipment/vehicles for a fee

Switching from renting to buying your own vehicles/equipment doesn't get you out of sales tax on the purchase -- if you use the same asset for both a non-resale purpose (instruction) and a taxable rental-to-customer purpose, the resale exclusion won't apply, and you'll owe tax on the full purchase with no offsetting credit for the taxable portion you later collect from customers. Budget for sales tax on the purchase price of vehicles and parts as a real cost of switching from renting to owning.

Businesses considering a resale exemption for mixed-use equipment

The "exclusively for resale" standard is strict -- any meaningful non-resale use of the same property (here, driving instruction) defeats the resale exclusion for the whole purchase, not just the non-resale portion.

Common questions

Q: Why is the 25% "vehicle" portion of the student fee taxable in the first place?
A: The Department has long treated supplying a car for a road test as a taxable license to use or rental of the vehicle under Tax Law § 1101(b)(5) -- not something merely incidental to the driving instruction itself, based on a 1966 Sales Tax Information Letter position the Department continues to follow.

Q: Since the school pays sales tax buying the car, and then collects sales tax on the 25% rental fee, isn't that double taxation?
A: The Department acknowledged the same vehicle generates tax at both the purchase stage (because it's not exclusively for resale) and the rental stage (the 25% fee) -- but found no statutory credit or refund mechanism that addresses this overlap, so the school must pay both.

Q: Would the purchase be exempt if the school ONLY used its vehicles for road tests and never for driving lessons?
A: The opinion's reasoning turns on the vehicles being used for BOTH purposes; a business using property exclusively for resale/rental (with no other use) would have a stronger case for the resale exclusion, though this opinion doesn't need to reach that scenario since it's not Model Auto's fact pattern.

Q: Are the repair parts taxed the same way as the vehicles?
A: Yes -- since the underlying vehicles aren't purchased exclusively for resale, the parts purchased to repair them are likewise ordinary taxable retail purchases, not resale purchases.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(4), (5), (6) (definitions of retail sale, sale/purchase, tangible personal property)
• Tax Law § 1105(a) (retail sale tax)
• Tax Law §§ 1119, 1132, 1139 (credits, exemption certificates, refunds)
• 20 NYCRR Part 534 (refund procedures)

Prior rulings and cases referenced:

• Sales Tax Information Letter No. 22, Q. 353, August 31, 1966
• Matter of Micheli Contracting v. State Tax Commission, 109 A.D.2d 957
• Matter of May Associates, Advisory Opinion, Commissioner of Taxation and Finance, March 23, 1984, TSB-A-84(15)S

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_25s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-96 (25)S
Sales Tax
May 2, 1996

Taxpayer Services Division
Technical Services Bureau

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S951208A

On December 8, 1995, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Model Auto Driving School, Inc., 145 West 14th Street, New York, New
York 10011.
Petitioner, Model Auto Driving School, Inc., raises the following issues:

1. Whether its purchases of motor vehicles are subject to sales tax.
2. Whether its purchases of motor vehicle parts are subject to sales tax.
3. In the event that Petitioner is required to pay sales tax on either the motor vehicles or the
   motor vehicle parts, whether Petitioner is entitled to take a credit on its New York State and local
   sales and use tax return for twenty-five percent (25%) of the sales taxes paid on the motor vehicles
   and parts.
   Petitioner submits the following facts as the basis for this Advisory Opinion.
   Petitioner is in the business of teaching individuals to drive motor vehicles. The program
   includes teaching an individual to drive and arranging for the individual to take the written and
   practical tests to acquire a New York State driver's license. Petitioner charges a fee that includes
   compensation for the driving lessons and for providing a motor vehicle to take the practical test.
   Petitioner has allocated seventy-five percent (75%) of its fee to the driving lessons and twenty-five
   percent (25%) of its fee to providing the motor vehicle.
   Petitioner charges, collects and remits New York State and local sales taxes on the fee that
   is allocated to providing the motor vehicle. Petitioner has always rented the motor vehicles that it
   provides from other companies and paid sales tax on its rental payments. Petitioner began purchasing
   motor vehicles on January 1, 1996, for use in its teaching program and will no longer rent motor
   vehicles from other companies. Petitioner will also purchase motor vehicle parts to repair the motor
   vehicles that it uses in its program.
   Applicable Law
   Section 1101(b) of the Tax Law provides in part:
   (b) When used in this article for the purposes of the taxes imposed by
   subdivisions (a), (b), (c) and (d) of section eleven hundred five and by
   section eleven hundred ten, the following terms shall mean:
   *
   *
   *

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Sales Tax
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(4) Retail sale. (i) A sale of tangible personal property to any person
for any purpose, other than (A) for resale as such or as a physical
component part of tangible personal property ....
(5) Sale, selling or purchase. Any transfer of title or possession or
both, exchange or barter, 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, including the
rendering of any service, taxable under this article, for a consideration
or any agreement therefor.
(6) Tangible personal property. Corporeal personal property of any
nature ....
Section 1105 of the Tax Law imposes sales tax on:
(a) The receipts from every retail sale of tangible personal property,
except as otherwise provided in this article.
Opinion
The Department of Taxation and Finance has long held that fees charged for supplying
vehicles to individuals for taking road tests are subject to sales tax. "The supplying of cars for road
tests constitutes a license to use or a rental of such cars (Tax Law Section 1101(b)(5)). It is not
merely incidental to any instruction the instructor provides immediately preceding the road test"
(SALES TAX INFORMATION LETTER NO. 22, Q. 353, August 31, 1966).
Although a "license to use" and a "rental" fall within the definitions of "sale" and,
consequently, "retail sale" as set forth in paragraphs (4) and (5) of Section 1101(b) of the Tax Law,
only purchases made for the exclusive purpose of resale come within the resale exclusion provided
for in Section 1101(b)(4)(see, Matter of Micheli Contracting v State Tax Commn., 109 AD2d 957;
Matter of May Associates, Adv Op Comm T&F, March 23, 1984, TSB-A-84(15)S). Because
Petitioner uses its motor vehicles to provide driving lessons in addition to providing the motor
vehicles for purposes of taking practical tests, the motor vehicles are not purchased exclusively for
resale but are instead purchased by Petitioner at retail. The motor vehicle parts are also purchased
at retail. Accordingly, Petitioner's purchases of motor vehicles and motor vehicle parts are subject
to sales tax.
Sections 1119, 1132 and 1139 of the Tax Law and Part 534 of the Sales and Use Tax
Regulations describe situations and transactions in which credits and refunds of sales tax are
applicable. There are no provisions in these sections for credits or refunds of sales taxes that are
properly paid on the retail sales of motor vehicles and motor vehicle parts if the motor vehicles are

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Sales Tax
May 2, 1996

sometimes rented to third parties. Therefore, Petitioner is not entitled to a credit on its New York
State and local sales and use tax return for twenty-five percent (25%) of the sales taxes paid on the
motor vehicles and motor vehicle parts.

DATED: May 2, 1996

/s/
Doris S. Bauman
Director
Technical Services Bureau

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