When a truck lease separately bills the lessee for interest expense (plus a profit markup), is that interest charge part of the taxable rental receipt?

Plain-English summary

Island Leasing Corp. (Westbury, New York) leases trucks to New York customers. Under some of its leases it bills the lessee a fixed rate plus a mileage rate, and also bills separately for interest expense associated with the leased vehicle — with that interest charge marked up by a 10% profit factor. It asked whether the interest portion is subject to sales tax.

The answer: yes — the interest charge (markup included) is part of the taxable rental receipt.

• § 1105(a) taxes receipts from every retail sale of tangible personal property, and § 1101(b)(5) defines a "sale" to include any rental or lease. A truck lease is therefore a taxable sale.
• 20 NYCRR 526.5(a) and (e) define the taxable "receipt" as the sale price, and provide that all expenses a vendor incurs in making a sale are not deductible from the receipt — regardless of their nature and regardless of whether they are separately billed to the customer.
• So the interest-expense portion of the rental payments, including the 10% profit factor, is a component of the taxable receipt and sales tax must be collected on it under § 1105(a).

What this means for you

Breaking out a cost on the invoice doesn't make it nontaxable. When you lease equipment, the whole charge to the customer is the taxable receipt. Splitting out interest, financing, or overhead as separate line items doesn't remove them from the tax base.

Your costs of doing the deal stay in the receipt. New York's rule is explicit: a vendor's expenses of making a sale aren't deductible, even when separately billed. Interest tied to the leased vehicle — plus any profit markup on it — is taxed like the rest of the rent.

This is a leasing-industry trap. Lessors often itemize financing charges. Under this opinion, those charges are taxable in New York if they're part of what the lessee pays to lease the property.

Common questions

Q: We list interest as a separate line — isn't that separate from the rent?
A: No. Under 20 NYCRR 526.5(e), a vendor's expenses of making the sale aren't deductible from the receipt even when separately billed. The interest charge is part of the taxable rental receipt.

Q: What about the 10% profit markup on the interest?
A: It's taxable too. The opinion specifically includes the 10% profit factor as part of the taxable receipt.

Q: Does this apply to leases other than trucks?
A: The opinion addresses truck leases, but its reasoning rests on the general rule that a lease is a taxable sale and a vendor's expenses aren't deductible from the receipt. Apply the same principle carefully to your own facts.

Citations and references

Statutes, regulations and authority:

• Tax Law § 1105(a) — imposes sales tax on receipts from every retail sale of tangible personal property
• Tax Law § 1101(b)(5) — defines "sale" to include any rental, lease, or license to use tangible personal property
• 20 NYCRR 526.5(a) and (e) — the taxable "receipt" is the sale price; a vendor's expenses of making a sale are not deductible, whether or not separately billed

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1980.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/h80_238s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-H-80(238)S
Sales Tax
December 5, 1980

Taxpayer Services Division
Technical Services Bureau

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S800711A

On July 11, 1980, a Petition for Advisory Opinion was received from Island
Leasing Corp., 123 Frost Street, Westbury, New York ll590.
The issue raised is whether the amount of the receipts subject to sales tax
on certain truck leases includes separate billings for interest.
Petitioner leases trucks to persons in New York State. Pursuant to certain
of its leases Petitioner bills the lessee not only at a fixed rate plus a mileage
rate, but also for interest expenses associated with the leased vehicle, such
charges for interest augmented by a 10% profit factor.
Section 1105(a) of the Tax Law imposes a tax on "The receipts from every
retail sale of tangible personal property...." Section 1101(b)(5) of the Tax Law
defines the term "sale" to include "Any... rental, lease or license to use or
consume, conditional or otherwise, in any manner or by any means whatsoever for
a consideration...."
The Sales and Use Tax Regulations define the term "receipt" to mean "(a)...
the amount of the sale price of any property and the charge for any service
taxable under articles 28 and 29 of the Tax Law, valued in money, whether
received in money or otherwise...(e) All expenses incurred by a vendor in making
a sale, regardless of their status and regardless of whether they are billed to
a customer are not deductible from the receipt...." 20 NYCRR 526.5(a)and(e)
It follows from the foregoing that the portion of the rental payments which
is related to interest expenses constitutes receipts from a retail sale (viz.a
lease or rental) of tangible personal property, and are thus subject to tax under
section 1105(a) of the Tax Law.
Accordingly, Petitioner is advised that the appropriate sales tax must be
collected on separately billed charges for interest, including the 10% profit
factor, constituting a component part of rental payments made pursuant to the
truck leases described in this Advisory Opinion.

DATED: November 18,1980

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau

JAMES H. TULLY, JR., COMMISSIONER
LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR