If a finance company collects lease payments that include sales tax and then remits money to the leasing company, does it still owe that sales tax to the state?

Plain-English summary

Tilden Commercial Alliance, Inc. is a commercial finance company that lends to equipment-leasing companies to finance equipment leased to lessees (mostly in New York). Tilden takes a security interest in the equipment and an assignment of the lessor's rights under the leases, and collects the lessees' monthly payments — through a lock-box on "non-notification" accounts (the lessee still pays the leasing company) or directly on "notification" accounts. Tilden knows each lessee's identity, the rental amount and the sales tax paid, and it remits money back to the leasing companies (on notification accounts, it sends a separate check to the State Tax Commission for the tax). It asked whether it has any further sales tax obligation once it issues its checks to the leasing companies.

The Department held that Tilden remains liable to the state for sales-tax money it receives, until that tax is actually remitted to the state.

• The leasing company is the vendor. A lease is a "sale" (§ 1101(b)(5)), and the leasing company is a vendor (§ 1101(b)(8)) required to collect the tax at the time of collecting the price and remit it (§ 1105(a); § 1132(a)).
• But sales-tax money is the state's money. Section 1132(a) says the tax is paid to the collector "as trustee for and on account of the state," so those moneys belong to the state.
• Whoever receives that money must pay it over. Under City of New York v. Advance Trading Corp., 202 Misc 208 (1952), a factor that received payments including sales tax via an assignment of accounts receivable was liable for the tax — because "where one receives money that rightfully belongs to another the law creates a debt and implies a promise ... to pay it over to the rightful owner." The court applied this to the City sales tax; the Department applied the same rule to the State tax.
• Tilden is liable, and not discharged by paying the leasing company. Because Tilden receives lessees' sales-tax payments, it is liable to the state for those amounts. Remitting them to the leasing companies does not relieve it; Tilden is relieved only when the leasing companies actually remit the tax to the state.
• Bankruptcy changes nothing. Even where a leasing company is in bankruptcy and being liquidated, Tilden must remit to the Tax Commission the sales-tax payments it has received.

What this means for you

Sales tax is trust-fund money — holding it creates a duty to remit. If your business (a factor, lender, servicer or lock-box operator) comes into possession of funds that represent state sales tax, you can be personally on the hook to pay that tax over to the state, even if you're not the vendor who made the sale.

Passing the money downstream doesn't discharge you. Remitting the tax portion to the leasing company or original vendor doesn't end your obligation — you're discharged only when the tax is actually paid to the state. If it never reaches the state, the party that held the money can be pursued.

Segregate and track the tax component. Because you can be liable for sales-tax dollars that flow through your hands, identify the tax portion of every payment and make sure it reaches the Tax Commission — ideally by remitting it directly to the state rather than relying on a counterparty (especially one that may be insolvent).

Common questions

Q: I'm a finance company, not the vendor — why am I liable for the sales tax?
A: Because sales tax is held "as trustee for and on account of the state" (§ 1132(a)), the money belongs to the state. Under Advance Trading Corp., anyone who receives money that is actually state sales tax must pay it over to the state.

Q: I already sent the tax money to the leasing company — am I off the hook?
A: No. Remitting it to the leasing company does not relieve you. You are discharged only when the leasing company (or you) actually remits that tax to the state.

Q: The leasing company went bankrupt. Do I still have to remit the tax I collected?
A: Yes. The bankruptcy of the leasing company doesn't change the result — you must remit the sales-tax payments you received to the Tax Commission.

Citations and references

Statutes, regulations and authority:

• Tax Law § 1105(a) — imposes sales tax on receipts from retail sales of tangible personal property
• Tax Law § 1101(b)(5) — defines "sale" to include any rental, lease or license to use
• Tax Law § 1101(b)(8) — defines "vendor"
• Tax Law § 1132(a) — requires the vendor to collect the tax and provides that the tax is held "as trustee for and on account of the state"
• City of New York v. Advance Trading Corp., 202 Misc 208 (1952) — a party receiving money that is actually sales tax is obligated to pay it over to the taxing authority

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1981.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/h81_105s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-H-81(105)S
Sales Tax
May 26, 1981

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S800725A

On July 25, 1980, a Petition for Advisory Opinion was received from Tilden
Commercial Alliance, Inc., 2 Lambert Street, Roslyn Heights, New York 11577.
The issue raised is the nature of Petitioner's obligations and liabilities
under Article 28 of the Tax Law, which imposes the State's Sales and Compensating
Use Taxes, with respect to the financing operations described herein.
Petitioner is in the commercial finance business, a substantial part of
which consists of the making of loans to leasing companies to finance purchases
of equipment to be leased to various lessees, most of whom are located in New
York. Petitioner obtains a security interest in the leased equipment and an
assignment of the lessor's rights under the equipment leases. The loan payments
are required to be made in the form of monthly insta11ments somewhat smaller than
the monthly rentals.
In some cases the lessee is not notified of the assignment to Petitioner
and is billed monthly by the leasing company, with remittances payable to the
leasing company but mailed to a lock-box controlled by Petitioner. In other cases
the lessee is notified of the assignment and pays the monthly rental directly to
Petitioner. In every case Petitioner collects the remittances and knows the name
and address of the lessee making the payment, the amount constituting rental and
the amount of sales tax paid.
Petitioner furnishes each leasing company with a monthly report giving the
above details except that on "non-notification accounts" the sales tax collected
is not stated separately. With the report Petitioner sends leasing companies on
a non-notification basis there is included a check for the difference between the
total amount collected, including sales tax, and the installment due on the
company's loans. Where a leasing company is on a notification basis, Petitioner
sends two checks with its report, one payable to the State Tax Commission for the
amount of sales tax collected, as shown on the report, and the other payable to
the leasing company for the excess of the rentals collected over its loan
installment.
Petitioner inquires whether, under these circumstances, it has "...any
further sales tax obligation after issuing its checks to the respective leasing
companies as stated above."
Section 1105(a) of the Tax Law, contained in Article 28, imposes a tax on
the "...receipts from every retail sale of tangible personal property, except as
otherwise provided in this article." The term "sale" is defined in section
1101(b)(5) to include "Any ...rental, lease or license to use or consume...."
Section 1132(a) of the Tax Law requires the collection of sales tax, at the time
of "collecting the price" to which it applies, by a vendor of tangible personal
property. The term vendor is defined, in relevant part, in section 1101(b)(8) of
the Tax Law, as "A person making sales of tangible personal property or services,
the receipts from which are taxed..." under Article 28 of the Tax Law.
Accordingly, the leasing company, in the transactions described, is a vendor
making retail sales of tangible personal property and is thus required to collect
the sales tax due and to remit the same to the Tax Commission.

TP-8 (4/80)

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

TSB-H-81(105)S
Sales Tax
May 26, 1981

Petitioner, while it may not have the responsibility of a vendor to collect
taxes, once having come into possession of money constituting State sales tax,
acquires an obligation to remit such money to the State Tax Commission. Thus, in
City of New York v. Advance Trading Corp., 202 Misc 208 (1952) a factoring
corporation was held liable for New York City sales taxes it had collected as a
result of an assignment to it of accounts receivable by one of its debtors, a
retail coal dealer. The court stated the grounds for its decision, at page 209,
as follows:
"Such moneys [the portion of payments received by the factor representing
City sales tax payments] were the property of the plaintiff, the City of
New York, and the defendant was under a legal obligation to pay the same
to the city. It is settled law that where one receives money that
rightfully belongs to another the law creates a debt and implies a promise
on the part of the person who has received the money to pay it over to the
rightful owner (Cohen v. City of New York, 283 NY 112-115)."
Although the cited case involved the New York City sales tax, the same
result applies with respect to the State sales tax. Section 1132(a) of the Tax
Law provides, in part, that "The tax shall be paid to the person required to
collect it as trustee for and on account of the state." Moneys paid to vendors
as State sales tax belong to the State. According to the reasoning of the Court
in Advance Trading Corp., whoever receives such State sales tax moneys becomes
similiarly obligated to pay them over to the State. Petitioner, therefore, by
virtue of its receipt of sales tax payments from lessees becomes liable to the
State for those amounts. Petitioner is not relieved of this liability by virtue
of remitting checks in the amounts of the sales tax payments to the leasing
companies. Of course, when the leasing companies in turn remit the amounts paid
as tax to the State, Petitioner is no longer liable for such amounts.
Petitioner also inquires as to its responsibility in a situation similar
to those described above except that the leasing company is in bankruptcy and is
being liquidated by a trustee. Petitioner has withheld its normal remittance, to
the leasing company, of sales tax paid on the leases of such company. The fact
that the leasing company is in bankruptcy requires no conclusion different from
that set forth above. Petitioner is liable to the State for the sales tax
payments it has received, and must remit such sales tax payments to the Tax
Commission.

DATED: May 11, 1981

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau