Is a delivery arrangement a nontaxable transportation service or a taxable rental of vehicles, when the carrier hires the drivers but the written contract shifts ownership-type risks to the shipper?

Plain-English summary

Adam Meldrum and Anderson Co., Inc. had a 1968 agreement with Leaseway Deliveries, Inc. under which Leaseway moved the store's merchandise between its stores and warehouse. The question: was Leaseway renting vehicles to the store (a taxable rental of tangible personal property) or providing a transportation service (not taxable)?

The Department held the arrangement was a taxable rental.

• Rental turns on transfer of possession. Section 1105(a) taxes the "rental, lease and license to use" tangible personal property, and § 1101(b)(5) and 20 NYCRR 526.7(c)(1) define those terms as transactions transferring possession without transferring title. Possession is transferred when there's a transfer of custody, the right to custody, or the right to use, or control or direct the use of the property.
• The petitioner's facts pointed toward a service. Leaseway hired and fired the drivers, exercised discretion over the driving and routes, remained responsible for operating the vehicles, and paid the drivers' wages, tolls, fines and fuel. Standing alone, those facts were "consonant with" a finding that Leaseway kept control and thus provided a service.
• But the written contract terms preponderated toward a rental. The agreement (i) has the shipper hold the carrier harmless for loss, damage or destruction of the cargo; (ii) requires the carrier to dedicate ten vehicles and pay for forty hours per vehicle per week even if used less; and (iii) on termination requires the carrier to sell the vehicles, with the shipper paying any shortfall below depreciated value and receiving any excess above it.
• Those terms shift the burdens and benefits of ownership to the shipper. Because they were preponderant, the receipts are receipts from a rental/lease of tangible personal property and are taxable under § 1105(a).

What this means for you

"Who hires the driver" isn't the whole test. Carrier-supplied drivers and carrier-set routes suggest a service, but New York looks at the entire written agreement. If the contract shifts the economic risks and rewards of the vehicles onto you — indemnifying the carrier for cargo loss, guaranteeing minimum payments on dedicated units, or making you absorb the resale gain or loss — the deal can be recharacterized as a taxable rental.

Read your transportation contracts for ownership-type risk allocation. Dedicated-fleet commitments, take-or-pay hour guarantees, and end-of-term buy/sell true-ups are the kind of provisions that tipped this arrangement into a rental. The label the parties use ("carrier," "transportation service") does not control.

When it's a rental, the whole receipt is taxable. If separately stated operator wages reflect prevailing rates, 20 NYCRR 526.7(e) allows them to be excluded from the taxable receipt of a lease — but that carve-out only helps once you've correctly identified a rental and broken out qualifying wages.

Common questions

Q: The carrier hired and controlled the drivers — why wasn't this a nontaxable transportation service?
A: Those facts alone supported a service, but the Department found the written agreement's other terms preponderant: cargo-loss indemnity by the shipper, ten dedicated vehicles with guaranteed forty-hour weekly pay, and a termination clause making the shipper absorb any resale shortfall and take any excess. Those shift ownership-type risks to the shipper, making it a rental.

Q: How does New York decide rental versus service?
A: By whether "possession" is transferred — custody, the right to custody, or the right to use, control or direct the use of the property (§ 1101(b)(5); 20 NYCRR 526.7). If the customer effectively controls or bears the ownership risks of the equipment, it's a taxable rental.

Q: If an arrangement is a rental, is the driver's pay taxed too?
A: Not necessarily. Under 20 NYCRR 526.7(e), where a lease includes an operator, separately stated operator wages that reflect prevailing wage rates can be excluded from the taxable lease receipt.

Citations and references

Statutes, regulations and authority:

• Tax Law § 1105(a) — taxes the rental, lease and license to use tangible personal property
• Tax Law § 1101(b)(5) — defines "sale" to include rental, lease and license to use (transfer of possession without transfer of title)
• 20 NYCRR 526.7(c)(1) — rental/lease/license means transfer of possession without transfer of title
• 20 NYCRR 526.7(e) — transfer of possession where lessee can direct and control use; separately stated operator wages at prevailing rates are excludible from the lease receipt

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_124s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-H-81(124)S
Sales Tax
June 29,1981

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S80l211A

On January 11, 1981, a Petition for Advisory Opinion was received from Adam
Mcldrum and Anderson Co., Inc., P.O. Box 976-389 Main Street, Buffalo, New York
14205.
Petitioner entered into an agreement with Leaseway Deliveries, Inc. on
April 29, 1968, whereby the latter agreed to transport Petitioner's merchandise
between its stores and warehouse. At issue is whether Leaseway rents its vehicles
to Petitioner under the agreement or whether Leaseway provides a transportation
service. A rental of equipment would be subject to the New York State sales and
use taxes while a transportation service would not be taxable.
Petitioner states that "dominion and control" remains with Leaseway, and
cites the following: drivers are hired and fired by Leaseway; Leaseway uses its
own discretion in performing its work, including the driving of the vehicles and,
in general, the selection of routes; Leaseway retains responsibility for the
operation of the vehicles; and, finally, Leaseway directs the work and pays all
operating expenses, including the drivers' wages, tolls, fines and fuel costs.
The sales tax imposed under section l105{a) of the Tax Law is applicable
to the "rental, lease and license to use" tangible personal property. Tax Law,
§1101(b)(5). The Sales and Use Tax Regulations provide that "The terms 'rental,
lease, license to use' refer to all transactions in which there is a transfer of
possession of tangible personal property without a transfer of title to the
property." 20 NYCRR 526.7(c)(1).
The Regulations further provide that:
(3)

Transfer of possession with respect to a rental, lease or license to
use, means that one of the following attributes of property
ownership has been transferred:

(i)

custody or possession of the tangible personal property, actual or
constructive;

(ii)

the right
property;

to

custody

or

possession

of

the

tangible

personal

(iii) the right to use, or control or direct the use of tangible personal
property."
...
(5)

When a lease of equipment includes the services of an operator,
possession is deemed to be transferred where the lessee has the
right to direct and control the use of the equipment. The operator's
wages, when separately stated, are excludible from the receipt of
the lease provided they reflect prevailing wage rates. 20 NYCRR
526.7(e).

The facts recited in the Petition are by themselves consonant with a finding that
Leaseway has retained, and not transferred to Petitioner, that degree of control

TP-8 (4/80)

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

2
TSB-H-81(124)S
Sales Tax
June 29,1981

and direction over the vehicles which, had it been so transferred, would have
rendered the agreement a rental or leasing agreement within the meaning of the
Tax Law. However, an examination of the written agreement between Petitioner and
Leaseway reveals the presence of factors which mandate a contrary finding. Thus,
section 5 provides that "Anything herein to the contrary notwithstanding, Carrier
shall not be responsible for and Shipper shall save harmless Carrier from any
loss, damage or destruction of any merchandise or other cargo transported by
Carrier under this Agreement including, without limitation, consequential damages
flowing from such loss, damage or destruction." Further, the carrier is required
to dedicate ten vehicles to the fulfillment of its obligations under the
contract, and for each of these dedicated vehicles the carrier is entitled to
forty hours of compensation per week, even where the vehicle is operated for less
than forty hours. Finally, upon termination of the agreement by either party, the
carrier is to sell all the vehicles for cash. If the net sales proceeds are less
than the depreciated values, such deficiency is to be paid by the shipper to the
carrier. If the net sales proceeds are greater than the depreciated value, such
excess amount is to be paid to the shipper.
Thus, while certain of the provisions of the agreement between Petitioner
and Leaseway may suggest a characterization of the same as a contract for a
transportation service, other provisions, set forth above, suggest a contrary
conclusion, and it is the latter which are preponderant. Accordingly, the
receipts from the performance of such contract constitute receipts from the sale
(i.e., a rental or lease) of tangible personal property within the meaning and
intent of section 1105(a) of the Tax Law, and are therefore subject to the sales
and use taxes imposed under Article 28 of the Tax Law.

DATED: June 10, 1981

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau