How did Rhode Island sales and use tax apply when Company A loaned inventory automobiles to prospective buyers for free test drives using dealer plates or dealer registration?

Plain-English summary

Company A's purchases of automobiles from Company C remained exempt sales for resale even when some inventory vehicles were loaned free to prospective buyers for demonstration. The tax result during the test-drive program then depended on how each car was plated or registered.

Test-drive cars bearing dealer plates did not subject Company A to Rhode Island sales or use tax. Cars registered in Company A's own name were taxable under Regulation SU 97-133, with the tax base measured as one-third of Company A's cost for each vehicle.

The prospective customer could use a car without charge for one week to six months and then buy it or return it. Returned vehicles would be sold or leased to another customer, and Company A employees could not use the test-drive cars.

What this means for you

Automobile dealers

Demonstration use did not destroy resale treatment when the dealer gave its supplier a resale certificate and kept the vehicles in the stated sales or leasing program.

Dealership accounting teams

Track dealer-plated and dealer-registered vehicles separately. The ruling imposed different tax treatment and a one-third-of-cost measure on cars registered to the dealer.

Promotional-program managers

Preserve evidence that the cars are loaned to prospective buyers, used for demonstration and display, unavailable to employees, and returned to sale or lease inventory if not purchased.

Common questions

Did free test-drive use invalidate the original resale exemption? No, provided Company A gave Company C a resale certificate.

Were dealer-plated test-drive cars taxable to Company A? No.

Were cars registered in Company A's name taxable? Yes. Tax was measured on one-third of Company A's cost.

Could Company A use fair rental value instead? No such alternative was granted in the final ruling; it applied the one-third-of-cost rule.

Could employees use the test-drive cars? The stated program excluded employee use.

Citations and references

• R.I. Gen. Laws § 31-3-20 — dealer-plate provision referenced in the facts.
• Rhode Island Regulation SU 97-133 — tax treatment of dealer plates and dealer-registered demonstration vehicles.

Source

• Landing page: Rhode Island Declaratory Rulings
• Declaratory order: Declaratory Order 1997-04

Original ruling text

Ruling Request No. 97-04

Declaratory Rulings

Ruling Request No. 97-04

Re: Request for Ruling Regarding Use of Automobiles for Demonstration and Display

Request for Ruling

On behalf of your client ("Company A"), the undersigned respectfully requests certain declaratory rulings regarding the Rhode Island sales and use tax consequences of the transactions described herein.

Facts

Company A has been organized as a wholly owned subsidiary of Company B. Company B is a wholly owned subsidiary of Company C which is engaged in the business of worldwide distribution of automobiles ("automobiles") manufactured by its affiliated company. Company C intends to use Company A as a vehicle for distribution of Automobiles throughout the northeast of the United States, including Rhode Island. Company A (or its wholly owned subsidiary which may be organized in Rhode Island) will purchase automobiles for resale from Company C and distribute them by sale or lease in Rhode Island. For these purposes, Company A will apply for licenses and all other required permits to operate as a new car dealership and/or an automobile leasing company in Rhode Island. Company A will also obtain a sales tax permit from the Rhode Island Tax Administrator.

As a promotional measure designed to demonstrate and display the Automobiles to the buying public in Rhode Island, Company A plans to lease or loan a selected number of Automobiles (the "Test Drive Cars") from inventory to prospective purchasers ("Test Drivers") free of charge for periods of time ranging from one week to six months (the "Test Drive Program"). The Test Drive Cars will either bear dealer plates (to the extent permitted by R.I. General Laws section 31-3-20) or will be registered in the name of Company A. In either case the Test Drive Cars will be loaned or leased to the Test Drivers at no charge for the duration of the Test Drive (the "Test Drive Period"). At the end of the Test Drive Period, each Test Driver will have the option of purchasing his Test Drive Car or returning the vehicle to Company A. All returned vehicles will be sold or leased to another customer. None of the Test Drive Cars will be made available for use by employees of Company A.

Ruling Requested

(1) Provided Company C receives a resale certificate from Company A, purchases of Automobiles by Company A from Company C will be exempt from Rhode Island sales and use tax as a sale for resale, notwithstanding use of some of such Automobiles by Company A in the Test Drive Program.

(2) The use by Company A of the Test Drive Cars bearing dealer plates in the Test Drive Program will not subject Company A to Rhode Island sales and use tax.

(3) The use by Company A of the Test Drive Cars, registered in the name of Company A, for the Test Drive Program will not subject Company A to Rhode Island sales and use taxes or, alternatively, if the payment of Rhode Island sales and use taxes is required for such use, Company A may elect to calculate such taxes on the basis of the fair rental value of the Test Drive Cars during the Test Drive Period.

Discussion

The promotional program utilizing the test drive cars constitutes demonstration and display of those vehicles. Therefore, the purchase of automobiles by Company A from Company C will be exempt as a sale for resale provided Company A issues resale certificates to Company C, notwithstanding the use of some of the purchased vehicles in the Test Drive program.

The response to requests numbers 2 and 3, i.e., the use of dealer plates on some test drive cars and the registering of others is governed by Regulation SU 97-133 entitled "Use of Motor Vehicles by Dealers."

Paragraph II of that regulation entitled "Use of Dealer Plates" permits the use of dealer plates on automobiles used for demonstration and display purposes. Paragraph III entitled "Dealer Registered Vehicles" reads as follows:

Franchised new car dealers holding a valid sales tax permit may register new vehicles in the name of the dealer upon payment of a tax based on one-third (1/3) of the cost of the vehicle to the dealer provided that said vehicle is acquired for resale by the dealer and the use of the vehicle is limited to demonstration and display as defined in paragraph II, above.

Pursuant to Paragraph III of SU 97-133, Company A would be required to pay a tax on any automobile registered in the name of Company A which is used in the Test Drive Program. However, under the regulation, the tax is measured on on-third of the cost of the automobiles purchased for resale and used for demonstration and display.

Ruling

(1) Provided Company C receives a resale certificate from Company A, purchases of Automobiles by Company A from Company C will be exempt from Rhode Island sales and use taxes as a sale for resale, notwithstanding use of some of such Automobiles by Company A in the Test Drive program.

(2) The use by Company A of the Test Drive Cars bearing dealer plates in the Test Drive Program will not subject Company A to Rhode Island sales and use taxes.

(3) Company A would be required to pay a tax to Rhode Island measured by one-third of the cost of any automobile registered in the name of Company A which is used in the Test Drive program.

This ruling may be relied upon by Company A and shall be valid until expressly revoked or until the applicable statutory provisions of law are amended in a manner that requires a different result of the underlying situation described above changes.

**R. Gary Clark

Tax Administrator**

August 18, 1997