Sales Tax State Activity Update - February 2004

Lease Of Loaner Car To Customer Taxable in New York

In a recent ruling, the New York Tax Appeals Tribunal ruled that an automobile dealer is not entitled to a sales tax exemption for leases of loaner cars to customers.

The Taxpayer, West-Herr Ford Inc, a car dealer, was audited by the Department of Revenue and was assessed sales tax of $160,438. The Taxpayer disputed the sales tax assessment on leases of rental vehicles from a car rental agency that were used as loaner cars for customers whose vehicles were being repaired. The Taxpayer argued that loaner cars leased from the rental agency were for resale and therefore, not subject to sales tax.

The DOR distinguished between two types of repair services: those performed under the basic warranty and those performed under the Extended Service Plan. It was the DOR's understanding that the Taxpayer was legally obligated to provide its customers with a service loaner under the terms of the Extended Service Plan. However they believed that the Taxpayer was not legally obligated to provide a loaner car under the terms of the basic warranty or any other agreement. As such, the charges incurred to provide loaner cars were operating expenses and not purchases for resale. The Taxpayer disagreed and appealed.

The Administrative Law Judge (ALJ) for the Division of Tax Appeals agreed with the DOR that the leases were not for resale because there was no general right to a loaner car included in the vehicle purchase price, and loaner car statements in a service replacement policy (policy) were insufficient to be considered part of the sale agreement. Taxpayer disagreed and appealed to the State Tax Appeals Tribunal.

The Tribunal agreed with the ALJ ruling that the purchase agreement of new cars with a basic warranty does not obligate the Taxpayer to provide a loaner car to all of its new car purchasers. Therefore, the Taxpayer was not entitled to a resale exemption for its lease of certain vehicles from the rental car agency.

The case is available at: http://www.nysdta.org/Decisions/818510.dec.htm (State Of New York Tax Appeals Tribunal { West – Herr Ford, Inc} DTA No. 818510, December 4, 2003) 01/04

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