BILL NUMBER: S3067A

SPONSOR: BRESLIN
 
TITLE OF BILL:

An act to amend the tax law, in relation to terminal rental adjustment
clauses in motor vehicle leases

 
PURPOSE OF THE BILL:

To clarify how sales taxes must be calculated and remitted under termi-
nal rental adjustment lease agreements.

 
SUMMARY OF SPECIFIC PROVISIONS:

Section 1 of the bill would clarify the Tax Law to state that under
vehicle leases containing a terminal rental adjustment clause, any
increase in the consideration given upon termination of the lease shall
be subject to tax and any decrease in the consideration upon termination
of the lease shall allow the lessor to exclude such amount from taxable
receipts provided that the lessor has repaid such tax to the lessee.
              

Section 2 of the bill establishes the effective date.

 
JUSTIFICATION:

Fleet vehicle management companies typically lease fleets of motor vehi-
cles to business clients under what are known as terminal rental adjust-
ment clause (TRAC) lease agreements. Under these lease agreements, busi-
ness customers lease vehicles with lease agreements containing no set
end dates. Instead, under these agreements the vehicles are leased for
an initial time period with an option to continue the lease on a month-
to-month basis thereafter. In 1992, the NYS Legislature enacted a
specific provision governing the sales tax treatment of TRAC leases. As
a result of this legislation, lessors of vehicles subject to TRAC leases
were required to collect and remit sales tax upfront at lease inception
based on the total payments of the first 32 months and subsequently on
each renewal option thereafter. However, the statute as currently writ-
ten fails to address the sales tax treatment of the TRAC adjustment
payment.

At the start of the lease, the leasing company determines the estimated
resale (residual) value for the vehicle that can be reasonably expected
when the lease is terminated and the vehicle is returned based on
factors such as mileage allowances and the vehicle's intended purpose.
This estimated resale value is used to help determine the lease payment
amounts due from the customer. When a customer then returns a vehicle
upon the termination of a lease, the condition of the vehicle is
assessed and the actual resale value of the vehicle is determined by the
amount actually received by the leasing company when it resells the
vehicle to a third party after the lease is terminated. A TRAC provision
in these lease agreements provides for an upward or downward adjustment
of the total final lease amount to reflect any difference between the
estimated resale value of the vehicle as originally projected at lease
commencement and the actual resale value of a vehicle that is determined
at lease termination.

For example, if the actual resale value of the vehicle upon lease termi-
nation is less than the originally estimated resale value, then the
total lease amount is increased and the lessee pays additional consider-
ation to the lessor. In this case, the customer must also make an addi-
tional sales tax payment to the state based on the additional consider-
ation paid to the leasing company. Conversely, if the actual resale
value of the vehicle upon lease termination is greater than the
originally estimated resale value, then the total lease amount is
decreased and the customer receives a refund of any overpayment from the
leasing company. In this case, the customer should logically exclude the
refunded amount from receipts subject to sales tax. However, when a
customer receives consideration back from the leasing company because
the vehicle is returned in better condition than initially projected,
customers have been unable to receive consideration back from the state
for the sales taxes that were collected and remitted on this overpay-
ment.

The New York State Department of Taxation and Finance has taken the
position that fleet vehicle management companies are not entitled to
exclude any TRAC adjustment payments to the lessee from receipts subject
to sales tax under state laws that broadly prohibit refunds of acceler-
ated sales tax on vehicle lease payments. However, commercial TRAC leas-
es are structured differently than other typical lease agreements in
that the actual amount of total sales taxes due on the vehicle lease
cannot be known until the end of the lease when the vehicle's resale
value is determined when the vehicle is sold to a third party. The TRAC
adjustment is then used to compute the total final lease payments and
associated sales taxes due. The purpose of this legislation is to ensure
that the actual sales taxes paid to the state are based on the actual
total final value of the lease, which is dependent on the final TRAC
adjustment.

 
LEGISLATIVE HISTORY:

None.

 
FISCAL IMPLICATIONS:

Unknown.

 
EFFECTIVE DATE:
Immediately.