97-073
Response December 8, 1997
Mr
Jeff McNemar,
We
would like to request an advisory opinion concerning the correct sales tax
procedure involving a new lease vehicle. We have just installed a new project
from COMPANY A. claims that trade equity used as capitalized reduction of a
lease vehicle should be taxed just as if the individual paid in cash. Please
provide us with written proof so we can change this setting with COMPANY A. Let me give a couple of
examples;
Customer
A:
Cap Cost 25,525.00
Trade Equity Cap
Reduction 4,500.00
Sales Tax on Cap
Reduction ?????????
Customer
B:
Cap Cost 25,525.00
Cash Cap Reduction 4,500.00
Sales Tax on Cap
Reduction ?????????
Customer
C:
Cap Cost 25,525.00
Trade Equity Cap Reduction
2,500.00
Cash Cap Reduction 2,000.00
Sales Tax on Cap
Reduction ????????
We
appreciate you assistance in helping us use the correct procedure of state sales tax and your quick
response. If you have any questions, please call me at #####.
Thank
you,
NAME
December
8, 1997
NAME
ADDRESS
CITY
STATE ZIP
Advisory
Opinion - Application of sales tax to trade-in equity on leased vehicles.
Dear
NAME,
Your request for sales tax guidance on
vehicle leases has been forwarded to our office . We offer the following advisory opinion in response to your
questions pertaining to the application of sales tax on various lease
transactions:
We begin with the following basic
principles: On lease transactions,
sales tax is due on the net cost or purchase price of the vehicle. A trade-in reduces the net purchase price
only to the extent of the customer’s equity in the trade-in vehicle. Although a cash down payment reduces the
amount to be financed, it does not reduce the net purchase price of the leased
vehicle or the tax base. With that
background, we examine some typical lease transactions:
1. The
first transaction involves a customer who owns a vehicle and uses that vehicle
as a trade-in to reduce the cost of a new vehicle lease. Depending upon the customer’s equity in the
trade-in, the transaction may take one of the following forms:
a. The
customer owns the trade-in outright.
The dealer allows $4,500 on the trade-in toward the lease of a $25,500
vehicle.
Cap cost of vehicle
being leased: $25,500
Trade-in equity value:
4,500
Net cap cost subject to
sales tax: 21,000
b. The
customer still owes $1,500 on the trade-in.
The dealer allows $4,500 on the trade-in toward the lease of a $25,500
vehicle.
Cap cost of vehicle
being leased: $25,500
Trade-in value: $ 4,500
Pay-off amount ( 1,500)
Net equity trade-in
value:
3,000 (
3,000)
Amount subject to sales
tax: 22,500
2. The second transaction involves a
customer who makes a $4,500 down payment to reduce the balance due on a lease
transaction. When the customer uses his
own cash as a down payment, it only reduces the amount left to be
financed. It does not reduce the purchase
price upon which sales tax is calculated.
The taxable transaction is as follows:
Cap cost of vehicle
being leased: $25,500
Down payment: $ 4,500
Balance due on lease: 21,000
Amount subject to sales
tax:
25,500
3. The third transaction involves a
customer who makes a down payment and also uses a trade-in to reduce the
purchase price of the new lease.
Depending upon how the customer uses the cash payment, the transaction
will take one of the following forms:
The
customer still owes $1,500 on the trade-in. The dealer allows $5,000 on the trade-in toward the lease of a
$25,500 vehicle. In addition, the
customer uses $2,000 in cash as a down payment. We assume that $1,500 of the cash down payment will be applied to
pay off (or increase equity in) the trade-in. Trade equity and cash down payment used to pay off the trade-
in reduces the tax base, but only to the extent of the trade-in value.
Cap cost of vehicle
being leased: $25,500
Net equity in Trade-in (after
payoff): ( 5,000)
Cash down payment (over
payoff amt.) $ 500 Balance due on lease: 20,000
Amount subject to sales
tax: 20,500
Lease transactions can be complex, and
we have only addressed the kinds of transactions that were described in your
letter. If you have other questions,
please contact us again.
For
the Commission,
Joe
B. Pacheco,
Commissioner
^^