BILL NUMBER: S3926

SPONSOR: KENNEDY
 
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, motor
vehicle leasing companies have the flexibility to pay sales taxes on its
purchases of fleet vehicles either up-front on the receipts of the sale
at the time it purchases motor vehicles for lease to New York businesses
or up-front on the lease consideration that the lessors receive from the
              

lease of these vehicles for the first 32 months of the lease term and
subsequently on each renewal option thereafter.

Section 2 of the bill establishes the effective date.

 
JUSTIFICATION:

Commercial motor vehicle lessors own and manage millions of vehicles
which are leased to corporations, small businesses, nonprofit organiza-
tions and government entities in all 50 states. These vehicles range
from passenger cars to cargo vans and trucks that are customized and
outfitted to fit business purposes, from electrical and plumbing repair
and telecommunications installation, to wholesale food and beverage
distribution and fuel delivery. These vehicles are on the road every day
and are part of the essential infrastructure of New York State's econo-
my.

Commercial motor vehicle leases, which are also known as "TRAC leases",
feature a minimum term of approximately one year and monthly renewals
thereafter until the customer returns the vehicle. The actual value of
the vehicle at the end of the lease term is then determined, usually by
sale at wholesale auction. Each lease agreement features a Terminal
Rental Adjustment Clause (TRAC) that provides for a payment adjustment
upon lease termination. If the actual value of the vehicle upon lease
termination is less than the value estimated in the lease agreement,
then the total lease computation may result in the customer having to
pay an additional lease payment. Conversely, if the value of the vehicle
upon lease termination is greater than the estimated value, then the
customer receives a refund of overpaid lease consideration throughout
the lease term.

Lessors of motor vehicles subject to TRAC leases struggle with how to
correctly collect, remit and report New York state and local sales taxes
on these unique transactions. Unlike consumer leases with individual
consumers, TRAC leases are not for a fixed term and the amount of rent
varies based on a variety of factors. Many TRAC lease payments contain a
variable interest rate component whereby the rent is allowed to change
as an underlying index interest rate fluctuates due to changing economic
conditions. The vehicle is sold at the end of the lease and, pursuant to
the TRAC clause in the lease agreement, additional rent is paid by or
rent previously paid is refunded to the lessee. Existing law is unclear
as to how these factors increase or decrease the taxable lease consider-
ation.

Providing commercial fleet lessors the option to pay tax on its
purchases of its motor vehicles for lease would simplify tax compliance
since tax could be paid instead on the purchase price paid by the lessor
to the seller as reflected on a bill of sale. This is the same manner by
which sales and use tax is computed on any other motor vehicle purchased
by an individual or business.  Allowing commercial fleet lessors to pay
sales and use tax on its purchases of motor vehicles for lease would
further accelerate tax revenues. If the up front tax election is made by
the lessor, tax would apply to the total vehicle purchase price paid by
the lessor rather than only the lease consideration paid by the lessee
for the use and possession of that vehicle. Moreover, tax paid on the
lessor's purchase would be paid immediately to the seller at the time of
sale (or, if the seller is not in New York State, to the Department of
Motor Vehicles at the time of titling and registration) rather than over
the lease term.

Under current law, sales tax is paid up-front on the lease consideration
received from the lease of these vehicles for the first 32 months of the
lease term and subsequently on each renewal option thereafter. If this
legislation is enacted, this same treatment will continue, except that
commercial fleet lessors will have the additional option of paying all
of the sales and use tax due on its purchase up-front. This will accel-
erate the tax paid to New York State and the tax will be paid on a high-
er tax base (subject to any reduction to the taxable sales price such as
rebates, incentives and trade-ins).

 
LEGISLATIVE HISTORY:

2019-2020: Referred To Rules

 
FISCAL IMPLICATIONS:

Enactment of this legislation would provide a new sales tax payment
option for fleet vehicle leasing companies that would accelerate
payments by paying upfront on the vehicle purchase price and it would
also enable NYS to receive additional revenues. The amount of additional
revenues would depend on how many companies opted in to this new option.
Based on recent fleet vehicle industry figures, the estimated range of
additional annual revenue would be $600,000 to $1.6 million paid to NYS.

 
EFFECTIVE DATE:
Immediately.