BILL NUMBER: S3399

SPONSOR: GOUNARDES
 
TITLE OF BILL:

An act to amend the tax law, in relation to sales of rental vehicles

 
PURPOSE OR GENERAL IDEA OF BILL:

To subject purchases of vehicles for rental car company fleets to the
state sales tax.

 
SUMMARY OF PROVISIONS:

Section one of this bill clarifies that purchases of vehicles for rental
company fleets shall not be considered a sale for resale for purposes of
exemption from the 4% state sales tax created in Section 1105 of Tax
Law.

Section two of this bill sets the effective date.

 
              

JUSTIFICATION:

Currently, the retail sale of tangible personal property to any person
for any purpose is subject to the state's 4% sales tax in Section 1105
of Tax Law. There are two exemptions to the definition of "retail sale,"
contained in clauses (A) and (B) of subparagraph (i) of paragraph (4) of
subdivision (b) of Section 1101 of Tax Law: the first, in clause (A), is
a sale for resale, which typically applies when a retailer is buying
inventory to then immediately sell it to a customer, such as a shoe
vendor buying a pair of boots to immediately put on the shelf. The
second exception, in clause (B) of § 1101(b)(4)(i), is for a "business
input" wherein the property exempted from sales tax is being manufac-
tured into a physical component of the product sold at retail. One exam-
ple of this is a lumber supplier giving wood to a furniture manufactur-
er, or a wholesaler providing flour to a baker to make into a cake.
Because the lumber and flour are being immediately used as physical
inputs to create the piece of furniture or the cake, the retailer does
not have to pay sales tax on them, as the retail sale of the furniture
or cake to the end consumer is subject to sales tax instead.

Fleet purchases by car rental companies in New York also qualify for the
sale for resale exemption, due to an advisory opinion issued by the
Department of Taxation and Finance in 1991, and have thus been able to
escape many millions of dollars in sales tax liability for the past
three decades. Upon closer scrutiny, however, these fleet purchases do
not neatly qualify as true sales for resale. While a rental vehicle may
eventually be resold by a car rental company to another user at the end
of its useful life, that is only after the vehicle's value has signif-
icantly depreciated such that it is no longer profitable for the rental
company to maintain it. The rental company will have derived significant
economic value from the vehicle before this point, by renting it out to
customers over many years while retaining title to the vehicle. The shoe
vendor qualifying for a sale for resale exemption as outlined above, for
example, isn't renting its boots to different customers over several
years and then selling them once they've been worn down.

While car rental companies will argue that they should be exempt from
sales tax since they must charge and remit a special 12% passenger car
rental tax at the point of the rental (a 6% baseline special tax on
passenger car rentals in Tax Law § 1160 on top of a 6% special supple-
mental tax in Tax Law § 1166-A or § 1166-B), this excise tax is imposed
only on the rental customer and ignores the fact that the car rental
company itself is also a consumer of the car, in that it derives econom-
ic value from the act of the rental as part of its business. The Oregon
Supreme Court recently made this same argument in EAN Holdings v. Oregon
Department of Revenue (2020), when it found that Oregon's "use tax"
should apply to the purchases of rental fleets there because car rental
companies are consumers of the goods they purchase and are not purchas-
ing them for resale ("Taxpayer (e.g, Enterprise) does not seriously
contend that it is not a 'consumer' of the vehicles, a term that it
acknowledges means one who 'utilizes' or 'uses' something...The court
has concluded above that the legislature's intent in using the term 'at
retail' was to distinguish purchases 'for resale.' The court sees no
need to determine the 'ultimate' user or consumer of the vehi cles, as
among Taxpayer as licensor to customers, the rental customers as driv-
ers, the secondary purchasers once Taxpayer decides to replace them, or
the steel recycler at the end of their life. It is sufficient that
Taxpayer uses the vehicles and does not buy them for resale in the ordi-
nary course of its business.")

Moreover, at least five other states, Hawaii, North Dakota, Georgia,
Oregon, and Florida, apply both a sales tax on car rental companies at
the point of purchase and a rental excise tax at the point of the
rental. Courts have upheld sales tax in similarly situated industries in
other states, such as those in the business of renting farm recruitment
in Iowa or aircraft in Kentucky, using the same logic employed by the
Oregon Supreme Court in the EAN Holdings ruling.

This bill endeavors to close this loophole in our sales tax statute by
clarifying, once and for all, that purchases of vehicle fleets by car
rental companies cannot credibly be called sales for resale, as such
companies' ordinary course of business is the rental of the vehicles for
consumers, not the resale to a consumer or auto dealer at the end of the
vehicle's useful life. In better aligning our state tax policy with that
of other states across the nation, this bill will raise hundreds of
millions in state revenue while ensuring that the "sale for resale" tax
exemption is reserved only for firms truly engaged in the business of
reselling.

 
PRIOR LEGISLATIVE HISTORY:

None

 
FISCAL IMPLICATIONS:

TBD

 
EFFECTIVE DATE:
This act shall take effect on the thirtieth day after it shall have
become a law and shall apply to sales of rental vehicles occurring on or
after such date.