Sales and Use Tax Trade-In Allowance and Other Procedures in Connection with Leases of Motor Vehicles
Alert:This publication has not been updated to accommodate the recent legislative changes.
Please visit our 2011 Legislative State Tax Update page for the most up-to-date tax information.
PURPOSE: This Policy Statement describes the Department's current policy permitting a trade-in allowance for a motor vehicle owned by a lessee to reduce the total gross receipts subject to sales and use taxes for the lease of a motor vehicle, under Conn. Gen. Stat. §12-430(4).
The trade-in policy was publicized in both Connecticut Tax Topics, Vol. 2, No. 4 (December, 1994), which was mailed to all persons registered as retailers with the Department, and DRS Tax News, Vol. 6, No. 3, (December, 1994). The Policy Statement also explains other applications of the sales and use tax statutes and regulations to the leasing of motor vehicles.
EFFECTIVE DATE: Because this Policy Statement describes current policies of the Department, it is applicable to all open tax periods.
All motor vehicle dealers and lessors that are not currently in compliance with the Department's policy described herein regarding the trade-in allowance for motor vehicles in connection with leases must be in full compliance with the policy by no later than February 1, 1997.
Continuing compliance with all other policies discussed herein is required for all tax periods.
STATUTORY AND REGULATORY AUTHORITY: Conn. Gen. Stat. §§12-407(2)(j), 12-407(8) and (9), 12-410(4)(a), 12-412(49), and 12-430(4) and (5); Conn. Agencies Regs. §12-426-25.
MOTOR VEHICLE TRADE-IN ALLOWANCE ON LEASED MOTOR VEHICLES: Where a customer owns a motor vehicle that is traded in upon the leasing of another motor vehicle, the sales tax applies only on the difference between the total taxable lease price of the leased vehicle and the amount allowed on the owned vehicle being traded in. (This is the same rule, set forth in Conn. Gen. Stat. § 12-430(4), that applies when a customer trades in a motor vehicle upon the purchase of another motor vehicle.) For purposes of this Policy Statement and all statutes cited herein, the term "motor vehicle" has the meaning ascribed to it in Conn. Gen. Stat. §14-1(a)(47).
The owner of the motor vehicle being traded in, as indicated on the motor vehicle certificate of title, must be the same as the lessee of the motor vehicle with respect to which the trade-in allowance is given, as evidenced by the lease agreement. The lease agreement must clearly show that a motor vehicle owned by the lessee is being traded in connection with the leasing of a motor vehicle, and that a specific amount, designated as "trade-in allowance," is being used to offset the total amount of payments due on the lease. The vehicle identification number of the motor vehicle being traded in, and other appropriate information identifying the vehicle, must be included on the lease agreement in order for the trade-in allowance to be subtracted from the taxable sales price for the lease. A trade-in allowance is NOT permitted when a LEASED motor vehicle is surrendered upon the leasing of another motor vehicle.
The lessor of a motor vehicle need not be a motor vehicle dealer licensed under Chapter 246 of the Connecticut General Statutes in order for the amount of the trade-in allowance to be excluded from the total taxable lease price.
TAXABLE CHARGES IN CONNECTION WITH MOTOR VEHICLE LEASES: Most charges made by a motor vehicle lessor in connection with the leasing of a motor vehicle are subject to sales and use taxes. As indicated by Conn. Agencies Regs. §12-426-25(c), such charges include the total amount of down payments or periodic payments (including finance charges), as well as charges for maintenance and service contracts, lease acquisition fees, cancellation charges, installation service and transportation charges and origination fees.
Charges made by a lessor to a lessee for reimbursement of the lessor's title and registration costs are taxable, because it is the lessor as owner of the vehicle, and not the lessee, that is legally responsible for titling and registering the vehicle. Although a motor vehicle owner's actual payment of title and registration fees to the Department of Motor Vehicles is not subject to sales and use taxes, when a lessor chooses to pass on the cost of these fees to a lessee, they become part of the lease price for purposes of sales and use taxes, whether or not the lessor separately itemizes these fees.
Security deposits are not taxable at the inception of a motor vehicle lease; however, any portions of security deposits that are not refunded are taxable at the time they are forfeited by the lessee. Also taxable are all charges made by the lessor at the termination of the lease, such as for excess mileage or damage to the vehicle.
NONTAXABLE CHARGES IN CONNECTION WITH MOTOR VEHICLE LEASES: Payments made by the lessee to the lessor to pay the lessor's property tax on a leased motor vehicle are exempt from sales and use taxes under Conn. Gen. Stat. §12-412(49), if such payments are (i) required by the lease, and (ii) either separately stated in the lease or separately stated in the lessor's bills to the lessee.
Insurance charges are nontaxable if such amounts are (i) separately stated and (ii) the lessee has the option to either accept the lessor's insurance or procure other coverage.
Separately stated federal luxury tax, where the lessor is authorized to collect and remit such tax to the proper governmental agency, is nontaxable, under Conn. Gen. Stat. §12-407(8) and (9).
Also nontaxable is any portion of the trade-in allowance that is added back by the lessor because the lessor has paid off existing debt on the vehicle being traded in. For example, a lessor may accept a trade-in of a motor vehicle owned by the lessee, on which the lessee still owes money. The lessor deducts the full amount of the trade-in allowance from the lease price, but agrees to pay off the existing debt on the owned vehicle (or sometimes gives the amount to the lessee in cash), and adds that amount back into its total charges to the lessee. The amount so added back is not subject to sales and use taxes, since it is a portion of the nontaxable trade-in allowance.
CALCULATING THE TRADE-IN ALLOWANCE AND TAXABLE AND NONTAXABLE LEASE CHARGES: The following example contains typical charges and adjustments made by lessors, and illustrates generally the calculations necessary to determine the correct amount of sales and use taxes on motor vehicle leases involving trade-ins, and the amounts not subject to tax:
LEASE PRICE 10,000.00
plus additional taxable charges
when paid at lease inception, if not
already included in lease price:
70.00 license & registration
100.00 delivery charge
300.00 maintenance contract
+28.20 (6% sales and use tax)
plus additional nontaxable charges when paid at lease inception:
150.00 security deposit
600.00 1st year property tax (if separately stated)
TRADE-IN ALLOWANCE $4,000.00
Unpaid balance on trade-in vehicle
added back by lessor -2,500.00 = 1,500.00
NET LEASE PRICE REDUCTION -1,500.00
NET LEASE PRICE AFTER REDUCTION 8,500.00
MONTHLY LEASE PAYMENTS
(including added finance 250.00
charges on monthly payments) x 36 mos = 9,000.00
(unpaid balance on trade-in vehicle
added back by lessor) -2,500.00
TAXABLE LEASE PAYMENTS 6,500.00
TAXABLE PERCENTAGE OF EACH LEASE PAYMENT
6,500.00 taxable payments =.7222 (72.22%)
9,000.00 total payments
MONTHLY TAXABLE PORTION 180.55
CT SALES AND USE TAX x .06
SALES AND USE TAX ON MONTHLY PAYMENT OF $250 10.83
NONTAXABLE PERCENTAGE OF EACH LEASE PAYMENT 250.00
(100% - 72.22% = 27.78%) x.2778
MONTHLY NONTAXABLE PORTION $69.45
REPORTING THE TRADE-IN ALLOWANCE AND OTHER NONTAXABLE AMOUNTS ON THE SALES AND USE TAX RETURN: Motor vehicle dealers and other lessors of motor vehicles should use the following procedure for reporting the taxable and nontaxable portions of motor vehicle leases involving the trade in of a motor vehicle owned by the lessee on the Sales and Use Tax Return, Form OS-114.
All gross receipts (taxable and nontaxable) from motor vehicle leases should be shown on Line 2, "Gross Receipts from Leases and Rentals." The total of all nontaxable portions of monthly lease payments, calculated according to the Example, above, should be entered on Line 50, "Trade-ins - Motor Vehicles, vessels, snowmobiles or farm tractors." The total of all nontaxable one-time charges collected at the inception of the lease should be entered on Line B, "Other Adjustments - leases and rentals," on the reverse side of the return, including nontaxable charges such as property tax. The total of all adjustments to taxable gross receipts should be entered on Line 8 of the return.
RESPONSIBILITY FOR CHARGING AND COLLECTING SALES AND USE TAXES ON MOTOR VEHICLE LEASES: Frequently, after a motor vehicle lease is entered between a customer and motor vehicle dealer, the dealer transfers ownership of the leased motor vehicle and assigns the lease to a leasing company. Some initial payments are usually made to the dealer, reducing the total lease charges, the balance of which is then paid in monthly installments to the leasing company.
It is the responsibility of the motor vehicle dealer to collect and remit sales and use taxes on all taxable amounts charged by it. (These amounts typically include delivery charges, title and registration fees, etc., and sometimes a down payment on the lease price.) After the lease is assigned and title to the motor vehicle is transferred to the leasing company, it is the leasing company's responsibility to collect and remit sales and use taxes on all taxable amounts charged by it, including any termination charges and any portion of the security deposit retained. The motor vehicle dealer should calculate in advance the taxable amount of each lease payment that will be made to the leasing company (see Example, above) and convey this information to the leasing company.
TAX ON MOTOR VEHICLES LEASED IN OTHER JURISDICTIONS AND BROUGHT INTO CONNECTICUT: A motor vehicle originally leased in another jurisdiction and subsequently brought by the lessee into Connecticut for use in this state (such as when the lessee moves from another state into Connecticut) is subject to Connecticut tax only on the periodic payments and any other payments (such as termination charges and amounts retained from security deposits) received after the lessee begins to use the vehicle in Connecticut.
If the sales and use tax laws of the jurisdiction where the lease originated required or provided the option that tax be paid in advance by the lessee on the entire sum of the lease payments, the lessee may credit the rate of tax actually paid to the other jurisdiction against the rate of tax due on the periodic payments made to Connecticut, to the extent of 6%.
EXAMPLE: Lessee originates a lease in State A, which requires that 4% sales and use taxes be paid by the lessee at the inception of the lease on the entire amount of the lease payments except the security deposit. Lessee moves into Connecticut after one year. The first periodic payment received by Lessor after Lessee moves into Connecticut will be subject to Connecticut tax at the rate of 6%, minus 4%, or 2% of the Connecticut taxable amount of the periodic payment. At the end of the lease, Lessee forfeits $500 of the security deposit and is assessed $1200 in charges for excess mileage and damage to the motor vehicle. Lessee owes 6% Connecticut use tax on $1700, since that amount was not taxed in advance by the other jurisdiction.
LOANER VEHICLES PROVIDED BY DEALERS IN CONNECTION WITH REPAIRS AND WARRANTIES: A motor vehicle dealer will sometimes provide a "loaner" motor vehicle to a customer when the dealer performs repair or maintenance work on the customer's vehicle. If the dealer receives payment for the use of the vehicle from a third party (such as a manufacturer or a leasing company), or from the customer (such as when the dealer charges the customer a nominal fee for use of the vehicle), the dealer is renting the motor vehicle to the party making the payment.
A dealer will not be liable for use tax on a motor vehicle that it is holding for sale or lease in the regular course of business solely by virtue of using the vehicle as a loaner, provided the dealer receives payment for the use of the loaner vehicle from the customer or a third party. However, if the dealer uses a motor vehicle it is holding for sale or lease in the regular course of business as a loaner and does not receive payment for the vehicle, the dealer will be liable for use tax on the price the dealer paid for the vehicle.
Because the payment received by the dealer for a loaner vehicle from the third party or from the customer is a rental payment, the dealer must charge sales tax on the payment to the person making the payment. However, if the loaner vehicle is being made available without additional charge to the customer pursuant to an explicit provision of a written repair, maintenance or warranty contract to which the customer was a party, and sales and use taxes have already been paid on the contract, the dealer need not charge sales tax on the amount received from the third party for the use of the loaner vehicle. This applies to original manufacturer's warranties that explicitly provide that a loaner will be made available without cost to the customer, and to extended repair, maintenance or warranty contracts or dealer's repair, maintenance or warranty contracts with the same type of provision. (In such cases, the payment for the warranty contract constitutes payment in advance for the loaner vehicle; therefore, a dealer will not be liable for use tax on a motor vehicle that it is holding for sale or lease in the regular course of business when the vehicle is made available without additional charge to the customer pursuant to a warranty contract on which tax has already been paid.)
EFFECT ON OTHER DOCUMENTS: The information on Loaner Vehicles Provided by Dealers in Connection with Repairs and Warranties in this publication amplifies the information in PS 94(2). PS 94(2) is amplified by this policy statement.
EFFECT OF THIS DOCUMENT: A Policy Statement (PS) is a document that explains in depth a current Department position, policy or practice affecting the tax liability of taxpayers.
Sales and use taxes