Ruling 94-13, Sales and Use Taxes / Leases of Tangible Personal Property / Motor Vehicles

FACTS:

A motor vehicle leasing company ("the Company") enters into long-term leases with its customers (the "lessees"). Under the terms of a typical lease, at the end of the lease period, upon surrender of the vehicle to the Company by the lessee, the Company sells the vehicle "in a commercially reasonable manner," generally to a dealer or broker. The difference between the proceeds realized from such sale and the book value of the vehicle is then examined. This difference is used to adjust the amount the lessee owes the Company. If the proceeds from the sale of the vehicle are below the book value, the lessee must pay the Company a "rental charge adjustment" in the amount of such deficiency. On the other hand, if the proceeds from the sale of the vehicle exceed the book value, the Company will pay the lessee the amount of such excess as a "rental charge adjustment," or will apply the excess to any amounts still owed by the lessee to the Company.

The Company charges Connecticut sales and use taxes on any "rental charge adjustments" it assesses the lessees for deficiencies between the proceeds from its sale of the vehicles and the book value of the vehicles.

ISSUE:

Whether the Company should refund sales and use taxes on amounts it refunds to its lessees for the excess of the proceeds of the sale of the vehicles over the book value of the vehicles.

DISCUSSION:

Conn. Gen. Stat. 12-407(2)(j) defines "sale and "selling" to mean and include "the leasing or rental of tangible personal property of any kind whatsoever, including but not limited to, motor vehicles ..." Conn. Gen. Stat. §12-407(8) and (9) define "sales price" and "gross receipts" subject to sales and use taxes to include "the total amount of payment or periodic payments received for leasing or rental of tangible personal property for the term of any such lease or rental ..." Conn. Agencies Regs. §12-426-25 provides, with respect to the leasing or rental of tangible personal property, that such "total amount" includes "all charges including but not limited to maintenance and service contracts, cancellation charges, installation service and transportation charges for delivery to the lessee, whether or not such amounts are separately stated...."

It is clear from the language of the statutes and regulation that the total taxable amount received for leasing of tangible personal property is intended to include charges other than just the regular periodic payments made by the lessee. In the case of the Company and its lessees, the total amount includes the "rental charge adjustments" to be assessed at the end of the rental term. If such charges, when assessed against the lessee, are subject to sales and use taxes as part of the total amount received, it follows that when a "rental charge adjustment" is made in favor of the lessee, and refunded to the lessee, the charge should be considered a reduction in the sales price and gross receipts from the leasing of the vehicle.

Since the leasing of tangible personal property does not involve the transfer of title to the property, there is ordinarily no single "taxable moment" to refer to in determining when the entire tax becomes due. Tax may become due many times during the term of a lease. Conn. Agencies Regs. §12-426-25(b) provides that "[the rental is deemed received when it is due and owing." This means that a payment that is due on a certain date is subject to sales tax on that date, whether the payment is actually made on that date or not.

In the instant matter, since a "rental charge adjustment" resulting in an additional payment due from the lessee can only be made after the sale of the vehicle by the Company, it becomes subject to tax at the time it is assessed under the terms of the lease. If the "rental charge adjustment" results in a refund to the lessee and the refund is paid to the lessee, this adjustment should be considered a reduction in the sales price and gross receipts for the rental of the vehicle, to be applied against the lease payments most recently received by the Company, to the extent of the amount of the refund. Thus, for example, if the periodic payments are $300, and at the end of the term the "rental charge adjustment" results in a refund to the lessee of $500, then the refund should be considered a reduction of the most recent periodic payment to $0 and a reduction of the next most recent periodic payment to $100. If sales and use taxes have been paid and remitted on these two periodic payments within the previous three years, the Company should refund the lessee the tax on $500, and should apply to the Department for a refund of such tax, pursuant to Conn. Gen. Stat. §12-425.

RULING:

The Company should refund sales and use taxes on amounts it refunds to its lessees for the excess of the proceeds of the sale of the vehicles over the book value of the vehicles, and should apply to the Department for a refund of the sales tax, if such tax was paid within three years of the refund request.

LEGAL DIVISION

JULY 5, 1994