If a car-lease company refunds a lessee an end-of-lease adjustment because the returned vehicle sold for more than its book value, does that reduce taxable receipts and require refunding the sales tax?

Plain-English summary

A motor-vehicle leasing company wrote long-term leases under which, at the end of the lease, the customer returned the vehicle, the company sold it "in a commercially reasonable manner," and the parties settled up with a "rental charge adjustment" based on the sale:

• If the vehicle sold for less than its book value, the lessee pays the shortfall to the company.
• If it sold for more than book value, the company pays (or credits) the excess to the lessee.

The company had been charging sales tax on the deficiency adjustments (the ones the lessee owed). Its question: when the adjustment runs the other way and it refunds money to the lessee, should it also refund the sales tax on that amount?

DRS said yes. Leasing tangible personal property — including motor vehicles — is a taxable "sale" under § 12-407(2)(j), and the taxable "sales price"/"gross receipts" is the total amount received for the lease, including charges beyond the regular periodic payments (§ 12-407(8), (9); Conn. Agencies Regs. § 12-426-25). DRS reasoned by symmetry: if a rental charge adjustment assessed against the lessee is taxable as part of that total, then an adjustment made in favor of the lessee and refunded to them must be a reduction in the sales price and gross receipts.

Because a lease has no single "taxable moment" (title never transfers, and Conn. Agencies Regs. § 12-426-25(b) deems rent received "when it is due and owing," so tax can arise many times over a lease), DRS applied the refund against the most recently received lease payments. Its example: on $300 monthly payments, a $500 refund zeroes out the most recent payment and reduces the one before it to $100. If sales tax on those payments was paid within the last three years, the company should refund the lessee the tax on $500 and apply to DRS for a refund of that tax under § 12-425.

What this means for you

Motor-vehicle and equipment leasing companies

If your end-of-lease reconciliation can swing in the customer's favor, remember the tax is symmetric. A refund to the lessee reduces your taxable lease receipts. You should refund the customer the sales tax tied to that amount and then seek that tax back from DRS — but only for tax paid within the three-year window, and by applying under § 12-425 (it isn't automatic).

Lessees who lease vehicles or equipment

If you get money back at lease-end because the leased item sold for more than expected, the sales tax you paid on the corresponding lease charges may be refundable to you through the lessor. Ask whether your refund included the tax portion.

Accountants and tax professionals

Two mechanics matter: (1) apply the refund to the most recent payments first, because a lease has no single taxable moment and rent is taxed as it becomes "due and owing"; and (2) the lessor must file for the refund under § 12-425 within three years of the tax payment. Miss the window and the tax isn't recoverable even though the receipts were reduced.

Common questions

Q: A car-lease company refunded me money at lease-end — should I get sales tax back too?
A: Under this ruling, yes. A refund to the lessee is treated as a reduction in the taxable lease receipts, so the lessor should refund the sales tax attributable to the refunded amount and recover it from DRS.

Q: Why apply the refund to the most recent payments?
A: Because leasing has no single "taxable moment" — tax can arise repeatedly as rent becomes due and owing (Conn. Agencies Regs. § 12-426-25(b)). DRS applies the refund against the most recently received payments, reducing them (its example: a $500 refund zeroes the last $300 payment and cuts the prior one to $100).

Q: Is there a deadline to recover the tax?
A: Yes. The lessor must apply to DRS under Conn. Gen. Stat. § 12-425, and only tax paid within the previous three years is recoverable.

Q: Does the same idea apply to deficiency adjustments the lessee pays?
A: Yes, in reverse. DRS treats an adjustment the lessee owes as taxable when assessed under the lease. The refund treatment here is just the mirror image of that.

Citations and references

Statutes and regulations:

• Conn. Gen. Stat. § 12-407(2)(j) (leasing/rental of tangible personal property, incl. motor vehicles, is a taxable "sale")
• Conn. Gen. Stat. § 12-407(8), (9) ("sales price" / "gross receipts" = total payments for the lease term)
• Conn. Agencies Regs. § 12-426-25 (lease charges included in the taxable amount); § 12-426-25(b) (rent deemed received when due and owing)
• Conn. Gen. Stat. § 12-425 (refund procedure and three-year limit)

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 94-13

Original ruling text

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