Are a lease's cancellation fee and transportation charges taxable when the leased property was damaged en route and never entered New York?

Plain-English summary

Airway Services agreed to lease a mobile passenger lounge — a 55,000-pound, 49-by-16-foot non-highway vehicle that carries up to 90 airline passengers from a terminal to an aircraft — to an airline, to be delivered in New York City. But while the unit was being transported to New York it was damaged, was diverted for repair to a point outside New York, and never entered New York State. The airline then terminated the lease, which provided for a cancellation fee and transportation charges. Airway Services asked whether those charges were taxable.

The Department held no tax is due, because the property was never delivered in New York.

• Sales tax is a "destination tax." Under 20 NYCRR 525.2(a), the point of delivery — where the vendor transfers possession to the purchaser or its designee — controls both the tax incident and the rate.
• The lounge never entered New York or reached the lessee. Because the unit never came into New York and was never transferred to the airline, no tax incident arose.
• So the termination billings aren't taxable. Airway Services isn't required to collect sales tax from the airline on the cancellation fee or the transportation charges prescribed in the lease.

What this means for you

No delivery in New York, no New York tax — even on related charges. A lease is normally a taxable transaction, but the destination-tax rule means the taxable event is delivery/transfer of possession. If the property never enters New York and the lessee never takes possession, there's no New York tax incident for the lessor to collect.

Charges that ride on a lease follow the lease's taxability. Here the cancellation fee and transportation charges were part of a lease that never produced a taxable delivery, so they weren't taxable either. When the underlying transfer never happens in New York, associated fees generally aren't taxed as New York receipts.

Keep proof of where the property went. The outcome depends entirely on the fact that the unit never entered New York and never reached the lessee. Document the diversion and non-delivery so you can support treating the termination charges as non-taxable.

Common questions

Q: The lease was for delivery in New York City — why isn't it taxable?
A: Because the destination-tax rule looks to actual delivery/transfer of possession. The unit was damaged, diverted, and never entered New York or reached the lessee, so no tax incident arose.

Q: Is a cancellation fee taxable on its own?
A: Here it wasn't, because it arose from a lease that never resulted in a taxable New York delivery. The fee followed the (non-taxable) status of the underlying transaction.

Q: What if the unit had entered New York and then the lease was cancelled?
A: The analysis could differ, because delivery/transfer of possession in New York is the taxable event. This ruling turns on the property never entering the state.

Citations and references

Regulation:

• 20 NYCRR 525.2(a) — sales tax as a "destination tax"; point of delivery/transfer of possession controls

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1981.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a81_32s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-81(32)S
Sales Tax
October 9, 1981

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S810526A

On May 26, 1981, a Petition for Advisory Opinion was received from Airway Services,
P. 0. Box 157, JFK International Airport, Jamaica, New York 11430.
The issue raised is whether a cancellation fee and transportation charges relating to the lease
of tangible personal property are subject to tax.
Petitioner entered into an agreement with an airline company for the lease of a mobile
passenger lounge to be delivered within New York City. The mobile passenger lounge is a non­
highway vehicle powered by a V-8 engine, weighs 55,000 pounds and is 49 feet long by 16 feet
wide. It is used to transport up to 90 passengers from an airline terminal to an aircraft.
The unit was located outside New York State and, while being transported to New York, it
sustained damage which required that it be diverted enroute to another point outside New York
for repair. The unit never entered New York State. The lessee-airline company advised Petitioner
that it was terminating the lease. The lease agreement provided a cancellation fee and
transportation charges upon termination.
The Sales and Use Tax Regulations state, in relevant part that: "The sales tax is a
"destination tax," that is, the point of delivery or point at which possession is transferred by the
vendor to the purchaser or designee controls both the tax incident and the tax rate." 20 NYCRR
525.2(a).
Since the mobile passenger lounge never entered New York State and was never transferred
by Petitioner to the lessee-airline, no incident of tax arose. Accordingly, Petitioner is not required
to collect sales tax from the lessee on billings for the cancellation fee and transportation charges
prescribed in the lease agreement.

DATED: September 22, 1981

JAMES H. TULLY, JR., COMMISSIONER
TP-8 (4/80)

s/LOUIS ETLINGER
Deputy Director
Technical Services

LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR