Does a sale-and-leaseback of leased vehicles trigger sales tax, or is it exempt as a purchase for resale?

Plain-English summary

Key Capital Corporation leases automobiles to customers. It owned cars already on the road under true leases to its customers, and proposed a sale-and-leaseback: sell each car to a buyer ("L"), subject to the existing customer lease, and simultaneously lease it back so Key Capital keeps subleasing the car to its customer. Key Capital would never itself become the end user of the cars. It asked whether this triggers any sales tax.

The Department held there is no sales tax on either leg — both are sales for resale.

• Both legs are "sales." A "sale" includes any transfer of title, possession, rental or lease for consideration (§ 1101(b)(5)). So Key Capital's transfer of title to L, and L's leaseback to Key Capital, are each a sale.
• But each is made solely for resale. Key Capital holds the cars only to continue leasing them to its customers, never as an end user, so the sale to L and the leaseback are made "for the sole purpose of resale as such." That is not a taxable "retail sale."
• Result. The receipts from both the sale and the leaseback are not subject to the § 1105(a) tax, nor to local taxes under Article 29. A Resale Certificate should be furnished for each transfer.
• Ongoing customer rentals stay taxable. Key Capital continues to collect and remit New York sales tax on the lease rentals its customers pay.

What this means for you

A financing sale-leaseback of leased property can be tax-free when the property never leaves the leasing stream. Because the operator resells (subleases) the property the whole time and never uses it as an end user, both the sale and the leaseback qualify for the resale exclusion.

Document it with resale certificates. The exemption depends on the transfers being for resale — give (and get) a Resale Certificate on each leg so the paper trail matches the tax position.

The end-user question is what matters. Contrast TSB-A-84(15)S, where a vehicle buyer kept personal use and so wasn't buying exclusively for resale — making that purchase taxable. Here, no one in the chain uses the cars personally, so the resale exclusion holds throughout.

Common questions

Q: I sell my leased fleet to a lender and lease it back to keep operating the leases. Is that taxable?
A: On these facts, no. Because you continue to lease the vehicles to your customers and never become the end user, both the sale and the leaseback are treated as made for resale and are not taxed. Use resale certificates.

Q: What paperwork supports the exemption?
A: A Resale Certificate (Form ST-120) furnished for the sale and for the leaseback, documenting that each transfer is for resale.

Q: Do my customers still pay sales tax on their lease payments?
A: Yes. The sale-leaseback doesn't change that — you keep collecting and remitting sales tax on the customer lease rentals.

Citations and references

Statutes:

• Tax Law § 1105(a) — tax on retail sales of tangible personal property
• Tax Law § 1101(b)(5) — definition of "sale" (transfer of title, possession, rental or lease)
• Tax Law § 1101(b)(4) — definition of "retail sale" and the resale exclusion
• Tax Law Article 29 — locally imposed sales taxes

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1984.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a84_14s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-84(14)S
Sales Tax
May 17, 1984

This advisory opinion supersedes
TSB-A-84(14)S dated April 10, 1984
which should be destroyed.
STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S840315B

On March 15, 1984 a Petition for Advisory Opinion was filed by Key Capital Corporation,
57 River Street, Wellesley Hills, Massachusetts 02181.
The issue presented is whether any sales tax liability would arise from a proposed sale and
lease-back transaction.
The factual basis for the present Advisory Opinion, as submitted by Petitioner, is as follows:
"Petitioner Key Capital is a corporation which is engaged in the business of leasing
automobiles to customers. Each of the automobiles which are the subject of the proposed sale­
leaseback transaction described below is now owned by Key Capital and is now leased pursuant to
a true lease transaction by Key Capital as lessor and such customer as lessee.
Key Capital purchased each automobile for the purpose of leasing such automobile to a
customer, and at the time of purchase Key Capital supplied a Resale Certificate (Form ST-120) to
the seller. When each customer pays lease rentals to Key Capital pursuant to the applicable lease
agreement, Key Capital collects New York State sales tax imposed on the lease payments and remits
such tax to New York State.
Subsequent to the initial acquisition of the automobiles, Key Capital determined to enter into
a sale-leaseback of the automobiles with L in a true lease transaction. Under the proposed sale­
leaseback,
(1)

Key Capital will sell each automobile to L, subject to an existing lease between Key
Capital as lessor and a customer as lessee, as described above, and

(2)

simultaneously L will lease back such automobile to Key Capital. Pursuant to the
documents evidencing the leaseback, Key Capital will be both a lessee of L,
obligated to pay rent to L, and a sublessor of the customer, entitled to the rents
payable by such customer.

Key Capital intends to use the automobiles acquired pursuant to the leaseback solely in its
leasing business, pursuant to which at all times it will hold the automobiles subject to the pre­
existing leasing to customers, and in the event such customer lease expires or otherwise terminates
prior to the term of the leaseback for any reason it will either re-lease such automobiles or terminate
RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-84(14)S
Sales Tax
May 17, 1984
the leaseback in respect of such automobile; in no event does it intend itself to be an end user of the
automobiles. The foregoing proposed sale-leaseback transaction with L will not affect the rights or
obligations of the customers under the pre-existing leases, and the customers will not be parties to
such transaction. In all circumstances, Key Capital's obligation to pay rent to L will be a full recourse
obligation and will not be subject to Key Capital's receiving rent payable by the customers. Key
Capital may or may not have termination options pursuant to which, if the applicable customer
defaults under its lease arrangement, Key Capital would be entitled to terminate the portion of the
lease between it and L related to the affected automobiles, upon payment by it as liquidated damages
of additional rent in accordance with certain formulary clauses contained in the lease.
The proposed sale by Key Capital to L of the automobiles, in which Key Capital will transfer
title to each automobile to L, will constitute a sale for purposes of local law and of Federal income
tax law. The proposed lease by L to Key Capital of the automobiles, in which L will transfer the right
to possession of each automobile to Key Capital (subject to the pre-existing leases with the
customers), will constitute a lease for purposes of local law and of Federal income tax law.
L will furnish a Resale Certificate to Key Capital in respect of the proposed sale. In addition,
Key Capital will furnish a Resale Certificate to L in respect of the proposed leaseback.
After consummation of the proposed sale-leaseback between Key Capital and L, Key Capital,
as sublessor, will continue to collect and remit New York State sales tax imposed on the lease rentals
paid by the customers to Key Capital."
Section 1105(a) of the Tax Law imposes a tax on the receipts from retail sales of tangible
personal property in New York. The term "sale" is defined as "any transfer of title, or possession
or both . . ., rental, lease . . . for a consideration . . . ." Tax Law, § 1101(b)(5) The term "retail
sale" is defined, in relevant part, as "a sale of tangible personal property to any person for any
purpose, other than (A) for resale as such . . . . "
The transfer by Key Capital of title to the automobiles to L, and the leasing of such vehicles
back to Key Capital, both constitute sales within the meaning of Section 1101(b)(5) of the Tax Law.
Such sales will be made for the sole purpose of resale as such. Thus, the receipts from such sales are
not subject to the tax imposed under section 1105(a) of the Tax Law, nor to any locally imposed
sales taxes imposed pursuant to the authority of Article 29 of the Tax Law. A Resale Certificate
should be provided in each instance, as set forth above.

DATED: March 22, 1984

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.