How is a car dealer taxed on vehicles it loans to customers as courtesy cars, especially if it depreciates them as business assets?

Plain-English summary

Crestview Cadillac, Inc. loans courtesy cars to customers whose vehicles are being serviced (free while a car is under warranty), and asked how those vehicles are taxed. It specifically asked about seven new cars it had removed from inventory for company use before June 1, 1986, which it said were placed "in rental service."

The Department held those seven cars are taxed on their full cost — they qualified as neither rental cars nor mixed-use vehicles.

• The three dealer categories. Rental cars are used exclusively for rental at the market rate with rental plates; the dealer owes no tax on its own use, but collects tax on rental charges and on the eventual sale. Demonstrators used only to demonstrate to buyers are not taxable (though gas/oil/parts are). Mixed-use vehicles are held in inventory for sale but used occasionally by the dealer, and may be taxed on a 2%-per-month depreciation method for up to a year (within mileage limits) instead of full cost.
• Courtesy cars are mixed-use. Cars loaned free or below market are treated as mixed-use, and a nominal charge unrelated to true rental cost is not a taxable "rental" (§ 1101(b)(5); 20 NYCRR 526.6(c)(4)). Free loans to a High School Driver Education program create no tax.
• Why the seven cars don't fit. They are not rental cars — only vehicles used exclusively for market-rate rental with rental plates qualify, and these were also loaned free as courtesy cars. And they are not mixed-use vehicles — because Crestview depreciated them and treated them as business assets rather than inventory held for sale.
• Result: taxed on full cost. Because they were diverted from inventory and treated as business assets, they are subject to state and local sales tax based on the total cost of the vehicles as of the date each was removed from inventory (a use-tax-on-withdrawal principle, § 1110; 20 NYCRR 531.3(a)(2)).

What this means for you

How you carry the car on your books can decide the tax. A dealer vehicle kept in inventory for sale and only occasionally used can get the favorable 2% depreciation treatment. Once you depreciate it and treat it as a business asset, it's no longer inventory — and withdrawing it is taxed on the full cost of the car.

"Rental car" is a strict category. To get rental-car treatment, the vehicle must be used exclusively for market-rate rental with rental plates. Mixing in free courtesy-car loans knocks it out of the rental category and into mixed-use — or, if it's been booked as a depreciated asset, into full-cost tax.

A free or nominal courtesy loan isn't a taxable rental — but the car still isn't tax-free. Lending a car for free or a token charge isn't a "rental" you collect tax on, because you're the end user. The tax instead attaches to your use of the vehicle under the mixed-use (or full-cost) rules.

Common questions

Q: I loan customers free courtesy cars. Is that a taxable rental?
A: No. A free or nominal-charge loan isn't a taxable rental; you're treated as the end user. But the vehicle is subject to the dealer-use (mixed-use or full-cost) rules.

Q: I moved some cars out of inventory and started depreciating them. How are they taxed?
A: On their full cost as of the date they left inventory. Depreciating them as business assets means they're no longer inventory, so the mixed-use 2% method doesn't apply.

Q: Can a car be both a rental car and a courtesy car?
A: No. Rental-car treatment requires exclusive market-rate rental use. Loaning it free as a courtesy car makes it mixed-use instead.

Citations and references

Statutes, regulations, and guidance:

• Tax Law § 1105(a) — taxes retail sales of tangible personal property
• Tax Law § 1101(b)(5) — defines "sale," including rental
• Tax Law § 1110 — compensating use tax
• 20 NYCRR 531.3(a)(2) — use tax on property diverted from inventory to a taxable use
• 20 NYCRR 526.6(c)(4) — a nominal courtesy-car charge is not a taxable rental
• TSB-M-83(13)S, revised by TSB-M-87(2)S — taxability of motor vehicles used by dealers; the 2% depreciation method

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1987.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a87_16s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-87(16)S
Sales Tax
April 16, 1987

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S850917A

On September 17, 1985, a Petition for Advisory Opinion was received from Crestview
Cadillac, Inc., 717 W. Genesee Street, P.O. Box 311, Syracuse, New York 13204.
The issue raised is the taxability, under Article 28 and 29 of the Tax Law, of motor vehicles
loaned by automobile dealers as courtesy cars, with or without charge, to customers whose vehicles
are being serviced or repaired.
Petitioner has collected and remitted sales tax on all rental charges to customers. Petitioner
makes no charge for the loan of a dealer car when a vehicle still under warranty is being serviced.
Vehicles used for rental or loan are registered in the dealer's name and treated as depreciable
assets for accounting purposes. After removal from the rental pool, these automobiles are usually
sold for an amount in excess of dealer cost and tax is collected either on the sale price or on the
difference between the sale price and the trade allowed for the customer's vehicle.
Section 1105(a) of the Tax Law imposes a tax on the receipts from sales, except for resale,
of tangible personal property.
Section 1101(b)(5) defines sale as "[a]ny transfer of title or possession or both, exchange or
barter, rental, lease or license to use . . . for a consideration".
Section 1110 imposes a use tax "for the use within this state . . . of any tangible personal
property purchased at retail".
The Sales and Use Tax Regulations of the State Tax Commission explain further:
The compensating use tax is due upon the use of tangible personal
property which was purchased for resale or an exempt use and is
subsequently. . . diverted to a taxable use by the purchaser.
Example 2: A retail store purchased a dozen desks at $75 each for
sale to its customers at $125 each. It subsequently withdrew one of
the desks from inventory to be used in its office. A compensating
use tax is due for the desk withdrawn from inventory. The tax is
computed on the $75 the store paid.

RODERICK G. W. CHU, COMMISSIONER
GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR
TP-8 (3/83)

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Sales Tax
April 16, 1987

Example 3: A machine shop which produces machine tools for sale
withdraws from it production line a drill press for use in its building
maintenance shop. The drill press was originally purchased exempt
from tax for use in production. The use of the drill press in the
building maintenance shop is a use subject to the compensating use
tax, at cost or fair market value, whichever is lower.
20 NYCRR 531.3(a)(2).
Additional rules publicized by the Department of Taxation and Finance in two Technical
Services Bureau Memoranda on the taxability of motor vehicles used by dealers, (TSB-M-83(13)S,
May 24, 1983, revised by TSB-M-87(2)S, January 16, 1987), require differentiation between the
various uses of such vehicles.
1.

Rental Vehicles

These are vehicles used for short-term rental (six months or less) or long- term lease at the
current commercial rental rates. While a vehicle is employed in rental service the dealer incurs no
tax liability for its purchase or use nor for the cost of gas, oil, parts or supplies expended for its
operation.
For accounting purposes (i.e. depreciation, investment tax credit) the vehicle may be treated
as property used in a trade or business rather than inventory property.
The dealer must collect sales tax on rental charges as defined in Regulation Section 530.4
(b) and (c). When the vehicle is thereafter sold, tax is due on the total sale price or, if a vehicle is
taken in trade, on the sale price less trade allowance.
From customers claiming exemption from sales tax on rental charges, the dealer must obtain,
no later then 90 days after rendition of the service, a properly completed Exemption Certificate. Tax
Law 1132(c).
The vehicles described here must be registered as rental cars and operated solely for rental
or lease at the market rate. Concurrent use of a vehicle by company officers or employees or as
courtesy car will make it subject to the rules applicable to "mixed-use" vehicles set forth below.
2.

Demonstrators

This term refers to vehicles held for sale, which are used with dealer plates for demonstration
to prospective customers. The use of vehicles exclusively as demonstrators is not taxable. However,
tax is due on gas, oil, parts and supplies used for their operation.

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Sales Tax
April 16, 1987

3.

Mixed-Use Vehicles

These are vehicles intended for sale, but used occasionally for business or personal purposes
by the dealer or his officers or employees. Since such vehicles will usually be used in this manner
for only a short period of time and since no purchase, sale or trade, occurs at the beginning or end
of taxable use, the dealer may pay use tax based on depreciation rather than on dealer cost. The
taxable amounts must be reported under "purchases subject to use tax" on the sales tax returns which
cover the period of use.
The rate of depreciation is 2% per month or any part thereof, computed on the total invoiced
cost to the dealer including delivery ("total cost") for any vehicle purchased new and on the purchase
price or trade allowance plus the value of repairs for any vehicle purchased used or taken in trade.
Prior to June 1, 1986, this method of taxation was applicable only to vehicles kept in mixed
use for six months or less. Once a vehicle had been so used for more than six months, additional use
tax became due in an amount equal to total cost multiplied by the tax rate, less use tax paid on
depreciation. Technical Service Bureau Memorandum TSB-M-87(2)S, January 16, 1987, extends
the six month limitation applicable to the period June 1, 1983, through May 31, 1986, to twelve
months without imposing a mileage restriction.
As of June 1, 1986, the new departmental policy allows application of the 2% depreciation
method ("2% method") to a qualifying vehicle if:
(1)

The vehicle is kept in mixed use for six months or less (no mileage limitation
applies), or

(2)

the vehicle is retained in mixed use for more than six months, but not more than one
year, and the mileage does not exceed 9000 miles for the entire period of mixed use.

If mileage exceeds 9000 miles between six months and twelve months of use, or if the
vehicle is used by the dealer for more than twelve months, use tax is due based on the dealer's total
cost of the vehicle plus penalty and interest computed from the date that a return for the occasion of
first mixed use would have been due. Credit for tax paid under the 2% method will be allowed.
However, if a vehicle prior to being placed in mixed use has been used by the dealer for
exempt purposes (such as leasing) for more than six months, fair market value (not to exceed cost)
rather than total cost may be used as the basis for calculating use tax.
Any vehicle assigned to a family member not actively associated with the business as an
officer or employee who actually performs duties or services, does not qualify for the 2% method
of computing use tax. The "mixed use" vehicle must be held in inventory available for sale.

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These additional guidelines apply when a vehicle is taxed under the 2% method:
(1)

A dealer may not seek a trade-in allowance on a vehicle which is taxed under this
method.

(2)

A dealer may not depreciate the vehicle or take an investment tax credit while
computing use tax under the 2% method.

(3)

A "mixed use" vehicle, unless operated with dealer plates, must be registered in the
dealership's name.

(4)

A dealer must maintain records as described in Technical Services Bureau
Memorandum TSB-M-87(2)S.

If a dealer does not comply with any of these requirements, use tax is due on the dealer's total
cost of the vehicle, plus penalty and interest computed from the date that a return for the occasion
of first use would have been due, less credit for use tax paid under the 2% method.
The above guidelines no longer apply once use tax has been paid on the total cost or the fair
market value of a vehicle, with the exception that the dealer may not take a trade-in allowance on
replacement of a vehicle which has been used with dealer plates or registered in the dealer's name,
whether the dealership operates as a single or more than one business entity.
Vehicles loaned to customers without charge or at a rate below the market rental rate
(courtesy cars) are considered to be in mixed use even if rented occasionally at the commercial rate.
Receipts from the rental of such vehicles at the market rate are taxable.
However, no tax is due for the loan of a mixed-use car at a daily charge significantly lower
than the market rental rate since, for sales tax purposes, the dealer is considered the end user of the
vehicle rather than a vendor of property or services as defined in Tax Law 1101(b)(8)(i).
Consequently, when a nominal charge bearing no relation to true rental cost is made for the loan of
a courtesy car, the transaction is not deemed a "rental" within the meaning and intent of Section
1101(b)(5) of the Tax Law. 20 NYCRR 526.6(c)(4).
No tax liability arises from the loan of these vehicles to a High School Driver Education
Program.
Purchases of gas, oil, parts and supplies for operating mixed-use vehicles are taxable. Any
such items withdrawn from the dealer's inventory are subject to use tax.
Use tax due on the mixed-use vehicle is computed by multiplying total cost by the 2%
depreciation rate, the result by the number of months the vehicle was used (use in any part of a
month counts as a whole month) in a quarterly filing period, and the resulting taxable amount by the
State and applicable local tax rate.

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Effective January 16, 1987, the issuing date of TSB-M-87(2)S, the records listed in that
publication must be kept for every vehicle placed in mixed use. For the period from June 1 through
December 31, 1986, records not so maintained must be reconstructed from source documents.
Petitioner specifically inquires about the taxability of seven new automobiles removed from
inventory for company use before June 1, 1986. Petitioner states these vehicles were placed "in
rental service".
However, only motor vehicles purchased exclusively for rental purposes, operated with rental
plates and rented at the market rate qualify as rental cars and therefore for the resale exclusion under
the Tax Law. Since the vehicles in question were sometimes loaned as courtesy cars without charge,
they do not qualify as rental cars.
If the vehicles had been held in inventory exclusively for resale while being used occasionally
for business or personal purposes, they would be considered mixed-use vehicles. As such, dependent
on whether they were so used (without regard to mileage) for up to 12 months or more than 12
months, they would be subject to tax based on an amount calculated under the 2% method or on total
cost, respectively.
Nevertheless, the vehicles here at issue do not qualify as mixed-use vehicles because they
have been depreciated and otherwise treated as business assets rather than inventory property.
Accordingly, they are subject to State and local sales tax based on total cost of the vehicles as of the
date the vehicles was removed from inventory.

DATED: April 16, 1987

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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