Does a car importer owe sales or use tax on vehicles used in a free, six-month test-drive program before they're sold?

Plain-English summary

XYZ, Inc. is a foreign motor vehicle importer and distributor planning to sell cars in New York through its own dealerships. To launch the brand, XYZ wants to import vehicles and lend them to selected "evaluators" for up to six months, free of charge and with no obligation to buy, while keeping title, registering the cars under its own dealer plates, and keeping every car available for sale the whole time. XYZ's own employees may also drive the test-drive cars. XYZ asked the Department how sales and use tax applies to this arrangement.

Because XYZ holds the vehicles for resale, it can import and register them without paying sales or use tax up front, using Form MV-50 as a New York State registered dealer. The tax question arises once the cars are actually used rather than simply held in inventory. New York's rules for dealer vehicles (TSB-M-87(2)S) draw a sharp line: a car used purely as a demonstrator (held in inventory, driven only to show it to prospective buyers) isn't taxed at all, but a car used by an evaluator or an employee for their own purposes -- even temporarily and even without a rental charge -- becomes a "mixed-use vehicle." XYZ's test-drive cars fall squarely into that mixed-use category, since evaluators (and XYZ's own staff) get to drive them personally, not merely see a demonstration.

Because these test-drive vehicles will typically be used this way for only a short stretch before being sold, and because no actual purchase or trade happens at the start or end of that use, the Department lets XYZ pay compensating use tax based on a 2%-per-month depreciation formula on the vehicle's cost, rather than on the vehicle's full purchase price or its fair rental value. XYZ must track detailed usage records for each vehicle (stock number, who used it, dates, mileage, disposition, plate/registration status, and whether depreciation, an investment tax credit, or a trade-in allowance was ever claimed on it) and report the tax with its regular sales and use tax return (ST-100 or ST-809) for the period covering the use.

What this means for you

Vehicle importers, dealers, and manufacturers running demonstration or evaluation programs

Loaning inventory vehicles to outside evaluators (not just showing them) crosses the line from a tax-free "demonstrator" into a taxable "mixed-use vehicle" -- even if there's no charge and no purchase obligation. Plan for use tax on that portion of your test-drive fleet.

Dealers computing use tax on mixed-use or loaner vehicles

The tax is based on a 2%-per-month depreciation formula applied to the vehicle's total cost (not on what a rental of a similar car would cost, and not on the sale price) -- provided you meet the mileage/duration limits and keep the required usage records; miss those, and the Department can instead assess tax on the vehicle's full cost.

Accountants and tax professionals

This ruling is a clean application of TSB-M-87(2)S's demonstrator/mixed-use/rental-vehicle framework to a bulk pre-launch test-drive program -- useful precedent for any client running an evaluator, loaner, or pilot-fleet program rather than ordinary dealer demonstration.

Common questions

Q: Does a dealer owe tax just for holding vehicles in inventory for test drives?
A: No -- vehicles held exclusively for resale and used only to demonstrate to prospective buyers (not driven by outside evaluators) aren't taxed. Tax attaches once a vehicle is actually used by an evaluator or employee for their own purposes.

Q: How is use tax calculated on a mixed-use vehicle?
A: At 2% of the dealer's total cost (invoice cost plus delivery for new vehicles; purchase price/trade allowance plus repairs for used ones) per month or part of a month of mixed use, taxed at the combined state and local sales tax rate -- not on the vehicle's fair rental value or full sale price.

Q: What records does a dealer need to keep for a mixed-use vehicle?
A: Stock number, the user's name and title, assignment and return dates, mileage at each end, the vehicle's eventual disposition, registration/plate status, and whether depreciation, an investment tax credit, or a trade-in allowance was claimed -- missing records can force tax on the vehicle's full cost instead of the 2% method.

Q: Does this ruling apply to my dealership's demonstration or loaner program?
A: Not automatically. An Advisory Opinion binds the Department only for the taxpayer and facts it was issued to, and it can't be relied on by anyone else. Your program's structure would need its own analysis.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1997.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a97_75s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-97(75)S
Sales Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.S970806H

On August 6, 1997, the Department of Taxation and Finance received a
Petition for Advisory Opinion from KPMG Peat Marwick, LLP, 345 Park Avenue, 36th
floor, New York, NY 10154.
The issues raised by Petitioner, KPMG Peat Marwick, LLP, are:
(1) Whether Petitioner’s client, XYZ, Inc., will be liable for sales or use
tax on motor vehicles it imports and plans to offer for sale to prospective
customers through a six-month free demonstration/test drive program.
(2) If XYZ, Inc. is liable for sales or use tax, what methodology and
procedures must be followed to compute the sales or use tax due and register the
vehicles in New York State?
Petitioner submitted the following facts as the basis for this Advisory
Opinion.
XYZ, Inc. (“XYZ”) is a foreign based importer and distributor of motor
vehicles. As part of its business operations, XYZ will own and operate various
dealerships throughout the State of New York. XYZ plans to introduce its product
into the United States market through a free demonstration/test drive program
(hereafter referred to as the “test drive program”). As part of the test drive
program, XYZ plans to import a number of automobiles which it will offer to
selected prospective customers (“evaluators”). These evaluators will be allowed
to test drive the vehicles for a period not to exceed six months with no
obligation to lease or buy at the end of the period. However, evaluators may be
required to complete a customer survey at the completion of the test drive to
provide objective feedback regarding the performance of the vehicle. Evaluators
will be responsible for excessive wear and tear, associated fuel costs and
damages not covered by insurance.
Throughout the test drive program, XYZ will retain title to the vehicles.
XYZ will register as a retail dealer under the dealership name and/or obtain
dealer plates and provide appropriate insurance on each vehicle. Each vehicle
will be held in inventory and available for sale during the test drive program.
If an evaluator does not purchase the test drive vehicle at the end of the test
drive program (e.g., after the first week the evaluator decides he or she does
not like the car), the vehicle may be placed with another evaluator within the
six-month test drive program. The test drive vehicles will be held available for
sale on dealer lots, so that anyone interested in the vehicle may enroll in the
test drive program and have an opportunity to purchase it.

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Sales Tax

Any remaining unsold program vehicles at the end of the test drive program
may be made available for sale (at a discount) to the general public in the
United States. Once the six-month test drive program has been completed, the
vehicles will be shipped out of New York State unless the evaluator wishes to
purchase the vehicle in the state. In the event the vehicle is sold in New York
State, XYZ will collect all applicable sales tax and remit the monies to the
state. During the test drive program, employees of XYZ may use the test drive
vehicles for self use.
Applicable Law and Regulations
Section 1101(b)(4)(i) of the Tax Law defines “retail sale,” in part, as
follows:
A sale of tangible personal property to any person for any
purpose, other than (A) for resale as such or as a physical
component part of tangible personal property . . . .
Section 1105(a) of the Tax Law imposes a tax on the “receipts from every
retail sale of tangible personal property. . . .”
Section 1110 of the Tax Law provides, in part:
(a) Except to the extent that property or services have
already been or will be subject to the sales tax under this article,
there is hereby imposed on every person a use tax for the use within
this state on and after June first, nineteen hundred seventy-one
except as otherwise exempted under this article, (A) of any tangible
personal property purchased at retail . . . .
(b) . . . the tax shall be at the rate of four percent of the
consideration given or contracted to be given for such property, or
for the use of such property, including any charges for shipping or
delivery . . . but excluding any credit for tangible personal
property accepted in part payment and intended for resale.
With respect to the resale exclusion, Section 526.6(c) of the Sales and Use
Tax Regulations provides, in part:
(1) Where a person, in the course of his business operations,
purchases tangible personal property or services which he intends to
sell, either in the form in which purchased, or as a component part
of other property or services, the property or services which he has
purchased will be considered as purchased for resale and therefore
not subject to tax until he has transferred the property to his
customer.
(2) A sale for resale will be recognized only if the vendor
receives a properly completed resale certificate . . . .

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Sales Tax

(3) Receipts from the sale of property purchased under a
resale certificate are not subject to tax at the time of purchase by
the person who will resell the property. The receipts are subject
to tax at the time of the retail sale.
Section 531.3(a)(2) of the Sales and Use Tax Regulations provides:
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 withdrawn from or diverted to a taxable use by
the purchaser.
Technical Services Bureau Memorandum, TSB-M-87(2)S, dated January 16, 1987,
entitled Taxability of Motor Vehicles Used by Dealers provides, in part:
. . . vehicles held in inventory exclusively for resale but
used for demonstration to prospective customers are not taxable to
the dealer if used solely for demonstration.
Vehicles held in
inventory for resale but used occasionally for business or pleasure
by the dealer or one of his officers or employees, hereafter “mixed
use vehicles,” are subject to use tax. (Emphasis added) Use tax due
on these “mixed use” vehicles must be reported under “purchases
subject to use tax” and paid with the dealer’s return which covers
the period of use.
Since no purchase, sale, or trade occurs when
the taxable use begins or ends, and since a particular vehicle in
inventory usually will be used in this manner for only a short
period of time before being sold, dealers are allowed to pay tax
based on depreciation instead of paying the tax usually due on a
sale. . . .
Subject to the limitations and conditions described below, use
tax on mixed-use vehicles may be computed by applying the state and
local sales tax rate to an amount equal to 2% per month of the
dealer’s cost.
*

*

*

As of June 1, 1986, a motor vehicle dealer may apply the 2%
depreciation method to a vehicle held in inventory for resale but
used occasionally for business or pleasure by the dealer, his
employees or officers if: (Emphasis added)
(1) the vehicle is used by the dealer for six months or less
as a “mixed use” vehicle with no mileage restriction, or
(2) the vehicle is used by the dealer more than six months but
no more than one year, and the mileage does not exceed 9000 miles
for the entire 12 months.
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

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the vehicle plus penalties and interest computed from the date that
a return for the occasion of the first use would have been due.
Credit for tax paid under the 2% method will be allowed.
A dealer’s total cost of a new vehicle, for purposes of
computing use tax, includes total invoiced cost plus delivery
charge. On a used vehicle, the dealer’s total cost includes purchase
price or trade allowance plus the value of all repairs made to the
vehicle since being acquired by the dealer.
*

*

*

These additional guidelines apply when
depreciated under the 2% method of depreciation:

a

vehicle

is

(1) A dealer may not seek a trade-in allowance on a vehicle
which is depreciated under this method, regardless of whether the
dealer operates as a single entity or as more than one entity.
(2) A dealer may not depreciate or take an investment tax
credit while computing use tax under the 2% method.
(3) If a dealer does not comply with items (1) and (2), use
tax is due on the dealer’s total cost of the vehicle plus penalties
and interest computed from the date that a return for the occasion
of first use would have been due, with a credit for use tax paid
under the 2% method.
(4) A “mixed use” vehicle may be registered either in the
dealer’s name or used with dealer plates.
*

*

*

Receipts from rentals of vehicles to customers as “loaners”
are subject to sales tax when the customer is charged a market rate
for such rental. Vehicles loaned to customers without a separate
charge or at a rate which does not reflect the fair market rental
are treated as “mixed use” vehicles subject to the 2% per month
rules. (Emphasis added)
Computing Use Tax on a “Mixed Use” Vehicle
*

*

*

Example:
Cost of vehicle
Depreciation rate (2%)
Months used (2½)
Tax rate (7% combined state and local rate)
Tax due on use

$15,300
X .02
$306.00
X 3
$918.00
X .07
$ 64.26

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Records to be kept:
(1) Stock number identifying the vehicle.
(2) Name and title of person to whom vehicle is assigned.
(3) Date assigned and date returned.
(4) Mileage at date of assignment and date of return.
(5) Disposition of vehicle.
(6) Whether registration is in dealer’s name or the vehicle is
used with dealer plates.
(7) Whether depreciation or an investment tax credit has been
or will be claimed on the vehicle.
(8) Whether a trade-in allowance has been or will be taken on
the vehicle.
Effective January 16, 1987 . . . a dealer who withdraws a
motor vehicle from inventory for use as a “mixed use” vehicle must
keep records (previously listed) as use of the vehicle occurs... .
All required information must be maintained on “mixed use” vehicles,
including “loaners” treated as such.
If the records are not
properly maintained for any vehicle, it will be assumed, for use tax
purposes, that the vehicle is not a “mixed use” vehicle.
Accordingly, use tax will be due on the total cost of the vehicle,
with interest and penalties from the date of first use, as described
above, with a credit for tax paid under the 2% method.
Opinion
XYZ may register the vehicles it imports exclusive of sales tax. XYZ
should use Form MV-50, Retail Certificate of Sale, to register the automobiles
without payment of sales or use tax, since, as a registered vendor, XYZ collects
the tax from its customer and pays over the tax with its sales tax returns. See
Section 1132(f) of the Tax Law. In order for XYZ to transact any taxable business
within New York State, XYZ must be registered as a New York State sales tax
vendor. See Sales Tax Regulations Section 539 for requirements respecting vendor
registration.
Once purchased, XYZ plans to use the automobiles as part of a six-month
test drive program. Employees of XYZ will also be allowed to use the test drive
vehicles during the program for self use. The rules set forth in TSB-M-87(2)S,
supra, on the taxability of motor vehicles used by dealers, require
differentiation between the various uses of such vehicles depending on whether
they are demonstrators, mixed-use vehicles or rental vehicles.
“Demonstrator”
refers to vehicles held in inventory exclusively for resale, which are used with
dealer plates solely for demonstration to prospective customers. The use of
vehicles held in inventory exclusively as demonstrators is not taxable. “Rental

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vehicles” are vehicles used for short-term rental and must be registered as
rental cars and operated solely for rental or lease at the market rate. “Mixed­
use vehicles” are vehicles held in inventory for resale, but used occasionally
for business or pleasure by the dealer or its officers or employees (see BMW of
North America, Inc., Adv Op Comm T&F, April 16, 1990, TSB-A-90(19)S; Crestview
Cadillac, Inc., Adv Op Comm T&F, April 16, 1987, TSB-A-87(16)S). Vehicles loaned
to customers without a separate charge are treated as mixed-use vehicles (see
TSB-M-87(2)S, supra).
The test drive vehicles held in inventory for resale by Petitioner’s
client, XYZ, but used by the evaluators in the test drive program and also by
XYZ’s employees for business or pleasure are mixed-use vehicles. This use of the
test drive vehicles renders such vehicles subject to compensating use tax. Since
such vehicles will usually be used in this manner for only a short period of time
and since in many cases no purchase, sale or trade occurs at the beginning or end
of taxable use, XYZ may pay use tax based on depreciation rather than on its
purchase price of the vehicles, in accordance with the rules set forth in
TSB-M-87(2)S, supra (see BMW of North America, Inc., supra).
XYZ should apply the formula established by the Department in TSB-M-87(2)S,
supra, to compute use tax due on a mixed-use vehicle. This would include the
test drive vehicles, if the requirements set forth in TSB-M-87(2) are met. XYZ
may not seek a trade-in allowance on any vehicle which is depreciated under this
method, regardless of whether XYZ operates as a single entity or as more than one
entity. Also, XYZ may not depreciate or take an investment tax credit on any
vehicle depreciated under the 2% method. Provided that these conditions are met,
and that XYZ is a New York State registered motor vehicle dealer and the mixed­
use vehicles are registered in XYZ’s name or are used with XYZ's dealer plates,
the mixed-use vehicles would be subject to use tax based on depreciation of 2%
per month or any part thereof, computed on the total invoiced cost of the vehicle
to XYZ, including any delivery charge, for any vehicle purchased new, and on the
purchase price or trade allowance plus the value of all repairs made to the
vehicle since XYZ acquired it, for any vehicle purchased used or taken in trade.
The tax is not computed on the fair market rental value of the vehicles as
Petitioner suggests.
With respect to issue “2", use tax due on these mixed-use vehicles must be
reported under “purchases subject to use tax” and paid with XYZ’s sales and use
tax return (ST-100 or ST-809) which covers the period of use (see TSB-M-87(2)S,
supra). In order to pay use tax based on depreciation, XYZ must follow the
record keeping requirements set forth in TSB-M-87(2)S for each mixed-use vehicle.

DATED: December 4, 1997

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

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