Is a driving school's road test vehicle usage fee taxable, and must it collect sales tax when it occasionally sells one of its cars to an individual?

Plain-English summary

Package Auto School & Leasing Inc. charges driver-education students $40 for use of a vehicle to take their DMV road test. That fee actually bundles several things: making the road test appointment in person at the DMV, calling and writing the student about the appointment time, arranging transportation to and from the test site (usually in a different vehicle than the test car), a half-hour of last-minute instruction just before the test, and use of the instructional vehicle itself for the test (about 75% of students use the school's car; the rest bring their own). Package Auto also occasionally sells one of its used business vehicles to an individual for a few hundred dollars, and had been told by the DMV that the buyer would pay the tax at registration. The company asked whether the road-test charge and the occasional car sales are taxable.

The Department split the road-test charge into its parts. Making the appointment, sending reminder notices, arranging transportation, and last-minute instruction aren't any of the specific services New York's sales tax law taxes, so if Package Auto reasonably and separately states and bills those charges apart from the vehicle-use fee, they escape sales tax. But supplying the actual instructional vehicle for the road test is a taxable rental of tangible personal property -- both under the general sales tax and under the additional Special Tax on Passenger Car Rentals. If Package Auto instead charges one lump sum covering both the vehicle rental and the nontaxable services, the whole thing becomes taxable, since a combined charge doesn't get to keep the nontaxable pieces separate.

On the occasional car sales, the Department was direct: those sales are fully taxable retail sales, and Package Auto -- as the seller -- has a legal duty to collect the tax from the buyer at the time of sale. The fact that the DMV's registration process separately checks for tax payment before issuing a registration doesn't excuse the seller from its own independent obligation to collect and remit the tax.

What this means for you

Driving schools and vehicle-rental businesses billing bundled fees

Break out your vehicle-usage charge from any nontaxable scheduling, notification, transportation-arrangement, or instructional services on your invoice. A single combined price for everything makes the entire charge taxable, even though several of the pieces wouldn't be taxable on their own.

Businesses that occasionally sell their own vehicles to individuals

Don't rely on the DMV's registration-tax-verification process to handle your sales tax obligation. As the seller, you're personally responsible for collecting sales tax from the buyer at the time of sale, regardless of how infrequently you make such sales or what DMV staff may have told you about how registration works.

Accountants and tax professionals

The separate-statement rule here tracks the same principle applied elsewhere in this corpus (e.g., Moore Business Forms, Inc., TSB-A-95(6)S): a vendor combining taxable and nontaxable elements into one lump-sum charge loses the exemption for the nontaxable pieces unless they're reasonably and separately stated and billed.

Common questions

Q: Is a driving school's fee for using its car during a road test taxable?
A: Yes, as a rental of tangible personal property, plus the special passenger car rental tax -- but only the vehicle-usage portion, if separately stated from nontaxable scheduling and instruction services.

Q: Can a driving school avoid tax on the whole road-test fee by not itemizing it?
A: No -- doing that has the opposite effect: a single lump-sum charge combining taxable vehicle use with otherwise-nontaxable services makes the entire charge taxable.

Q: Who has to collect tax when a business occasionally sells one of its own vehicles?
A: The seller does, regardless of how infrequently it happens, and regardless of the DMV's separate registration-tax-verification process.

Q: Does this ruling apply to my driving school or vehicle-rental business?
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 own billing structure and invoices would need to be reviewed.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1998.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a98_10s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-98(10)S
Sales Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.S960826A

On August 26, 1996, the Department of Taxation and Finance received a
Petition for Advisory Opinion from Package Auto School & Leasing Inc., 7 Odell
Plaza, Yonkers, NY 10701.
Petitioner, Package Auto School & Leasing Inc.,
provided additional information pertaining to the Petition on July 16, 1997.
The issues raised by Petitioner, Package Auto School & Leasing Inc, are:

1. Whether Petitioner's road test vehicle usage charges are subject to
   New York State and local sales and use tax.
2. Whether Petitioner's occasional sales of company vehicles to
   individuals are subject to New York State and local sales and use tax.
   Petitioner presents the following facts.
   Petitioner inquires whether its charges for supplying vehicles to driver
   education students for purposes of taking the drivers’ licensing road test are
   subject to sales tax. In addition to use of the instructional vehicle for the
   road test, the road test vehicle usage charge includes the following services for
   a cost of $40:
   a. Petitioner makes the road test appointment in person at the Department
   of Motor Vehicles on behalf of the student.
   b. Petitioner makes phone calls and sends letters informing students of
   time and date of the test.
   c. Petitioner arranges for transportation to and from the road test site
   usually in a vehicle other than the road test vehicle.
   d. Petitioner provides one-half hour of last minute instruction and tips
   by certified instructors immediately prior to the road test.
   About 25% of the time, students will provide their own vehicle for use in
   taking the road test rather than the vehicle provided by Petitioner.
   Occasionally, Petitioner will sell one of the autos used in the business.
   The sale price of the vehicle is usually only a few hundred dollars. Petitioner
   states that the Department of Motor Vehicles advised that the tax would be paid
   by the purchaser of the vehicle at the time of registration.
   Applicable Law and Regulations
   Section 1101(b) of the Tax Law provides, in part:

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TSB-A-98(10)S
Sales Tax

When used in this article for the purposes of the taxes imposed by
subdivisions (a), (b), (c) and (d) of section eleven hundred five
and by section eleven hundred ten, the following terms shall mean:

*

*

*

(5) Sale, selling or purchase. Any transfer of title or possession
or both, exchange or barter, rental, lease or license to use or
consume ... conditional or otherwise, in any manner or by any means
whatsoever for a consideration, or any agreement therefor, including
the rendering of any service, taxable under this article, for a
consideration or any agreement therefor.
Section 1105 of the Tax Law imposes sales tax on:
(a)
The receipts from every retail sale of tangible personal
property, except as otherwise provided in this article.
Section 1132 of the Tax Law provides, in part:
(a) Every person required to collect the tax shall collect the tax
from the customer when collecting the price ... to which it applies.
If the customer is given any sales slip, invoice, receipt or other
statement or memorandum of the price, ... the tax shall be stated,
charged and shown separately ....
The tax shall be paid to the
person required to collect it as trustee for and on account of the
state.
*

*

*

(c)(1) For the purpose of the proper administration of this article
and to prevent evasion of the tax hereby imposed, it shall be
presumed that all receipts for property or services of any type
mentioned in subdivision (a) ... of section eleven hundred five,
...are subject to tax until the contrary is
established and the
burden of proving that any receipt, ... is not taxable hereunder
shall be upon the person required to collect tax or the customer.
*

*

*

(f)
The commissioner of motor vehicles shall not issue a
registration certificate for any motor vehicle, ... except upon
proof, ... that any tax imposed by section eleven hundred five or
eleven hundred ten of this article with respect to the sale of the
motor vehicle ... has been paid, or that no such tax is due....
(g)(1) The clerk of each county when performing the function of
registration of a motor vehicle, ... shall act as the agent of the
state tax commission to collect any retail sales tax due under this
article ...

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TSB-A-98(10)S
Sales Tax

Section 1133 of the Tax Law provides, in part:
Liability for the tax.--(a) ... every person required to collect
any tax imposed by this article shall be personally liable for the
tax imposed, collected or required to be collected under this
article....
Section 1160 of the Tax Law provides in part:
Special tax on passenger car rentals.
(a)(1) On and after June
first, nineteen hundred ninety, in addition to any tax imposed under
any other article of this chapter, there is hereby imposed and there
shall be paid a tax of five percent upon the receipts from every
rental of a passenger car which is a retail sale of such passenger
car.
SALES TAX INFORMATION LETTER NO. 22, Q. 353, August 31, 1966 provides:
"The supplying of cars for road tests constitutes a license to
use or a rental of such cars (Tax Law Section 1101(b)(5)). It is
not merely incidental to any instruction the instructor provides
immediately preceding the road test".
Opinion
Petitioner’s road test vehicle usage charge includes the services of making
the road test appointment, notifying the student of the time and date of the
appointment, transportation to and from the road test site in a vehicle other
than the road test vehicle, and last minute instruction. These services are not
included among the enumerated services subject to sales and use tax under Section
1105(c) of the Tax Law. Accordingly, if Petitioner reasonably and separately
states the charges for these services and the charges are separately billed on
an invoice or other document of sale given to the customer, the charges for these
services will not be subject to sales and use tax. The charge for supplying the
motor vehicle for the road test is subject to the tax imposed under Section
1105(a) of the Tax Law and the Special Tax on Passenger Car Rentals imposed under
Section 1160 of Article 28-A of the Tax Law. If Petitioner bills a customer a
lump sum for use of the vehicle and the nontaxable services, the entire charge
is subject to tax. See Moore Business Forms, Inc., Adv Op Comm T&F, February 15,
1995, TSB-A-95(6).
Petitioner’s sales of vehicles to individuals are subject to New York State
and local sales taxes. Petitioner is a person required to collect the tax and
was under a duty to collect the New York State and local sales tax on its sales
of company vehicles to individuals. The fact that section 1132(f) of the Tax Law
provides that a purchaser may not register a vehicle in New York until it is
proven that the sales tax was paid, does not relieve Petitioner of its duty and
responsibility to collect the tax from the purchaser. (Matter of Mendon Leasing

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TSB-A-98(10)S
Sales Tax

Corp. v State Tax Comm., 135 AD2d 917; Matter of the Boat Place, Inc., State Tax
Commission, November 20, 1981, TSB-H-82(2)S; Matter of Jaques and Joan Burger
as Officers of Country-Wide Leasing Corporation, State Tax Commission, October
7, 1986, TSB-H-86(181)S.

DATED: February 27, 1998

NOTE:

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

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