The taxpayer, a fleet management company that leases fleets of commercial vehicles to businesses, used leases containing a terminal rental adjustment clause (TRAC). Under these leases, the lessee paid estimated monthly rent based on the projected residual book value of the vehicle at lease termination. When the lease ended, the estimated rent was retrospectively adjusted to determine the actual rent owed.

At lease commencement, the taxpayer reported and remitted sales tax based on the estimated rent schedule. If the actual rent was lower, the taxpayer refunded the excess rent and the related sales tax to the lessee and then claimed credits on its sales and use tax returns to recover the overpaid sales tax.

The Department of Taxation and Finance (Department) audited the taxpayer and concluded it was not entitled to take such credits, resulting in additional sales tax due of nearly $3M. The Department’s position was that the sales tax liability was irrevocably fixed at the inception of the lease. The Tax Appeals Tribunal agreed with the Department.

On appeal, however, the appellate court ruled in the taxpayer’s favor. The court held that, in TRAC leases, initial payments are provisional estimates and the final consideration is not determined until the lease concludes. Accordingly, amounts ultimately refunded to lessees were never definitively contracted to be paid and therefore should not have been included in the sales tax base.

In re Gelco Corp. v. State of N.Y. Tax Appeals Trib., No. CV‑24‑1376 (N.Y. App. Div. 3d Dep’t Feb. 5, 2026).