Taxpayer, a fleet management company, leases vehicles to businesses pursuant to a lease agreement that contains a terminal rental adjustment clause (“TRAC”) which is a clause that adjusts the amount of rent due under the lease at the end of the lease based on the value of the vehicle at that time. Depending on the vehicle’s value, the lessee may owe additional rent at the end of the lease or be entitled to a refund of rent previously paid. 

By statute, New York requires that sales tax be remitted on rent payments required by a vehicle lease at the beginning of the lease if the lease lasts more than one year. N.Y. Tax Law § 1111(i) The taxpayer remitted sales tax on the sum of the total estimated rent payments at the time the parties entered into the lease agreement. At the end of the lease, if the TRAC resulted in a refund of rent to the lessee, the taxpayer refunded the tax paid on that rent and took a credit on its New York sales tax returns. If the TRAC resulted in a payment of additional rent, the taxpayer remitted sales tax on that additional rent. After an audit, the Division of Taxation determined that the taxpayer could not take credits on its sales tax returns for sales tax it refunded due to the TRAC. The ALJ ruled in favor of the Division, stating that the taxpayer properly collected and paid the sales tax due at the beginning of the leases and that no statutory provision allows the taxpayer to take credits for sales tax refunds paid to its lessees.

The taxpayer appealed to the Tax Appeals Tribunal arguing that, inter alia, the TRAC provision is an integral part of the lease agreements and thus the lease end adjustments must be included when calculating taxable consideration. The Tribunal, affirming the ALJ, rejected the taxpayer’s argument reasoning that the statute “unambiguously” requires that the tax be paid at the beginning of the lease and that there was no legal basis for the sales tax to be refunded at the end of the lease. In support, the Tribunal pointed to the fact that during the 2022 legislative session the Legislature amended the statute to specifically allow sales tax refunds and credits for lease end adjustment on TRAC leases. The Tribunal stated that this change strongly support their conclusion “that such refunds and credits were not permitted by the version of the statute in effect during the period under review[.]”

In the Matter of the Petition of Gelco Corporation, DTA No. 829011 (Dec. 21, 2023).