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A Road Map of State Taxation on Motor Vehicles

June 22, 2015, 07:00 AM

Equipment finance companies not regularly engaged in motor vehicle leasing are often unaware that a state’s tax treatment of motor vehicles will often differ from that of other equipment.  One distinction that drives this difference is the fact that motor vehicles are ‘titled’ assets with a state agency. One important difference to recognize is that of titling address and taxing address, also referred to as ‘tax situs‘.  Most states will define the tax situs of a vehicle to be the garaging address, the place where the vehicle is parked when not in use. The mere fact that a motor vehicle is not titled in the state does not mean that it does not have tax situs within that state.  As well as the reverse being true for titled address. There will be more detailed discussion in future installments.

Leasing of titled vehicles requires a whole new level of knowledge as compared to other commercial and industrial equipment. We have organized this three part blog to keep you from information overload and help you recognize when you meet a fork in the road which requires a new procedure specifically for motor vehicles.

Vehicle Excise Tax and Administering State Agency

First and foremost is the fact that several states have a separate vehicle tax that is ‘in lieu of’ the regular equipment sales tax. These "in lieu of" taxes have a variety of names, yet for sake of simplicity, we will just refer to them as "vehicle excise tax." Another important fact about motor vehicle taxation is to recognize when you are dealing with a vehicle excise tax that is covered by a separate body of tax law and a separate listing of tax exemptions, which may or may not be the same as the sales tax exemptions for other equipment. Texas is a good example of a state with a vehicle excise tax, although it is misleading because it is called a Motor Vehicle (“MV”) Sales Tax, the MV Sales Tax does not have the exemption for a lessor to purchase (i.e. title) a vehicle exempt from tax as is done with other equipment for lease under the regular sales tax.

Another matter of simplicity will be the use of the DMV as a reference to the state administrative body (albeit at state or local level) that titles and registers the vehicle and generally always administers the collection of a vehicle excise tax as well as serves as an auditor to make sure the proper sales tax is collected on a vehicle or a proper sales tax exemption form is included with the title application. And with states, isn’t it always about the form of the transaction as well as the form that is used?

Proper Licensing With States as a Vehicle Lessor or Dealer

If you are transacting a true lease (FMV and TRAC) in a state that requires special licensing or registration for vehicle dealers, this may be a first consideration, as obtaining these state licenses may be necessary before titling the vehicle in the lessor’s name. Registration and licensing with the state may run as much as four and five hundred dollars a year and include a lengthy application for the license. Louisiana and West Virginia are two good examples of states that require a special vehicle lessor license before they will allow a lessor to title the vehicle in its name and claim sales tax exemption. There are also states with an option to register for a special ‘use license’ and allow the vehicle excise tax to be collected on the rent rather than paid upfront to the DMV at time of titling.

Other states that have requested dealer licenses based on certain lessor profiles are California, Florida and Ohio. However, these are more regulatory in nature and tend not to create any sales tax issues.

Knowing State Requirements for Proper Registering, Titling

Although this blog is about state taxation, the lessor and the lessee should recognize proper title and registration requirements of the state. Since motor vehicles are mobile, determining the tax situs can be difficult. As stated earlier, the general tax situs for leased motor vehicles is the garaged address. However, there are some states that impose a local tax based upon the dealer location and/or the lessor location. Many states require title and registration if the vehicle is garaged in the state for 30 days or more, or require registration (but not title) if the vehicle regularly travels the highways in a given state in a commercial capacity. However, there are some exceptions for motor vehicles leased by a businesses. You will want to make sure what state law applies if you are managing a fleet of vehicles that will be registered to a business location but garaged at a different location(s).  This is particularly true if these two locations are in different states.

This matter of fleets and multi-state use has given rise to the creation of the International Registry Plan (“IRP”) which is about multiple state registrations and apportionment of the registration fees. A common misconception is the IRP means the vehicles are tax exempt, it does not.
The important point we want to drive home about title and registration, is the situation of the title state being different than the garaged state. This dual domicile, one being legal the other being considered actual or physical, is a conundrum that can create duplicative state taxes due to inconsistent and non-reciprocating state tax policies. As mentioned in the first paragraph of this blog, both states can assert their taxing rights, and they frequently do, particularly when one state has a vehicle excise tax and the other a sales tax ... hence, the conundrum.

Gross Vehicle Weight Rating (“GVWR”), Curb Weight and Vehicle Class

Some states have different tax rules and/or rates based upon the GVWR of a vehicle. For example, the State of New York imposes tax on motor vehicles leases up-front on the sum of the payments. However, if the vehicle is 10,000 lbs. or greater, then the tax is due up-front on the purchase price.  Similarly, the State of Pennsylvania has a 3% Public Transportation Authority (PTA) tax that is imposed on leases up to 9,000 lbs. Vehicles leased over 9,000 lbs. are not subject to the PTA.  There are also exemptions that may be applicable based upon a vehicle’s GVWR.  Many states exempt from their sales tax motor vehicles with GVWR of 26,000 lbs. or greater. It is important to know the specific rules applicable to each state as they vary greatly. Just remember GVWR and vehicle class will often be taken into consideration when calculating state taxes.

Address for Registration and Plates

Many lessors chose to register the motor vehicle in the lessor’s name and care of the lessee. By doing so, important time sensitive information that should go directly to the lessee, will. For example, titling and registration information, parking tickets, and in some cases property tax bills will go directly to the lessee. The lessee is usually directly responsible for these additional amounts and you will want to insure that they receive these notices timely.

Titled Owner vs. Lienholder

There are states that will allow an option to collect sales tax either upfront on the sales price or monthly on the lease payments. When allowed or convenient, most lessors will elect to collect and remit sales tax on the monthly rent. When the rent option applies, the lessor’s sales tax registration number or certificate is provided with the title/registration application to allow the lessor to register the vehicle without sales tax being paid upfront on the sales price.  By providing this information to the DMV, the lessor is making an assertion that tax will be collected and remitted by the lessor. 

If instead the lessee is listed as titled owner, with lessor as lienholder, only the lessee’s sales tax exemption can be recognized. Care must be taken in the states that do not allow an election and mandate collection of tax on the rent, or upfront on gross lease receivable. In these latter states, you’ll need to make sure an exemption can be rightfully be claimed at time of titling and the correct party is on the title as owner and able to claim the exemption. 

Specialized Mobile Equipment

This refers to equipment, on wheels, that is regularly transported over highways and required to have special plates. Specialized mobile equipment is often defined as mobile equipment with a primary purpose to perform a function or service, rather than to transport property or persons.  A couple examples of specialized mobile equipment are well servicing equipment and cranes. 

Specialized mobile equipment, it is taxed differently than a vehicle.  This type of mobile equipment often has a separate set of tax policies apart from those created for motor vehicles. For instance, in Oklahoma, has a flat tax on commercial trailers of $10, however specialized mobile equipment is subject to a 3% excise tax.  In Texas, it is taxed under the regular sales tax, just like other equipment. And then you may have a situation with multiple vendors building up the specialized mobile equipment. In this event, caution must be exercised in states with a vehicle excise tax as some will mistakenly assume the DMV taxed the entire unit, when in fact, only the chassis or trailer was taxed and the specialized equipment is left to be taxed as regular equipment under the sales tax rules. The variables are many and it is important to understand how a given state taxes this mobile equipment.

In closing, it is important to make sure that appropriate procedures are in place to collect and remit the correct sales tax or vehicle excise tax as states are becoming increasingly active in auditing lessors. Future installments will delve deeper into tax calculations and procedures that will help you to navigate state taxation issues of motor vehicle leases.

Photo of Valerie Pfeiffer, Founder and Managing Principal of The Tax Coefficient and Sheryl Flynn, President of Tax Lease Consultants, LLC

Valerie L. Pfeiffer and Sheryl L. Flynn
Managing Principal & Founder/President | The Tax Coefficient, LLC/Tax Lease Consultants, LLC
Valerie L. Pfeiffer is Managing Principal & Founder of The Tax Coefficient LLC a specialized state tax consulting and services firm supporting the equipment lease and finance industry. Prior to this, she held the position of Vice President – Tax Services at CIT Group. Her 35 years of tax and leasing experience covers international, federal, state and local corporate tax. With a forte' in sales and use tax, in 1985, Pfeiffer received a professional designation as "CMI" from the Institute of Professionals in Taxation (“IPT”) and served as instructor for several years at the Institute's annual sales tax school. She has spoken on the subject of advance recycling fees, sales and property tax at several tax and leasing conferences and served as technical advisor for the chapter on sales, use and property tax in the book Business Leasing for Dummies. As member and current chair of the Equipment Leasing and Finance Association's (“ELFA”) State Government Relations Committee, Pfeiffer has worked with state government and other industry members on numerous matters of taxation affecting our industry for nearly 25 years. In 2005, she received ELFA’s Distinguished Service Award in recognition of her outstanding leadership and contributions to the association and industry.

Sheryl Flynn is President of Tax Lease Consultants, LLC where she specializes in sales, use, and property tax solutions for motor vehicle lessors. She was formerly with DaimlerChrysler Financial Services where she was the Senior Manager of Sales and Use Taxes for DaimlerChrysler Services Americas LLC, in Farmington Hills, MI. Flynn was responsible for overseeing all sales and use tax activities, including compliance, audits and appeals for the North American Automotive finance activities of DaimlerChrysler. Prior to this, she was a Tax Specialist at General Motors Corporation, in Detroit where she was responsible for sales tax compliance for General Motors Corporation as well as General Motors Acceptance Corporation. Flynn has over twenty-five years of tax experience related specifically to leased motor vehicles. She earned her undergraduate degree from the University of Michigan and a Masters of Science in Taxation from Walsh College of Accountancy and Business Administration. She is an active participant in the Streamlined Sales Tax Project (SSTP), the Association of Consumer Vehicle Lessors (ACVL), and is a frequent speaker at Equipment Lease and Finance Administration (ELFA) events
Comments From Our Members

Lawrence Elton
Only Val can make taxes sound exciting. And she knows it, loves it! She's an invaluable consultant to our company. Larry Elton, Advantage+
7.30.2015 @ 11:36 AM
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