Welcome back to Part II of our series on navigating state tax policy with regard to motor vehicle taxation. This second part will continue to journey deeper into the more technical aspects of sales, rental and excise taxes. As an added bonus we’ll be introducing you to tax terminology commonly used in many state revenue departments. If you’ve not read Part I of this blog series, we encourage you to do so before reading further as you may not be properly primed to continue this review of matters under the hood of vehicle state taxation.
Vehicle Excise Tax in Lieu of Sales Tax
As mentioned in Part I, several states impose a vehicle excise tax that is in lieu of the sales tax. The vehicle excise tax has a wide variety of names. Some states, to name a few, like:
- Georgia, with their Title Ad Valorem Tax (O.C.G.A. Title 48 Chapter 5C),
- Kentucky’s and their Motor Vehicle Usage Tax (KRS Title XI Chapter 138),
- Maryland’s Titling Tax (Title 13 Subtitle 8 Part II, Trans. Art, Ann. Code), or
- North Carolina’s Highway Use Tax (G.S. Chapter 105 Subchapter I Article 5A)
These states have carefully articulated a name that is unique to how they impose their tax on vehicles. Whereas other states, like Texas (34 TAC Title 2 Subtitle E Chapter 152) and West Virginia (WV Code Chapter 11 Article 15 subsection 3C), continue to refer to their tax on motor vehicle sales and leases as a ‘sales tax’ because it is contained within the taxation code under the general heading of sales tax. Yet, both Texas and West Virginia’s sales tax on motor vehicles acts more like a vehicle excise tax in application due to the fact that it is 1) collected by the DMV and 2) is a specific subsection of tax law unique to motor vehicles sales and leases.
We refer to the vehicle excise taxes as 'in lieu of' taxes because most sales tax statutes exempt motor vehicles that have paid that state’s vehicle excise tax. These alternate state tax schemes can raise issues when the state of title imposes its vehicle excise tax and the tax situs state denies a sales tax credit for taxes paid to the title state. Tax credits will be discussed in more detail later in the next installment of this blog.
When reading the tax code and regulations in states regarding motor vehicle taxes, we must be mindful of a host of tourism, recovery fees and special excise taxes that are imposed on short term vehicle rentals ranging from agreements for leases and rental periods of 31 days or less to periods up to one year. If you ever rent a vehicle while on vacation and look at all the taxes, fees and surcharges listed, you’ll recognize the fact that the tax code is riddled with these impositions and care must be taken not to confuse these as being applicable to the standard long-term commercial motor vehicle lease that is of primary concern to this readership.
Tax Situs and “Sourcing”
We already eased in a little tax terminology in Part I when we used the term 'tax situs,' a general term that indicates the vehicles location for purposes of applying a given state and/or local tax. We also mentioned in Part I that both the title and registration state, as well as the garaged address state, can assert a right to apply their sales tax or excise tax to the vehicle. Many times title and registration in a state other than that of the garaged address can result in a situation of irreconcilable double taxation, although most states require a vehicle to be titled within the state after entering into the state within a given period (generally 60-90 days). Therefore, the title state would ordinarily be the garaging address state. With 46 states imposing a sales tax as well as hundreds of locals with self-administered local sales tax, a myriad of combinations and results can occur. Some come with solutions, by way of a tax credit, while other situations do not. Although this double taxation policy may seem problematic with our interstate commerce clause in the U.S. Constitution, the situation has yet to surface and be reconciled by the Supreme Court of the United States.
Double taxation aside, the lessor must determine the proper “sourcing” for the lease or the lease payments to identify the correct tax situs for applying a sales tax. Although a state DMV will always default to the title and registration address, under state sales tax law the Lessor must apply “sourcing” rules and collect the sales tax accordingly or collect a sales tax exemption certificate.
Streamlined State Sourcing Rules
The Streamlined Sales and Use Tax Agreement (“SSUTA”) added both complexity and simplicity to the leasing world. SSUTA is joint effort of numerous participating states (currently 24 member states) to simplify and provide uniform provisions and definitions under their sales tax laws. The effort is largely driven by the states’ desire to force out-of-state internet/remote sellers to collect use taxes when they otherwise do not have a requirement to do so under a landmark case decided by the Supreme Court of the United States decision, Quill Corp. v. North Dakota, 504 U.S. 298 (1992). In Quill, the court held the state sales tax system was too complex to force a catalog seller to collect the tax when it did not have physical presence in the state. Although the impetus of SSUTA was largely driven to simplify sales tax and convince Congress to overturn Quill, the fact remains that is has made a major overhaul to many member states’ sales tax laws and provided simplification for all seller’s and lessor’s in many ways. Motor vehicle lessor’s may not feel as blessed by these provisions as SSUTA member states with an 'in lieu of vehicle excise tax,' have specifically excluded their vehicle excise taxes from the changes they made as a result of entering into the multistate agreement. Simply stated, this uniform set of sourcing rules only applies to the member state sales tax, not vehicle excise tax unless the vehicle excise tax was explicitly changed as well.
The sourcing rules with respect to SSUTA have both simplified and complicated matters for motor vehicle leases. For leases with recurring payments and qualified transportation equipment it has simplified sourcing. Leases without recurring payments (i.e. ‘single pay’ leases) the matter is a little more complicated. SSUTA sourcing for motor vehicles has three separate rules, as follows:
- Motor vehicle leases are sourced to the primary property location. This is generally the garaging address of the vehicle. This is also similar to the way other leased equipment is sourced for sales tax with the exception of specific provisions for situsing of the first payment on non-motor vehicle leases.
- For single pay leases (or leases with non-recurring payments), the situs is the dealer location. This assumes that the dealer acts as the original lessor and the financial institution is the assignee. If this is a direct origination, the lease is sourced to the location where the vehicle is delivered to the lessee at the time the lease is entered into (which for motor vehicles is generally at the dealer location and done as a courtesy delivery).
- “Qualified transportation vehicles” are basically sourced the same as the single pay leases. They are either sourced to the 1) dealer location (when dealer acts as original lessor) or 2) sourced to the location where the vehicle is delivered to the lessee at the time the lease is entered into. “Qualified transportation vehicles” are trucks, trailers and passenger buses with GVWR of 10,001 pounds or greater that are both registered through the International Registry Plan and authorized by the US DOT as a Motor Carrier for carriage of persons or property in interstate commerce.
Unique Sourcing Rules of Other States
There are a few states with unique sourcing rules for vehicles; namely Colorado and California. Unique to motor vehicles, Colorado has two sourcing rules for local taxes on long-term leases greater than 36 months: 1) for state administered and state collected city and county sales taxes, and 2) for the 70 home rule cities that self-administer and collect their use tax. Note, leases 36 months or less may be taxed upfront or on the rent the same as long term leases if lessor has obtained written approval to do so from the state. This guidance assumes the lessor is collecting tax on rent for both short term and long term leases.
Sourcing and collection for state administered city and county sales taxes:
- If a Colorado dealer delivers the vehicle, the city and county sales taxes of the dealer will apply if the customer is in the same jurisdiction.If not, taxes will be due up-front at the time of registration.
- If the vehicle is obtained from a dealer outside of Colorado, city and county sales taxes of the lessee’s garaged address will apply.
- If a Colorado based broker originates the lease, the city and county sales taxes of the broker will apply, otherwise it is the lessee’s city and county sales taxes that apply.
The city and county taxes above are only collected if the lessor registers with the state for the separate ‘branch’ sales tax licenses for the locality (as a matter of compliance on other leases of equipment), then the lessor collects the state administered city and county sales tax. If the lessor is not required to have the local sales tax branch license, then the DMV collects these local taxes upfront.
Sourcing and Collection for Self-Administered Home Rule City Use Tax:
- All home rule city use taxes are sourced to lessee’s garaged address, the state administered county tax is sourced based on the above rule.
The home rule city will generally require the lessor to register and collect the city use tax on the rent in accordance with the city’s use tax ordinance which may or may not follow state law.
Colorado tax collection requirements are complicated. We recommend reading the Department of Revenue’s Bulletin FYI Sales 56, along with Form DR1002 -- Sales Tax Rates and Home Rule Cities, to better understand sourcing requirements for the particulars of your business.
California has a unique set of sourcing rules for motor vehicles, in particular, is the sourcing rule and tax treatment for Mobile Transportation Equipment (“MTE”). MTE is generally defined to include all vehicles other than passenger vehicles and trailers towed by passenger vehicles. Included in this definition are pick-up trucks. California generally sources to the location of equipment, however with MTE the sales tax (including tax rate), if electing to pay it on the rental stream, is sourced to the location where the vehicle is first delivered at the inception of the lease. Even though the MTE garaging address may change (including relocation outside of California) the sourcing (and tax rate) continues to be based on the original delivery through the original lease term and subsequent renewals (see California BOE Publication 34).
Dealer location, if located in California, may also affect allocation of the district tax to the local jurisdictions depending on how and where the vehicle is delivered.