In a decision dated December 21,2023, the State of New York Tax Appeals Tribunal determined a fleet management company is not entitled to take credits for sales tax refunds they had paid to lessees in accordance with a terminal rental adjustment clause (TRAC) in lease agreements. The TRAC provision stated that at the end of a customer’s lease, the company, Gelco Corporation, would adjust the total rent due on vehicles pursuant to the original lease agreement by calculating the value of the leased vehicle at the end of the period. If the residual value of the vehicle was higher than expected, lessees had to pay the difference (including tax), but if the residual value was lower, lessees were granted refunds based on previous payments. Gelco then reported and remitted any additional tax collected and took credits on sales tax returns for the refunded sales tax where needed. However, when the Division of Taxation audited Gelco for the period between June 1, 2012 – August 31, 2015, the Division determined Gelco could not take these credits on sales tax and presented a notice of determination for the tax, which Gelco challenged first in front of an Administrative Law Judge and then appealed to the New York Tax Appeals Tribunal.
Gelco argued that because of the TRAC provision, the monthly lease payments were only estimated payments and should be considered closer to a security deposit, thus the tax would not be due until the final calculation. Because Gelco had paid the taxes, the refund should entitle them to a credit because the adjustments were for the cancellation of a contract when sales tax was refunded to a lessee.
However, the Tax Appeals Tribunal deferred to existing New York Tax Law as well as precedent setting cases in New York in upholding the Administrative Law Judge’s ruling and denying the exception. In New York, sales tax is a “transaction tax” which means it is due when the transfer of property occurs—in this case, at the beginning of the lease. Since the tax was correctly assessed at the time of the initial transfer, there was no refund to take credit for. Further, this case did not meet the requirement for a sales tax refund in New York which offers refunds only in circumstances where sales tax was “erroneously, illegally, or unconstitutionally collected or paid” (Tax Law 1139). Though the legislature did amend the Tax law to allow the credits this taxpayer had claimed, the Tribunal noted first that the amendment was effective in June 2022, after the period in question for this case, and further pointed out that the expansion specifically allowing this supports the conclusion that the previous version of the law did not permit the credits during the period under review.
In this case, the taxpayer was hampered in their appeal by New York’s very specific laws about when a sale takes place, how sales tax is handled and when changes to the law became effective. Taxpayers need to be aware that definitions of the word “sale” used by states may be legally defined in a given state and ensure they are aligning with that definition in their business in that state. The next consideration highlighted in this case is how sales tax and specifically refunds are handled by law in the state. Finally, this case reminds taxpayers of the importance of knowing when a law goes into effect- things may be very different from how they were even six months ago depending on legislative changes. (In the Matter of the Petition of Gelco Corporation, DTA No. 829011, decision signed by A. Giardina (President), C. M. Monaco (Commissioner), K. A. Cahill (Commissioner), dated Dec. 21, 2023)