The information below applies to leases entered into on and after 10-1-05, which is the
date of the adoption of the streamlined sales tax provisions.
1. A lease agreement entered into prior to 10/1/05 is assumed by another lessee after the 10/1/05 implementation date. Vehicle and the terms of the contract remain unchanged. Is the assuming lessee obligated to pay any tax?
If the terms and conditions of the lease remain intact, the new debtor signs a note that relates to the original lease, and the original lessee maintains the obligation as if he were a co-signer, this is not a new lease and no additional tax is due.
If terms or conditions do change in any way and the new debtor is required to sign a lease contract rather than an assignment form, this is treated as a new lease and the new law applies.
2. A lease contract with a New York lessee (sales tax accelerated and paid at lease inception), lessee relocates to New Jersey on or after 10/1/05. What amount of tax is due if any?
New York law requires sales tax on a motor vehicle lease to be paid as if the total payments due had been paid at the time of the first lease payment. If the lease was entered into on or after 10/1/05, since tax was legally due and paid to New York with no right to a refund, and the tax in both states is imposed on the lessee, New Jersey’s reciprocity provisions will apply. Thus, although sales tax is due in New Jersey once the primary property location is here, the lessee may claim a credit
for the tax paid to New York. Since the New York tax rate exceeds 7%, no additional tax will be due. The Division does not have a specific form to claim credit for taxes paid to another state. When the vehicle is registered in New Jersey, the lessee will have to provide the New Jersey Motor Vehicle Commission with proof of tax paid to the original state. No additional tax should be collected.
If the lease was entered into prior to
10/1/05, the prior law applies and the tax is due in full up front, based on the remaining lease payments. Under the prior law, which would apply, there is no right to a credit for the tax paid to New York because in New York, the taxpayer is the lessee, whereas in New Jersey, the taxpayer for leases entered into prior to 10/1 was the lessor. As stated above, the new law will resolve this cross-border problem, which has existed since 1989.
3. Lessee relocates to New Jersey from a state where tax is paid monthly on the lease payment, is tax now calculated on the remaining term of the lease?
Yes. When leased property is relocated into New Jersey, the lease is subject to tax based on the remaining lease payments. If the lease was entered into prior to 10/1/05, the prior law applies and tax is due up front from the lessor, based on the total of the lease payments remaining. If the lease was entered into on or after 10/1/05, the new law applies and New Jersey tax must be collected from the lessee, based on the remaining lease payments, but it may be remitted with each periodic payment. (For leased property moving into New Jersey, the tax payment is not accelerated because the provision in the law regarding accelerating the tax payment is only applicable when the leased property is “delivered to the lessee in this state.”)
4. How does the sales tax credit system work?
When leased property is relocated to New Jersey, New Jersey’s reciprocity provisions allow an exemption from tax “to the extent that a retail sales or use tax was legally due and paid thereon, without any right to a refund or credit, to any other state…”
When a vehicle is registered in New Jersey, if documentation is presented that at least 7% sales tax was paid to another state, the New Jersey Motor Vehicle Commission (MVC) should process the new title and registration without requiring additional tax to be paid. If tax was paid at a rate less than 7%, the MVC will require the difference to be paid either directly by the lessee, or as evidenced by the lessor’s use of a New Jersey Sales Tax Satisfied Stamp.
5. Will the following be put back into the Sales and Use Tax Act?
§ 54:32B-14 -- Liability for tax
A vendor other than a vendor subject to subsection (e) of this section making retail sales of tangible personal property or sales of services may advertise that the vendor will pay the tax for the customer subject to the conditions of this subsection.
(1) The advertising shall indicate that the vendor is, in fact, paying the tax for the customer and shall not indicate or imply that the sale or charge is exempt from taxation.
(2) Notwithstanding the provisions of section 12 of P.L.1966, c.30 (C.54:32B-12) to the contrary, any sales slip, invoice, receipt or other statement or memorandum of the price or service charge paid or payable given to the customer shall state that the tax will be paid by the vendor; provided however that such record shall be otherwise subject to the provisions of section 12 of P.L.1966, c.30 (C.54:32B-12).
(3) The vendor shall pay the amount of tax due on the retail sale or service receipt, as determined pursuant to section 4 of P.L.1966, c.30 (C.54:32B-4), as trustee for and on account of the State, and shall have the same liability for that amount of tax pursuant to the “Sales and Use Tax Act,” P.L.1966, c.30 (C.54:32B-1 et seq.), as for an amount collected from a customer.”
Yes, that section was erroneously removed and replaced by different language in P.L. 2005, c. 126. We have been advised that the above language is to be treated as if it were still in the Sales and Use Tax Act. This section was enacted to resolve an issue with vendors advertising that they would pay the tax for the customer, or that it was a “no tax” sale, neither of which were permitted, based on the law at the time. This section provides the means for a business to advertise that it will pay the sales tax on behalf of the customer. Due to the possibility of a refund of tax paid on a lease transaction where the property is subsequently moved out of New Jersey, it is extremely important that if a lessor advertises and pays the tax for the customer, that it be clearly stated on any documentation that would be required in support of a refund claim. The general assumption will be that the lessee paid the tax to the lessor (who remitted it to the State), so that assumption will have to be overcome by the lessor’s paperwork. Guidelines that must be followed in order to utilize this means of advertising are available on the Division’s website.
6. A New Jersey Admin ruling (January/February 1990) stated that special conditions are allowed for certain construction equipment leases. If the leased or rented equipment is subject to many different customers over its useful life, then the customer could be billed New Jersey sales tax on a monthly basis, no matter how long the term of the lease. This determination was based on the lessor's trade and business practice. If this was the normal practice of the taxpayer, then they could continue to treat all New Jersey based lease assets as rental property, no matter the term of the lease. Is this ruling going to be effected/updated due to the October 1, 2005 change, or is this still a viable option for long lived multi-customer equipment leasing companies?
Under the circumstances described above, as set forth in the Division’s 1990 State Tax News article, the Division will continue to allow such open-ended agreements for certain types of construction equipment to be treated as rentals, no matter the length of the term. Thus, sales tax is collected on each monthly payment. This treatment does not apply to equipment provided with an operator, which, under the new law, cannot be treated as a lease or rental transaction. See the Division’s Notice on equipment rentals with an operator.
7. What is the tax base under the original purchase price method?
8. What is the tax base under the total lease payments method?
- Are separately stated delivery charges excluded? Delivery charges incurred to transport the vehicle to the dealer/lessor’s place of business are included in the tax base. Prior to October 1, 2006, delivery charges that related to delivery of the vehicle by the dealer/lessor directly to the lessee were excluded from the tax base . On and after October 1, 2006, delivery charges that relate to delivery of the vehicle by the dealer/lessor directly to the lessee are included in the tax base.
- Are separately stated interest, financing, and carrying charges excluded? (Not applicable when using the original purchase price method.) When the purchase price option is elected, the tax is calculated at 7% of the manufacturer’s invoice price for the vehicle.
- For purposes of the total lease payments method, is the amount of the lessee’s trade deficit paid off through the lease excluded from the tax base? Yes, the amount of the trade deficit is excluded.
- Are separately stated delivery charges excluded? Delivery charges incurred to transport the vehicle to the dealer/lessor’s place of business are included in the tax base. Prior to October 1, 2006, delivery charges that related to delivery of the vehicle by the dealer/lessor directly to the lessee were excluded from the tax base. On and after October 1, 2006, delivery charges that relate to delivery of the vehicle by the dealer/lessor directly to the lessee are included in the tax base.
- Are separately stated interest, financing, and carrying charges excluded? No, such charges are not deductible in determining the tax base under the lease payments method.
See the Division’s Notice
summarizing which items are included in the tax base.
9. Is the lessee entitled to a partial tax refund if the lease is terminated early? If there is a fee to terminate the lease, is this lease termination fee taxable?
If a lease is terminated early and the vehicle returned to the lessor, the lessee may apply to the Division for a partial refund, based on the remainder of the lease term, within the four year statute of limitations period. The documentation must include a copy of the original paperwork, which separately states the tax collected, as well as paperwork from the dealer/lessor verifying the date that the lease was terminated. The refund provision in the law allows a vendor (the lessor in this case) to apply for a sales tax refund; however, the lessor first has to refund or credit the tax to the lessee and provide documentation of such refund or credit, as part of the refund claim. See N.J.S.A. 54:32B-20(a)
The lease termination fee is not considered to be part of the lease payments and thus, is not subject to tax. (NOTE:
other end of lease fees such as excess mileage/wear & tear are considered to be part of the lease payments and are subject to tax.)
10. If an agreement includes a bargain purchase option, but the lessee is not required to exercise this option, does the agreement still constitute a lease for New Jersey sales tax purposes?
If the agreement requires transfer of title and the price does not exceed the greater of $100 or 1% of the totals required payments, it is not a lease under the new law, therefore, it is taxable as a sale. If the agreement does not require transfer of title, but has a bargain purchase option, the Division has always treated such transactions as sales rather than leases, and will continue to do so.
11. For purposes of determining whether an agreement is a lease, when is an operator considered “necessary for the equipment to perform as designed”? For example, if an automobile is provided with a driver, is the driver considered necessary?
New Jersey has always treated the rental of a vehicle with a driver as a transportation charge, rather than as a rental of the vehicle. Prior to October 1, 2006, such charges were not subject to tax; on and after October 1, 2006, such charges imposed by a limousine operator are subject to tax.
12. The Division has indicated that the tax base will be reduced by the value of a trade-in of property owned by the lessee that is accepted by the lessor as partial payment.
- Does this rule apply under both the original purchase price method and the total lease payments method?
- In determining whether the lessee is the owner of property, what is controlling (i.e. GAAP, UCC, tax treatment)? For example, a lessee trades in property subject to a finance lease. Is the tax base reduced if the lessee is considered the owner for GAAP purposes?
Since the tax is imposed on the lessee, the trade-in credit is applicable under both calculation methods. However, in both cases, the lessor must disclose the tax base (purchase price or lease payments), as well as the amount of sales tax due, on the paperwork provided to the lessee. As long as the property traded in was originally acquired by the lessee, it does not matter if there is an amount owed to pay off a loan. The trade-in credit is based on the amount of value allowed by the dealer/lessor against the lease.
13. If a lessee pays tax on property based on the original purchase price method, is a subsequent lease of the property (to the same or different person) taxable? How about a subsequent sale of the property?
If a lessee pays tax based on the original purchase price method, a subsequent lease of the property is not subject to tax. However, a subsequent sale of the property is a separate transaction, and is subject to tax.
14. Since lessors are no longer taxable on their purchase of property for lease, are lessors relieved of their obligation to pay the Motor Vehicle Tire Fee? Lessees were previously not subject to the Motor Vehicle Tire Fee, has this law been changed to impose the fee on lessees?
The New Jersey Motor Vehicle Tire Fee is imposed on sale and lease transactions that are subject to New Jersey sales tax. Under the prior law, the lessor was the retail purchaser of leased property, and thus, was the party responsible for paying the Fee. Under the new law, the lessor is no longer the retail purchaser, so is no longer responsible for paying the Tire Fee when they purchase the vehicle from the dealer. However, the dealer/ lessor is now responsible for collecting the Tire Fee from the lessee, just as they would in a sale transaction. If the finance company is never the originating lessor, it will not need to register to collect the Tire Fee.
In order to obtain the eligibility to file and pay the Tire Fee, registered businesses must go to The New Jersey Division of Revenue’s website and click on Online Services/Online Registration Change (REG-C). You must enter the tax ID# and a PIN#. The system will accept the business’s sales tax or employer PIN#. For additional questions concerning registering to file and pay the Motor Vehicle Tire Fee or obtaining a PIN#, you must contact the Division of Revenue, Client Registration at (609)-292-9292.
15. A purchaser may now seek a refund of over-collected sales tax from the seller. What is a lessor’s responsibility to provide a sales tax refund to lessees who are now claiming an exemption or other basis for non-taxability?
Under the new law, a lessee may apply for a refund if the leased property is moved from the State. A lessor is not required to provide a refund to the lessee. If the leased property is moved outside of the State, the lessee may apply for a refund within the four year statute of limitations period. The refund provision in the law does allow a vendor (the lessor in this case), to apply for a refund; however, the lessor first has to refund or credit the tax to the lessee and provide documentation of such, as part of the refund claim.
This is a different issue from a lessee claiming an exemption from sales tax. As under prior law, if a lessee can claim an exemption from tax (e.g. exempt organization, non-resident), the appropriate exemption certificate or form must be provided to the lessor. The lessor is then relieved of the obligation to collect tax on the lease. If the lessee does not provide the exemption documentation up front, and tax is collected, then as stated above, a refund claim can be filed by either the lessee or the lessor.
16. Under prior law, sale-leaseback transactions were considered non-taxable financing arrangements. The new law provides a specific exemption for sale-leaseback transactions where the lessor leases the property back to the original owner within 180 days. Do sale-leaseback transactions that do not meet this 180-day threshold remain non-taxable?
New Jersey treats sale-leaseback transactions as financing arrangements. The new law contains a specific exemption provision which indicates a 180-day time period. The Division will also continue to treat sale-leaseback transactions as financing transactions, notwithstanding the statutory time frame.
17. For purposes of sourcing certain lease payments (for example, a lease of an automobile under an agreement requiring periodic payments), how should the lessee determine the primary property location?
The primary property location is the address provided by the lessee in good faith which indicates where the leased property will be located. For motor vehicles, the lessor can generally rely on where the vehicle is registered, since that address should reflect where the vehicle is garaged. However, see #19.
18. If a lease permits the lessee to make accelerated payments, and thus does not require that only recurring periodic payments be made, is the lease sourced according to the general sourcing rules under N.J.S.A. § 54:32B-3.1(a)?
If a motor vehicle lease requires periodic payments, but permits the lessee to make payments other than the periodic payments, the lease is sourced according to the lease sourcing rules in N.J.S.A. 54:32B-3.1(c). In a motor vehicle lease or rental that does not require periodic payments, such as the rental of a car for three weeks, or the lease of a vehicle where all payments are contractually required up front, the payments are sourced in the same manner as a sale under N.J.S.A. 54:32B-3.1(a). In that case, the lease is sourced to the location where the lessee takes delivery of the vehicle.
19. For leased tangible personal property that has been purchased outside the state for lease outside the state to become subject to New Jersey use tax, must the property be relocated permanently to New Jersey?
If leased property that was purchased out of State and leased out of State is relocated to New Jersey, the remaining payments are sourced to New Jersey, for as long as the leased property remains here. If the lessor has information that the property is located in New Jersey, but the vehicle registration has not been changed, the lessee’s provision of the out of State address as the primary property location ( PPL) will not constitute good faith. The term “permanent” is intended in the sense of other than transient.
20. What is the lessor’s responsibility for collecting tax on lease payments for property that was subject to a lease that originated outside New Jersey but that is subsequently brought into New Jersey for use in the state? What if the lessor had since assigned the lease to a finance company?
When leased property is brought into New Jersey, sales tax is due on each of the remaining periodic payments for the term that the property remains in New Jersey. If the original lessor assigned the lease to a finance company, then the finance company is the lessor and is the party responsible for collecting the tax from the lessee and remitting it to the State. (This treatment is substantially the same as under prior law. Prior to 10/1/05, when leased property was moved into New Jersey, the lessor was responsible for remitting tax based on the remaining term of the lease; however, the tax payment was accelerated, whereas under the new law, it is remitted with each payment.)A lessor must obtain a New Jersey Motor Vehicle Identification Number, and obtain and use a New Jersey Sales Tax Satisfied Stamp in order to lease, title, or register a vehicle in New Jersey (this has always been the case).
When a vehicle comes into New Jersey from out of State, the title must be stamped indicating the amount of tax due on the remaining payments, which must be collected by the lessor from the lessee and remitted directly to the Division on the tax return covering the period in which the leased property entered this State. If an out of state title is presented without a New Jersey Tax Satisfied Stamp, in order to process the paperwork, the MVC is required to collect the sales tax in full, based on the lessee’s remaining lease payments (so the lessee will have to provide such information).
21. For purposes of the partial refund allowed for tax paid on leased property removed from New Jersey, how should the lessee demonstrate that the property has been removed on a “permanent basis"?
The lessor can rely on information indicating that the primary property location is no longer in New Jersey, which may be evidenced by a copy of the lessee’s new vehicle registration.
22. A partial refund for tax paid on leased property removed from New Jersey is allowed only if the property is removed to certain states (i.e. states that do not provide a credit for the New Jersey tax paid and that allow a corresponding partial tax refund for leased property relocated to New Jersey). Does the Division maintain a list of these states?
As a practical matter, since the motor vehicle lease sourcing rules source each payment to the primary property location (PPL), once the PPL is no longer New Jersey, this State is not legally entitled to the tax. Therefore, if leased property is moved out of New Jersey, a refund will be allowed upon evidence of a new PPL, which may be documented by a copy of the new out of State vehicle registration and an indication that tax was paid to that state. If the second state allows a credit for the sales tax paid to New Jersey, there will not be a “double taxation” issue, so a refund will not be granted by New Jersey.
23. A New York lessor leases a truck with a GVWR of 10,001 pounds or greater (“transportation equipment”) to a New Jersey lessee, to be titled and registered in New Jersey. The state of New York imposes tax on a lease transaction based on where the vehicle is titled, so New York tax will not be due on the sale.
When the lessee brings the vehicle into New Jersey, New Jersey use tax will be due. If the New York dealer is registered in New Jersey, it must collect the New Jersey tax and stamp the title with the New Jersey Sales Tax Satisfied Stamp. If the dealer is not registered, the lessee will be required to pay the tax directly to the MVC at the time of titling and registration.
24. Assume a 60 month lease (tax collected up front); 40 months into the lease, the lessee decides to purchase the vehicle. They have already paid tax on the additional 20 months worth of payments. So the “sales price” will be the additional payments plus the buyout. Do the numbers on the Sales Tax Satisfied Stamp have to “add up?”
The Sales Tax Satisfied Stamp contains lines for the Purchase Price, the Net Sales Amount, and the Sales Tax Paid. The “Sales Tax Paid” amount should be 7% of the net sales amount.
25. What is the taxability of fleet purchase discounts or incentives (provided for volume purchases, ordering incentives, government contracts, etc.)?
Fleet purchase discounts or incentives are not subject to tax. Retail rebates are subject to tax.
26. A New Jersey resident enters into a 36 month lease with a New York dealer. The paperwork is signed at the dealership and the vehicle is garaged in New Jersey. The state of New York imposes tax on a lease transaction based on where the vehicle is titled, so New York tax will not be due on the sale. What are the dealer’s tax obligations?
The New York dealer should collect the New Jersey tax up front, based on either the original purchase price or the total lease payments option, and remit it with the next monthly return.
27. Should a lessor be purchasing everything from vendor's tax free by issuing a resale certificate?
The definition of “sale” in the law includes lease or rental. The definition of “seller” includes a person making leases or rentals or tangible personal property. Since tax is imposed on the lease or rental of tangible personal property, the purchaser of property for lease or rental should issue a New Jersey Resale Certificate (ST-3) (or the new Streamlined Sales and Use Tax Certificate of Exemption) when purchasing property held out for lease or rental.
28. Can the sales tax due up front be financed into the lease?
Yes, the sales tax due up front may be financed into the lease, but it must be remitted by the lessor with the sales tax return due for the period in which the leased property was delivered to the lessee in this State.
29. Is it necessary to issue an invoice for sales tax to the lessee on every lease contract?
For example, if is it acceptable to finance sales tax into the lease, is an invoice to the customer necessary or can the calculation of sales tax be outlined in the language of the lease contract?
The law requires that sales tax must be separately stated on any sales slip, invoice, receipt or other statement of the price or rent payable. In a lease transaction, the Division has determined that the sales tax amount can be itemized for the lessee on the lease contract. It is not necessary that each monthly lease payment invoice separately state the sales tax.
30. Are lessors allowed to accept direct pay permits in NJ?
The Direct Pay authority provided in the Sales & Use Tax Act only allows a direct pay permit to be issued to a purchaser who acquires tangible personal property or services under circumstances which make it impossible at the time of acquisition to determine the manner in which the property or services to be used. The Direct Pay Permit (ST-6A) cannot be used where the taxability is not in question at the time of the purchase. There does not appear to be any basis for issuing a Direct Pay Permit to a leasing company. If the property itself or the lessee of the property is entitled to a sales tax exemption, the appropriate exemption certificate should be provided to the lessor. (e.g. ST-4, ST-5, ST-7)
The Division also issues Direct Pay (Audit) Certificates (ST-6X). The holder of an ST-6X is generally authorized to pay the tax directly to the Division rather than to the vendor of taxable goods and services. The holder of a Direct Pay (Audit) Certificate may issue the Certificate to a lessor and self-assess the tax due on the lease. The tax is still due up front, and it is calculated in the same manner as if the lessor were collecting it. A list of Direct Pay holders is available on the Division’s website.
31. How should tax be calculated on an open-end lease with a defined minimum lease term using the total of the lease payments method?
If a lease is renewable, the sales tax due up front is based on the total amount due during the initial minimum lease term. Then for each subsequent renewal period, the tax is due on the total of the payments during the renewal period. Thus, for a 12- month lease that renews monthly, the tax is calculated based on the total payments through month 12, and then on each monthly payment. If instead of a monthly renewal, the lease renews for an additional 12-month period, then in month 13, the tax is calculated based on the payments for the next 12 months.
32. Most leases are written with a fixed interest rate and, therefore, a fixed periodic payment. In some cases, leases are written with a variable interest rate. In these cases the periodic payments will vary based on changes in their interest rates. For example, a lease’s periodic payments can vary if the interest rate is tied to a national index such as the prime rate. How should open end leases with a defined minimum lease term that also include a provision for a variable interest rate be taxed?
In this situation, the tax base of the lease during the minimum lease term should be based on the interest rate at the inception of the lease. If the lease is extended beyond the minimum term and a new interest rate is in effect, the tax base must be adjusted accordingly.
Send an e-mail concerning Streamlined Sales Tax
Division of Taxation’s website
Division of Revenue’s website
To obtain a New Jersey Sales Tax Satisfied Stamp:
If already registered with the New Jersey Division of Taxation, contact the Division’s Motor Vehicle Section for a Motor Vehicle ID# and instructions on obtaining the Stamp (609-984-6206). If not already registered with the New Jersey Division of Taxation, you must register, then contact the Division’s Motor Vehicle Section for a Motor Vehicle ID# and instructions on obtaining the Stamp (609-984-6206). To register online, go to the Division of Revenue’s website.