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Sales Tax Ruling for Transfers of Title on Loaner Cars

March 9, 2017
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Improper tax collection leaves dealership stranded

The New York Division of Tax Appeals recently ruled that certain motor vehicle title transfers from auto dealerships to an administrative entity within a commonly-owned sales and services group, constituted taxable sales for sales tax purposes.  CLM Associates, LLC (Div. Tax App., ALJ Unit) (February 23, 2017).
The taxpayer, CLM, was one of twelve auto dealerships within a sales and services group.  As is common, the various dealerships offered loaner cars to customers receiving service work. At a certain point, the parent company restructured its business model. It was decided that CLM would cease operating as a licensed dealership and would begin functioning as an administrative entity, servicing the remaining eleven dealerships (handling accounting, human resources, marketing, etc.). As part of this restructuring, it was also decided that all loaner cars within the group would be titled and insured by CLM, instead of the individual dealerships.  A bill of sale was created to effectuate the transfer of each loaner car to CLM, listing CLM as the purchaser. The loaner cars and title paperwork, however, remained with the individual dealerships.
During a routine sales tax audit, and later at trial, CLM argued that these transfers were not taxable sales, because no consideration was paid by CLM in exchange for receiving only nominal title to the loaner cars.  The Administrative Law Judge disagreed.  

The Judge concluded that, even though no cash changed hands, CLM provided the following forms of consideration:  First, by acquiring title, CLM also acquired any accompanying liability, which allowed the dealerships the significant benefit of spreading potential losses, and thereby avoiding direct, catastrophic financial loss.  Second, CLM had also assumed responsibility for each loaner car as joint, and several obligors on the financing.  Third, consolidation of all loaner car titles under CLM made them easier to manage, thereby easing each dealerships’ burden. 

In summary, the Judge concluded that CLM had assumed responsibilities that it did not have prior to the transfers, while the dealerships gained certain benefits - both of which are “hallmarks” of consideration.  Consequently, the title transfers were treated as taxable sales, with sales tax due.
Sales tax can be tricky.  Understanding the ins and outs of when to charge and collect sales tax, even on transfers between affiliated companies, can be critical.  Likewise, proper tax planning, in advance of a restructuring, can mitigate or even avoid sales tax issues.  Either way, mistakes can leave you 'stranded on the side of the road'.  Contact your Citrin Cooperman advisor to further discuss.