Laws, Regulations & Annotations
Business Taxes Law Guide – Revision 2013
Sales and Use Tax Annotations
215.0000 DEMONSTRATION, DISPLAY AND USE OF PROPERTY HELD FOR RESALE—VEHICLES—Regulation 1669.5
215.0580 Use of Vehicles. A company that is a wholly owned subsidiary of a major car manufacturer is engaged in the business of performing contracts for the manufacture of military hardware of surveillance equipment including satellite vehicles. It is not directly involved in the manufacture of components for motor vehicles but does perform considerable research and development work which could lead to improvements in motor vehicle components. Certain vehicles are acquired for resale without payment of sales tax reimbursement or use tax and are registered with the cooperation of local dealers. The employees are allowed the use of these vehicles for personal purposes for the payment of a monthly amount equivalent to 1.37% of the vehicle cost. The company declares and pays use tax on these amounts and also pays for repairs and maintenance, insurance, and all taxes and licenses. The employees are required to return these vehicles after they are used for 10,000 miles and complete a product evaluation form. Under terms of the agreement, a vehicle can be sold without notice or consent of the employee. Actual resale is made through local dealers. The company believes that the use of the vehicles should be regarded as nontaxable demonstration and display in view of the product evaluation or that the vehicles were leased to the employees.
Nontaxable demonstration and display are limited to activities performed while the purchaser is holding the property for sale in the regular course of business. In legal contemplation, the company did not purchase and hold the vehicles for sale in the regular course of business even though a resale was to be made of each vehicle after it was used for 10,000 miles. In addition, the company does not qualify for the alternative reporting authorized by Regulation 1669.5 since the method is limited to manufacturers, distributors, or dealers.
It is also concluded that the transactions are not bona fide lease agreements. The employees receive the limited right of use of the vehicles for a monthly amount that is only approximately one-third of the market rental rate. While the preparation of a simple evaluation sheet has some value, it is not measured in terms of money and does not account for the great disparity. The amount of the monthly payment is not negotiated but is dictated by the company. It is only available to certain employees. The property may be sold by the company without notice to the employee. Finally, the employee does not bear the ordinary expense relating to its use during the period it is driven as is currently required of a lessee. In substance, the possession and use were given to the employees primarily as a fringe benefit. Tax is due on cost. The company's purchase of these vehicles "for resale" is contrary to law and should be discontinued. 8/12/92.