Auto dealerships handle transactions that involve significant sums of money. Given the nature of these high-value transactions, heavily in the form of cash transactions, auto dealers are frequently scrutinized by the New York Department of Tax and Finance. The complexity of New York State sales tax regulations and high sales volume can make compliance challenging for dealership owners.

This guide is meant to provide you with the essential New York sales and use tax information that every auto dealer should know, as well as insights into other tax issues pertinent to your dealership. Drawing on our extensive experience with New York sales and use tax matters, we support auto dealers in defending their past sales reporting and identifying opportunities to minimize their sales tax liability wherever possible.

Understanding Sales and Use Tax for Automotive Dealerships in New York

The general rule is that New York sales and use taxes are imposed on the sale of tangible personal property and certain services. For automotive dealerships, this includes selling motor vehicles, parts, and accessories. Any charges related to maintaining, servicing, repairing, or installing tangible personal property in or on motor vehicles are also subject to sales tax.

New York auto dealerships regularly sell motor vehicles and related services. Dealerships must register and collect tax on all taxable sales. Once registered as a sales tax vendor, dealerships become trustees for the state, responsible for collecting and remitting the sales tax on behalf of the state. It's important to note that officers and employees responsible for these duties may be held personally liable for any sales tax collected but not remitted to the state.

Use tax may apply on the use of taxable tangible personal property and certain services within New York State. This tax ensures that purchases made out of state but used within New York are subject to the same taxation as items purchased within the state. For more detailed information on use tax, refer to the New York State Department of Taxation and Finance website.

How to Start Collecting New York Sales and Use Tax

As an automotive dealer in New York State, your first significant responsibility is registering with the New York State Tax Department to obtain a Certificate of Authority, which authorizes dealerships to:

Collect state and local sales and use taxes on all applicable transactions.
Issue and accept sales tax exemption documents where applicable.

You must apply for a Certificate of Authority at least 20 days before starting your business following these steps:

Visit the New York State Tax Department’s website.
Review the latest guidelines in the Tax Bulletin titled How to Register for New York State Sales Tax (TB-ST-360).
Complete and submit your application to legally operate from day one.

Operating your dealership without a valid Certificate of Authority can lead to severe penalties, including:

Fines of up to $10,000 for making taxable sales without the certificate.
Additional penalties for issuing or accepting exemption documents before being properly authorized.

Please ensure to secure your Certificate of Authority before business transactions begin to avoid these hefty fines. After obtaining your Certificate of Authority, your responsibilities don’t end. As a dealer, you must:

Maintain accurate records: Document all sales, exemptions, and taxes collected.
File regular tax returns: Submit timely filings to the New York State Tax Department.
Make timely payments: Ensure all collected sales taxes are remitted promptly to the state.

Failure to comply with these responsibilities can result in additional fines and legal challenges, disrupting your business operations.

Determining Sales Tax on Motor Vehicle Sales

When an automotive dealer in New York State sells a motor vehicle to a New York resident, it is generally required to collect sales tax from the customer. The sales tax applies to various components associated with the sale. The following items are generally included in the amount subject to sales tax:

Sale Price of the Vehicle: The total agreed-upon price of the motor vehicle.
Warranty Fees: Charges related to any warranties or service contracts associated with the vehicle.
Transportation and Destination Charges: Fees for transporting the vehicle from the manufacturer to the dealership or directly to the customer.
Dealer-Installed Optional Equipment and Accessories: Any additional features or accessories added to the vehicle by the dealer, unless specifically exempt.
Advertising Charges: Costs related to advertising the vehicle.
Dealer Preparation Fees: Charges for preparing the vehicle for sale, such as cleaning and inspection.
Dealer-Imposed Tire Disposal Fees: Certain fees imposed by the dealer for disposing of old tires when new ones are installed.
Customer Rebates or Incentives: Any customer rebates or incentives provided or reimbursed by the manufacturer or a third party that are applied to the sales agreement.

However, not every component of a vehicle sale is subject to sales tax. Exclusions from the taxable amount include:

Trade-In Allowances: The value of any trade-in vehicle accepted as part of the purchase, provided it is intended for resale.
Financing Fees: Charges for financing the vehicle, such as interest payments, are not subject to sales tax.
Gap Insurance Charges: Reasonable and separately stated gap insurance fees
Non-Reimbursed Dealer Discounts: Discounts provided by the dealer that the manufacturer or another third party does not reimburse.
Factory-to-Dealer Incentives: These are excluded from the taxable amount as they do not directly affect the customer’s purchase price.
Documentation Fees: Certain fees for preparing purchase documents, provided they are reasonable and separately stated.
DMV Fees: These are fees related to vehicle registration, title, and inspection that the DMV imposes.

When a vehicle is sold alongside non-taxable items for a single price, the entire sale may be subject to sales tax unless the non-taxable items are reasonably priced and separately listed on the invoice.

Trade-ins and Sales Tax Calculation

When a dealer accepts a motor vehicle or other tangible personal property as a trade-in for partial payment on a new vehicle purchase, the value of this trade-in can be deducted from the taxable amount. This deduction applies only if the dealer intends to resell the traded-in vehicle.

For example, if a customer agrees to purchase a new vehicle for $28,500, which includes all taxable optional equipment and accessories, and the dealer accepts the customer's current vehicle as a trade-in valued at $6,700, the sales tax would be calculated on $21,800 ($28,500 - $6,700). This results in substantial tax savings for the customer.

Dealers must document the trade-in value clearly on all sales paperwork and ensure the traded-in vehicle is intended for resale to qualify for the tax deduction. The trade-in deduction applies to the full agreed-upon value, regardless of any outstanding loans on the traded vehicle. See (New York State Department of Taxation and Finance, Publication 838, "A Guide to Sales Tax for Motor Vehicle Dealers," pp. 11-12).

Financing and Sales Tax Considerations

When calculating the taxable receipt amount for a motor vehicle sale certain financing-related charges are excluded. Specifically, any fees paid by the customer for financing the motor vehicle, including interest, are not subject to sales tax. This means that sales tax is applied only to the actual sale price of the vehicle and not to the cost of financing. Dealers should clearly document these non-taxable financing charges to ensure accurate tax calculation. See (DTF Publication 838, p. 11).

Warranties and Service Contracts: Sales Tax Implications

When a dealer offers a warranty, extended warranty, or service contract, the sale is subject to sales tax. The tax rate applied matches the jurisdictional rate of the vehicle covered by the contract.

Services provided under these contracts often have different tax treatments. For instance, if a customer receives complimentary services as part of their warranty or service contract, such as scheduled oil changes, these are not subject to additional sales tax. However, if a service is only partially covered by the warranty, any charges beyond the coverage are taxable.

When a dealer or repair shop performs maintenance, repairs, or other services at no cost to the customer under a warranty agreement, these services are not subject to sales tax. However, the tax implications change when warranty providers reimburse dealers for these services. Typically, such reimbursements are subject to sales tax. An exception exists if the warranty provider issues Form ST-120 to the dealer, which exempts the reimbursement from taxation. See (DTF Publication 838, pp. 15-17).

Sales and Use Tax Responsibilities for Dealerships Offering Long-Term Leases

For New York auto dealerships that offer long-term vehicle leases, it's imperative to understand that leasing is not exempt from sales tax. When your dealership enters into a long-term lease agreement with a customer, the total amount of sales tax due is calculated at the inception of the lease. All payments and fees associated with the lease—whether upfront owing or spread out over the lease term—are subject to sales tax from the beginning.

Key components of the lease that are subject to sales tax include:

Initial and Down Payments: Any money the lessee pays when signing the lease.
Total Monthly Payments: The combined total of all monthly or periodic payments for the lease term, including any renewal options.
Additional Fees: This covers a range of fees, such as acquisition fees, documentation fees, and dealer preparation charges.

Your dealership should collect the total sales tax from the lessee at the time of the first lease payment or when the vehicle is registered with the DMV, whichever occurs first.

While many components of a lease are taxable, there are some exceptions. For instance:

Vehicle registration and title fees are generally not subject to sales tax if they are separately stated and accurately reflect DMV charges.
Documentation fees can be exempt if they are reasonable, separately stated, and not bundled into the monthly lease payments.
Security deposits refundable at the end of the lease are not taxed unless a portion is withheld.

However, charges such as excess mileage fees or damage repair costs arising during the lease term will be subject to sales tax when paid.

In addition to long-term leases, dealerships should be aware of the tax implications for short-term leases (less than one year). For these, dealers must collect sales tax at the time of each lease payment, based on the locality where the vehicle is delivered. Furthermore, a 6% special tax is imposed on passenger car rentals in New York State for leases less than one year. An additional 5% special supplemental tax applies to passenger car rentals within the Metropolitan Commuter Transportation District (MCTD), which includes New York City and several surrounding counties. See (DTF Publication 838, p. 17).

Auto Sales Exempt from New York Sales Tax

In New York, certain motor vehicle sales conducted by your dealership may qualify for exemptions from sales tax, relieving your dealership of the responsibility to collect and remit tax on those transactions. Here are some of the key exemptions:

Vehicles Bought for Resale: If your dealership purchases vehicles for resale, you can use a resale certificate (Form ST-120) to avoid paying sales tax on those purchases.
Resale of Related Personal Property: This includes items such as accessories, parts, oils, lubricants, and paint that are intended for resale.
Subcontracted Motor Vehicle Services: Repairs performed by subcontractors may be exempt from sales tax
Sales to Non-Residents: Vehicles sold to non-residents of New York may be exempt from sales tax, provided certain conditions are met.
Accessibility Equipment: Sales of vehicles equipped with accessibility modifications for persons with disabilities, including the installation charges, are exempt from sales tax
Vehicles for Farming and Horse Boarding: Vehicles primarily used in farming activities or certain horse boarding operations qualify for sales tax exemption
Vehicles for Film Production: Vehicles explicitly purchased for film production can be exempt from sales tax
Qualifying Tractor, Trailer, and Semi-Trailer Sales: Under certain conditions, these vehicle sales may also qualify for exemptions
Bus Sales: Sales of buses, particularly for specific uses such as public transportation, may be exempt.
Sales to Exempt Organizations: Sales to entities such as the U.S. government, the State of New York, charitable organizations, educational institutions, and certain Indian nations or tribes are exempt from sales tax.

These exemptions can significantly impact your dealership's tax responsibilities, so you must familiarize yourself with the specific criteria and documentation required for each.

What Dealerships and Customers Need to Know about Out-of-State Leases Used in New York

When a New York resident leases a vehicle from a dealership in a neighboring state, such as New Jersey, the transaction is not exempt from New York's use tax. This scenario often occurs when a customer leases a vehicle in another state but registers and primarily uses the vehicle in New York. In such cases, New York use tax is due on the lease, regardless of where the lease originated.

Imagine a New York resident, who is registering their car in New York, but is leasing a car from a New Jersey dealership. Even though the lease is executed in New Jersey, the resident plans to register the vehicle in New York and use it primarily within the state. Under New York tax law, the lease is subject to New York use tax because the car is registered in New York, even if the transaction occurred in New Jersey.

Dealerships should inform customers that New York use tax will be owed, calculated based on the total lease amount, and payable when the vehicle is registered in New York.

Factors Affecting Use Tax on Vehicles Purchased Out of State

If a vehicle is purchased or leased and used outside New York before being brought into the state, the amount of use tax owed can vary depending on the length of time the vehicle was used out of state:

Used Outside New York for Less Than Six Months: The total purchase price or lease amount is subject to New York use tax.

Used Outside New York for More Than Six Months: The amount subject to New York use tax is the lower of the vehicle's original purchase price or its fair market value when it first enters New York.

A tax credit against its New York use tax for sales tax paid to other states is only available if the other state offers a reciprocal credit for taxes paid to New York. States like New Jersey do not provide this reciprocal credit. Consequently, New York residents leasing vehicles from dealerships in these states cannot reduce their New York use tax liability because they paid tax in another state.

Taxable Services in New York Auto Dealerships

Beyond the sale of motor vehicles, your dealership likely engages in various other transactions and services subject to New York sales tax. Understanding which services are taxable helps ensure your dealership remains compliant and avoids unexpected tax liabilities. Here are some of the critical services that are typically subject to sales tax:

Vehicle Maintenance, Service, or Repair Charges: Any charges for maintaining, servicing, or repairing vehicles are generally subject to sales tax.
Sales of Motor Fuel: The sale of gasoline or diesel fuel at your dealership is subject to sales tax.
Short and Long-Term Vehicle Leases: These transactions are subject to sales tax, whether leasing vehicles for a few days or several years.
Dealer’s Personal Use of a Vehicle: If a vehicle is used personally by a dealer or employee, it may be subject to use tax.
Donated Vehicles: Vehicles donated by the dealership may have specific tax implications, depending on the circumstances.
Demonstration and Loaner Vehicles: Vehicles used for demonstrations or provided as loaners (courtesy vehicles) may be subject to sales or use tax.
Parking, Garaging, and Storing Vehicles: Charges for parking, garaging, or storing vehicles are also subject to sales tax.

Staying informed about which services are taxable will help your dealership minimize the risk of audits or penalties from the New York State Tax Department.

Case Study: The Importance of Accurate Sales Tax Reporting

The recent case involving Guy Kennedy Nicolas, the owner of G&A Auto Care Inc., starkly reminds dealerships to accurately sales tax reporting.

In April, Nicolas was arrested following a joint investigation by the Office of the Attorney General (OAG), the State Department of Taxation and Finance (DTF), the New York State Police (NYSP), and the Department of Motor Vehicles (DMV). The investigation revealed that Nicolas had failed to report over $2 million in sales over 11 years, resulting in more than $160,000 in unpaid state sales taxes.

During this time, Nicolas only filed two business tax returns for his dealership, which led to six felony charges, including second-degree grand larceny and multiple counts of criminal tax fraud. If convicted, Nicolas could face up to 15 years in prison.

As Attorney General Letitia James emphasized, "Failing to pay taxes is not only illegal, it cheats New Yorkers across the state out of quality public services they rely on." The G&A Auto Care case is a cautionary tale for auto dealerships about the potential legal and financial risks of neglecting sales tax obligations.

Guide to New York Sales and Use Tax for Automotive Dealerships