Introduction: In many motor vehicle leasing transactions, the retail customer negotiates the terms and executes the lease contract with a dealer. The dealer then sells the vehicle and assigns the executed lease contract to a financing corporation, which may be a subsidiary of the manufacturer. The lease contract often provides that the retail customer pays a mandatory, separately stated "acquisition fee." This fee may be capitalized over the term of the lease or paid up-front. If it is paid up-front, it is generally transferred from the dealer to the leasing company. The retail customer may be advised that the purpose of the fee is to compensate the leasing company for administrative expenses in connection with the lease transaction.

Issue: Are separately stated, mandatory acquisition fees charged by a lessor to a lessee in connection with the lease of a motor vehicle subject to tax?

Directive: Separately stated, mandatory acquisition fees charged by a lessor to a lessee in connection with the lease of a motor vehicle are subject to tax, regardless of whether they are capitalized over the term of the lease or paid up-front at the origination of the lease.

Discussion of Law:

Massachusetts imposes an excise upon all retail sales of tangible personal property and telecommunications services in Massachusetts by a vendor unless otherwise exempt. The statutory definition of "sale" includes any transfer of title or possession, or both, for a consideration including leases or rentals of tangible personal property. Where applicable, the excise is imposed at the rate of five percent of the sales price of the property or services sold. G.L. c. 64H, §§ 1,2. A complementary five percent use tax is imposed on tangible personal property and telecommunications services purchased from any vendor for storage, use or consumption in Massachusetts. G.L. c. 64I, §§ 1, 2.

The taxable "sales price" in a retail sale is generally the total amount paid by the purchaser to the vendor as consideration. In a sale of tangible personal property, the taxable sales price includes any services that are a part of the sale. G.L. c. 64H, § 1.

The general rules for calculation of tax on leases of motor vehicles are contained in the Department's sale tax regulation on Motor Vehicles, 830 CMR 64H.25.1(9). This regulation provides that each period for which a motor vehicle lease or rental payment is charged is considered a completed retail sale for the purpose of imposition, collection, and payment of sales tax. The sales price on which the tax is computed for each period is the total lease or rental charge for that period. However, if the lease is for a period of one year or more, and if the monthly lease payments include separately stated charges for fuel, insurance, motor vehicle excise or registration fees, then the charges for those items are not included in the sales price on which the tax is computed. The taxability of various other charges in connection with motor vehicle leases is discussed in DOR Directive 97-4. [1] That directive provides that separately stated charges for optional extended warranty/service contracts, "roadside assistance" contracts, or life, accident or health insurance are also not subject to tax.

Acquisition fees are not specifically discussed in the Department's regulation or DD 97-4. However, they are paid by the lessee to the lessor as consideration for the transfer of possession (lease) of the motor vehicle. They are not optional. Thus, whether or not they or separately stated, and whether or not the lessor describes them as service charges for the lessor's administrative or paperwork costs in connection with the preparation and approval of the lease contract, they are subject to Massachusetts sales tax.

/s/Bernard F. Crowley, Jr.
Bernard F. Crowley, Jr.
Acting Commissioner of Revenue

BFC:DMS:ecl

August 6, 2001

DD 01-5



[1] Note that the portion of DOR Directive 97-4 discussing manufacturer's rebates has been superceded by an amendment to the Department's regulation on Discounts, Coupons and Rebates, 830 CMR 64H.1.4. Effective May 1, 2000, manufacturer's rebates that are applied, at the time of origination of a motor vehicle lease, as a capitalized cost reduction or otherwise used to reduce payments due under the lease, are excluded from the sales price subject to tax.