October 31, 2002

You request a letter ruling on behalf of the ***************** ("Lessor") regarding the applicability of Massachusetts sales and use taxes to deferred like-kind exchange transactions that qualify for nonrecognition of gain or loss treatment under I.R.C. § 1031. Generally, under § 1031, no gain or loss is recognized upon the exchange of property held for productive use in a trade or business or for investment if the property is exchanged solely for property of like kind which is to be held either for productive use in a business or for investment. I.R.C. § 1031(a)(1). At issue are motor vehicles used by Lessor in its leasing business. Lessor purchases the motor vehicles for lease and eventual sale upon the expiration of the lease period and uses the proceeds from the sale to purchase replacement vehicles for lease. Such an exchange is classified as a deferred like-kind exchange under § 1031. A "deferred like-kind exchange" is an exchange in which replacement property is received after the relinquished property has been transferred.

In particular, you ask about the applicability of Massachusetts sales and use taxes to sales by Lessor of motor vehicles previously leased by it. The sales at issue involve one of two scenarios:

1. the sale by Lessor of a previously leased motor vehicle directly to a lessee exercising his or her purchase option under the lease agreement; and

2. the sale by Lessor of a previously leased motor vehicle directly to a dealer for resale to the lessee or some other purchaser or at auction to a dealer for resale.

Additionally, you ask about the applicability of Massachusetts sales and use taxes to sales to Lessor of replacement motor vehicles purchased by Lessor using the proceeds received from the above sales.

You state that the actual sale of a motor vehicle at hand is made by a "qualified intermediary," as defined in Treas. Reg. § 1.1031(k)-1(g)(4)(iii) ("Intermediary"), not by Lessor. Lessor uses a qualified intermediary (one of four safe harbors allowed by Treas. Reg. § 1.1031(k)-1(g)) in purchasing and selling the motor vehicles it leases in order to qualify the deferred like-kind exchanges for nonrecognition of gain or loss federally under I.R.C. § 1031.

The qualified intermediary safe harbor, as is true of the other three safe harbors as well, is intended to protect a taxpayer's nonrecognition treatment in a deferred like-kind exchange in which cash or other property is received as full consideration for the relinquished property. See generally Treas. Reg. § 1.1031(k)-1(g). There, it is stated that the use of a qualified intermediary will result in a determination that the taxpayer is not in actual or constructive receipt of cash or other property for purposes of I.R.C. § 1031. Id. at 1(g)(1). Otherwise, the actual or constructive receipt of cash or other property as full consideration for the relinquished property before the like-kind replacement property is actually received would constitute a sale, not a deferred exchange. Thus, the taxpayer would be ineligible for nonrecognition treatment under § 1031.

Facts

Lessor is a company engaged in leasing motor vehicles. It operates several leasing divisions under various names. Lessor uses Intermediary to purchase the motor vehicles used in its leasing business. The vehicles purchased are paid for out of an account funded with money received from the sale of previously leased motor vehicles ("Exchange Account"), which Intermediary is authorized by Lessor to maintain. If the funds in the Exchange Account are insufficient to cover the cost of a vehicle purchased, Lessor will make up the difference.

The titles to the motor vehicles purchased are transferred directly from the sellers to Lessor, not to Intermediary. As expressly stipulated in the Exchange Account agreement (required by Treas. Reg. § 1.1031(k)-1(g)(4)(iii)(B)) between Lessor and Intermediary, the latter never takes actual or constructive possession of, holds title to, or is registered as the owner of such motor vehicles.

When purchasing a motor vehicle for use in its leasing business, Lessor provides the seller, via Intermediary, with a Sales Tax Resale Certificate, Form ST-4, in lieu of paying the vendor a sales tax. Lessor collects sales taxes from lessees in each period for which a lease payment is charged.

At the conclusion of the lease period, Lessor typically sells the motor vehicle, via Intermediary, directly to a dealer for resale to either the lessee or some other purchaser or at auction to a dealer for resale. Occasionally, lessee will exercise his or her purchase option under the lease agreement, in which case, Lessor will sell the motor vehicle, via Intermediary, directly to the lessee. The purchase price paid by the dealer or lessee is paid over, as directed by Intermediary, to the Exchange Account. The lessee pays a sales tax to the Registrar of Motor Vehicles upon registering the vehicle in Massachusetts. Dealers, including those that purchase at an auction, in contrast, provide Lessor, via Intermediary, a Sales Tax Resale Certificate, in lieu of paying a sales tax.

The title to a motor vehicle purchased by a lessee or dealer is transferred directly from the Lessor to the purchaser, not to Intermediary. As is true when the vehicle is initially purchased by Lessor, it is expressly stipulated in the Exchange Account agreement that Intermediary never takes actual or constructive possession of, holds title to, or is registered as the owner of such motor vehicles.

Discussion

A. Sales and Use Taxes - Generally

Under the Massachusetts General Laws a sales tax is imposed on all retail sales in Massachusetts, by any vendor, of tangible personal property at the rate of 5% of the gross receipts of the vendor from all such sales of such property, unless otherwise exempted. G.L. c. 64H, § 2. If no sales tax is paid on the purchase of the tangible personal property, a 5% use tax is imposed upon the storage, use, or other consumption of the property in Massachusetts. G.L. c. 64I, § 2. Otherwise, purchases upon which sales tax has been collected are exempt from use tax. G.L. c. 64I, § 7(a).

For both sales and use tax purposes, "sale" and "selling" are, in relevant part, defined as any transfer of title or possession, or both, exchange, barter, lease, rental, conditional or otherwise of tangible personal property for a consideration, in any manner or by any means whatsoever. G.L. c. 64I, § 1. "Retail sale" is defined, in relevant part, as a sale of tangible personal property for any purpose other than resale in the regular course of business. Id. Accordingly, sales for resale in the regular course of business are exempt from sales and use taxes.

The Massachusetts sales and use tax regulation on motor vehicles, 830 CMR 64H.25.1 (" Motor Vehicle Regulation" or "Regulation"), provides that the lease of a motor vehicle by a lessor in the regular course of business is considered a sale at retail and is subject to sales or use tax. 830 CMR 64H.25.1(9)(a). Additionally, the Regulation provides that a sale of a motor vehicle to a lessor who purchases the vehicle exclusively for lease or rental in the regular course of business is considered a purchase for resale in the regular course of business and is exempt from sales and use taxes, but only if the vehicle is in fact used exclusively for lease or rental. 830 CMR 64H.25.1(7)(b)(1)(a). Finally, it provides that the sale of a motor vehicle to a person who is an agent, employee, or other representative of a lessor is a sale to the lessor if the Certificate of Origin, title, or other document of ownership is issued, transferred, or assigned in the name of the lessor. 830 CMR 64H.25.1(7)(b)(1)(b).

B. Sale by Lessor/Intermediary Upon Completion of Lease Term Directly to Lessee

Based on the above, sales by Lessor, via Intermediary, of motor vehicles previously leased by Lessor directly to a lessee exercising his or her purchase option under the lease agreement are subject to use tax. As provided in the Motor Vehicle Regulation, "[i]f a vehicle which has been leased or rented is sold or transferred by a lessor, the sale or transfer is subject to the use tax under M.G.L. c. 64I, § 2." 830 CMR 64H.25.1(9)(b).

Upon the lessee's purchase of the motor vehicle, the title to the vehicle is transferred directly from Lessor to the lessee. Accordingly, as purchaser, title holder, and the one in possession of the motor vehicle, the lessee must pay the tax to the Registrar of Motor Vehicles ("Registrar") and file with the same a completed Application for Title and Registration, Form RMV-1, within 10 days of the date of purchase, assuming that pursuant to G.L. chapters 90 or 90D, lessee is required to register or title the vehicle in Massachusetts. 830 CMR 64H.25.1(4)(a). See also G.L. c. 64H, § 3(c). However, if the lessee is not subject to chapters 90 or 90D, then he or she must pay the tax to the Department of Revenue instead and file Form ST-7R, Motor Vehicle Certificate of Payment of Sales or Use Tax, on or before the twentieth day of the month following the month of purchase. Id. In either case, the tax is not to be collected by Lessor or Intermediary.

The fact that Intermediary, rather than Lessor, actually orchestrates and makes the sale to the lessee does not change the conclusion that lessee owes a use tax upon purchasing the motor vehicle. Although the Motor Vehicle Regulation expressly provides only that the sale of a motor vehicle to a person who is an agent, employee, or other representative of a lessor is a sale to the lessor if the Certificate of Origin, title, or other document of ownership is issued, transferred, or assigned in the name of the lessor, it logically follows that the sale of a motor vehicle by a person who is an agent, employee, or other representative of a lessor is a sale by the lessor if the Certificate of Origin, title, or other document of ownership is issued, transferred, or assigned in the name of the lessor. See 830 CMR 64H.25.1(7)(b)(1)(b). Accordingly, as the purchaser, title holder, and the one in possession of the motor vehicle, lessee must pay the tax regardless of whether he or she purchases the motor vehicle from Lessor or Intermediary.

C. Sale by Lessor/Intermediary to Dealers for Resale

Sales of previously leased motor vehicles by Lessor, via Intermediary, directly to a dealer for resale to the lessee or some other purchaser or at auction to a dealer for resale are exempt from sales and use taxes as long as the requirements found in 830 CMR 64H.25.1(7) of the Motor Vehicle Regulation are met. There, it is stated that sales and purchases of motor vehicles for resale by a Massachusetts lessor to a dealer are exempt from taxation as long as the dealer purchases the vehicles exclusively for resale in the regular course of business and, in fact, the vehicles are used exclusively for resale. 830 CMR 64H.25.1(7)(a). See also G.L. c. 64H, § 8.

The fact that Intermediary, rather than Lessor, actually orchestrates and makes the sales to the dealers does not change the conclusion that such sales are generally exempt from sales and use taxes. Whether the proceeds from such sales are paid directly to Lessor or to Intermediary for deposit into the Exchange Account makes no difference. In either case, Lessor is considered to have made the sale. As discussed previously, the sale of a motor vehicle to or by a person who is an agent, employee, or other representative of a lessor is a sale to or by the lessor if the Certificate of Origin, title, or other document of ownership is issued, transferred, or assigned in the name of the lessor. 830 CMR 64H.25.1(7)(b)(1)(b).

D. Sale to Lessor/Intermediary of Replacement Motor Vehicles

Sales to Intermediary of motor vehicles used by Lessor in its leasing operations are exempt from sale and use taxes, as long as such vehicles are in fact used by Lessor exclusively for lease or rental until eventually resold. The fact that Intermediary, rather than Lessor, actually makes the purchases does not change this conclusion. Because Intermediary is a representative of Lessor and the titles to the motor vehicles purchased are always transferred directly from the sellers to Lessor, never to Intermediary, Lessor is considered to be the purchaser and owner nonetheless under the Regulation and General Laws.

Conclusions

Regardless of whether the sale is made by Lessor or by Intermediary, sales of motor vehicles previously leased by Lessor directly to a lessee exercising his or her purchase option under the lease agreement are subject to use tax. Additionally, regardless of whether the sale is made by Lessor or by Intermediary, sales of Lessor's previously leased motor vehicles directly to a dealer for resale to the lessee or some other purchaser or at auction to a dealer for resale are exempt from sales and use taxes as long as the dealer purchases the vehicles exclusively for resale in the regular course of business and, in fact, the vehicles are used exclusively for resale. Finally, regardless of whether the sale is made to Lessor or to Intermediary, sales of motor vehicles used by Lessor in its leasing operations are exempt from sale and use taxes, as long as such vehicles are in fact used by Lessor exclusively for lease or rental until eventually resold.

Very truly yours,

/s/Alan LeBovidge

Alan LeBovidge
Commissioner of Revenue

AL:DMS:ps

LR 02-10