A recent decision issued by New York's Tax Appeals Tribunal illustrates the importance of careful drafting of automobile dealership sales and service agreements to avoid certain sales tax pitfalls. In Matter of West-Herr Ford, Inc., Tax Appeals Tribunal (December 4, 2003), the Tribunal sustained a determination that an automobile dealership was not entitled to a resale exclusion for the vehicles it used as loaner cars. The dealership was assessed thousands of dollars for unpaid use tax attributable to charges for cars it rented to be used as loaner cars. The dealership made these loaner cars available to service and repair customers who had purchased a new automobile from the dealership, as well as to customers who had purchased a new or used automobile and an Extended Service Plan contract on that automobile.

New York regulations provide that vendors performing warranty services may purchase for resale any tangible personal property which is transferred to its customer in connection with services rendered. Because the Extended Service Plan contained specific provisions regarding service loaners, the Tribunal reasoned that the dealership was legally obligated to provide its customers with a service loaner and consequently, the charges incurred by the dealership for these specific loaner cars were deemed to be acquired for resale. And, in fact, the Ford Motor Company reimbursed the dealership for rental car charges incurred under the terms of the Extended Service Plan, much as it did with other warranty items. Thus, if the use of the loaner cars was limited to satisfying the dealership's obligations under the extended service plan, no use tax would have attached.

The Tribunal determined, however, that the basic warranty supplied to customers did not obligate the dealership to provide a loaner car to all its new car purchasers. Even though the accompanying Service Replacement Policy contained provisions applying to transportation expenses, the Tribunal ruled that the Policy merely stated non-binding criteria for deciding whether the dealership would provide a loaner vehicle in certain instances. Since nothing in the purchase agreement or warranty obligated the dealership to provide a loaner car to its new car purchasers, the dealership was deemed to be the user of the loaner cars and was not entitled to the resale exclusion for the acquisition of these vehicles.

This decision demonstrates that a sales agreement and service warranty must clearly obligate the dealership to provide a loaner car to its customers before the acquisition of such cars can qualify for the resale exemption. Dealers would be wise to modify their agreements to take advantage of the resale exemption. If it is not possible or feasible to amend the agreements, tax may be saved by segregating the loaner fleet so that only a limited number of cars are used to provide loaner service to customers who do not have plans like the Extended Service Plan described above.