Policy letter; vehicle transfer; Sept15,2008

Topic Code: V037Vehicle Transfer (ST)           Document Reference: 08300052

September 15, 2008

Redacted Content

Re: Corporations acting as a unit, your email, 08-07-2008.

Thank you for your email and your continuing confidence in my ability to answer your more difficult questions about Iowa sales and use tax law. On this occasion you inquire if transfers of vehicles from several existing affiliated entities to a newly formed affiliated entity can be exempted from motor vehicle use tax. The newly formed entity will lease the transferred vehicles back to the existing affiliated entities. The leasing entity will be a “paper entity” with no employees; it will also be an LLC that will be ignored for the purpose of reporting income tax. The leasing entity will lease only to its affiliated entities. All this is done so that the cost of insuring the vehicles will be reduced.

You ask two questions. The first question is: “We already paid use tax on those vehicles when the affiliated companies in the group purchased the vehicles, if we transfer these vehicles to an internal leasing company. . .do we need to pay use tax on transfer?” The answer is no, though not for a reason you might expect. The use tax on motor vehicles subject to registration has been repealed, effective July 1, 2008. This was done in Senate File 2420, 82nd G.A. Regular Session, Part 3 of Division V (Iowa 2008). Replacing it is a fee imposed each time a vehicle is registered in Iowa. The fee is imposed on an amount almost always equal to the “purchase price” on which the motor vehicle use tax was previously computed. This registration fee is imposed by Part 2 of Division VI of Senate File 2420.

Are the transfers in question subject to the fee? Yes. The fact that use tax was paid on previous transfers of the vehicles does not exempt transfers to the leasing entity from tax. No exemption in favor of used vehicles existed when their transfers were subject to use tax, and no exemption in favor of used vehicles exists now that their transfers are subject to a fee. The fee is imposed on new transfers of vehicles and not on transfers of new vehicles.

Your email argues that the transfers are exempt from taxation or fee payment because the affiliated corporations would be “acting as a unit” during the course of the transfers. However, I think the “acting as a unit” exclusion is outdated. That phrase was set out in the definition of “person” applicable to the motor vehicle use tax prior to July 1, 2004. However, as of July 1, 2004, that phrase was stricken from the definition of “person” applicable to the motor vehicle use tax which is set out in the Iowa Code, § 423.1(32) (2007). Finally, the definition of “person” which is applicable to the registration fee is set out in Iowa Code, § 321.1(52) (2007), and that definition does not use the phrase “acting as a unit” either. So it must be concluded that entities acting as a unit are now considered to be more than one person, and transfers between or among them are subject to tax or a registration fee.

Your second question is: “All the leases of the vehicles will be long-term leases for several years. Do we have to collect sales tax on the lease payments of the vehicles to the other members within the affiliated group?” My answer would be that it appears the leases are subject to the registration fee imposed by SF 2420. Subsection 3 of section 40 of Senate File 2420 (§ 321.105A (3) when codified) states:

3. LEASED VEHICLES.

a. A fee for new registration is imposed in an amount equal to five percent of the leased price for each vehicle subject to registration with a gross vehicle weight rating of less than sixteen thous and pounds, excluding motorcycles and motorized bicycles, which is leased by a lessor licensed pursuant to chapter 321F for a period of twelve months or more. The fee for new registration shall be paid by the owner of the vehicle to the county treasurer from whom the registration receipt or certificate of title is obtained. A registration receipt for a vehicle subject to registration or issuance of a certificate of title shall not be issued until the fee for new registration is paid in the initial instance.

If the leases to affiliates are subject to the fee, then transfers of the vehicles to the leasing corporation are exempted from the fee by paragraph 25 of subsection 2 of Section 40 which excludes:

(25) Vehicles subject to registration under this chapter with a gross vehicle weight rating of less than sixteen thous and pounds, excluding motorcycles and motorized bicycles, when purchased for lease and titled by the lessor licensed pursuant to chapter 321F and actually leased for a period of twelve months or more if the lease of the vehicle is subject to the fee for new registration under subsection 3.

In closing, I must issue my usual warning. Please be advised that this letter is an informal opinion and is only applicable to the factual situation referenced and to the statutes in existence at the time of issuance. Because of this, the Department could, in the future, take a position contrary to that stated in the letter.

Sincerely,

Darwin D. Clupper

Tax Specialist, Policy Section

Compliance Division

515-281-3670