Iowa Administrative Code › Agency 701 - Revenue Department › Title I - Administration › Chapter 31 - Receipts Subject to Use Tax › Rule 701-31.5 - Motor Vehicle Use Tax on Long-term Leases

Current through Register Vol. 47, No. 3, July 24, 2024
On or after January 1, 1997, a tax shall be imposed on the
				  lease price of certain vehicles subject to registration under Iowa Code chapter
				  321 which are leased under long-term lease agreement.
(1)
vehicles subject to long-term
				lease defined.
Effective January 1, 1997, motor vehicles subject to
				registration with gross vehicle weight rating of less than 16,000 pounds,
				excluding motorcycles and motorized bicycles, which are actually leased for a
				period of 12 months or more, will be subject to a motor vehicle lease tax based
				upon the lease price as set forth in subrule 31.5(2). Such vehicles must be
				leased by a lessor licensed pursuant to Iowa Code chapter 321F. A registration
				receipt for a vehicles subject to registration or issuance of a certificate of
				title will not be issued until the tax is paid in the initial instance. If the
				lease is terminated prior to the expiration of the lease period, no refund will
				be allowed for tax previously paid on the monthly lease payments. Effective
				July 1, 1997, if a lease is terminated prior to the expiration of the lease
				period, a refund of tax previously paid under this rule will be allowed under
				Iowa Code section
				322G4..
				This definition of vehicles subject to long-term lease and subject to the tax
				under this rule includes vehicles leased under fixed-term or variable-term
				leases. Fixed-term lease means a lease contract in which the lease term is for
				a certain designated period of time. A payment amount charged under a
				fixed-term lease can be fixed or variable. Variable-term lease means a lease
				contract in which the lease term may contain an initial stated lease period
				with additional extension options that may be exercised at the discretion of
				the lessee. A payment amount charged under a variable-term lease may be fixed
				or variable. Exercise of an extension results in an extension of the original
				lease period for the purpose of this rule. A fixed- or variable-term lease may
				also contain a provision for adjustments which may be made by the lessor at the
				conclusion of the lease.
Vehicles entering this state under a lease entered into on or
				  after January 1, 1997, will be subject to tax on the date the vehicle enters
				  Iowa for the remaining lease period. Vehicles entering this state under an
				  optional lease period exercised under a lease entered into on or after January
				  1, 1997, will be subject to tax on the date the vehicle enters Iowa for the
				  remaining option period. A credit for tax paid on the lease for the lease
				  period at issue where incidence of the tax was on the lessor and the tax was
				  paid by the lessor to another state will be applied to the motor vehicle lease
				  tax due on the lease from the lessor in Iowa.
When motor vehicle lease tax has been paid on a qualifying
				  lease under this rule, and prior to the expiration of the lease the vehicles
				  subject to the lease is destroyed by means such as fire, accident, or
				  vandalism, to the extent that it constitutes a total loss of the vehicle, a
				  credit for motor vehicle lease tax paid for the period remaining on the
				  previous lease will be allowed when another vehicle is substituted under the
				  original lease or a new lease is executed with the intent to replace the
				  vehicles subject to the previous lease. To initially qualify for the credit,
				  there must be a total loss of the vehicles subject to the previous lease, a new
				  lease must be executed or a vehicle must be substituted under the original
				  lease. To qualify for the credit, the new lease or substituted vehicle under
				  the original lease must meet the following: The new lease must be executed by
				  the same lessor and lessee, for lease of a vehicle of the same or similar make,
				  model, year and options as the vehicles subject to the previous lease, for the
				  remaining lease period as the previous lease, for the same lease price and the
				  lease must contain the same lease terms as the previous lease.
When a vehicles subject to a taxable lease under this rule is
				  returned to the lessor and the lessor replaces the vehicle with a different
				  vehicle, but a new lease is not executed, the replacement is not subject to
				  tax. Often this type of return occurs when an original leased vehicle has
				  numerous mechanical problems, but has not been declared a "lemon" under Iowa
				  Code chapter 322G. Instead of requiring the lessee to go through the "lemon
				  law" process, the lessor replaces the vehicle under the same lease contract. In
				  this type of situation, tax would not be due because there has not been a new
				  lease transaction subject to tax.
A fixed- or variable-term lease that is subject to the motor
				  vehicle lease tax under this rule may contain a provision allowing adjustments
				  to be made by the lessor at the conclusion of the lease which may affect the
				  rental receipts for the term of that lease. Such adjustments may result in a
				  debit, credit, or no change in the rental receipts. Such adjustments may
				  include, but are not limited to, the condition of the vehicle, value of the
				  vehicle, sale price of the vehicle, mileage incurred, and variable payment
				  amount during the initial qualifying lease period. Such an adjustment may
				  result in a corresponding debit or credit of tax due from the lessor.
If a lease is a variable-term lease with a variable payment
				  amount, the lease payment for the initial minimum 12-month period shall be
				  computed using the payment amount in effect on the date the lease is executed
				  between the parties. If the payment amount then varies during that initial
				  minimum 12-month period resulting in a debit or credit of tax previously paid
				  for that period, such amount will be computed as an adjustment made at the
				  conclusion of the lease. If the total of the adjusted lease payments is greater
				  than the originally calculated lease payments, the incremental increase is
				  subject to lease tax and the tax is to be remitted by the lessor directly to
				  the department.
Vehicles entering this state under a lease or lease option
				  extending from a lease executed before January I, 1997, will not be subject to
				  the motor vehicle lease tax imposed under this rule. However, such vehicles
				  will be subject to tax on the use of the vehicle in Iowa based upon the fair
				  market value of the vehicle, payable by the lessor to the county treasurer at
				  the time of registration or titling of the vehicle.
(2)
Collection and computation of tax
				on long-term leases.
For leases entered into on or after January
				1,1997, a motor vehicle lease tax is imposed on certain vehicles subject to
				registration which are leased under terms as defined in subrule 31.5(1). Motor
				vehicle lease tax shall be paid by the owner of the vehicle to the county
				treasurer, Iowa department of transportation, or Iowa department of revenue. A
				registration receipt or certificate of title for the vehicle shall not be
				issued until the tax is paid in the initial instance. The amount subject to tax
				must be computed on each lease transaction based on the lease price. The lease
				price shall be computed by multiplying the number of months of the lease by the
				monthly lease payments, plus down payment, which shall include trade-ins and
				any additional costs or fees paid by the lessee. Capitalized costs paid by the
				lessee are generally included as part of the monthly lease payments.
				Capitalized costs may include, but are not limited to, rustproofing, floor
				mats, pin striping, management fees, reserved charges, air conditioning,
				stereo, mud flaps, lease acquisition fee, and finance charges. Down payment is
				defined for the purpose of this rule as any payment or trade-in made by the
				lessee for the purpose of reducing the lease price. In certain instances, there
				are costs associated with the lease and entering into the lease, which are not
				refundable, that are negotiated by the lessor and lessee, resulting in an
				agreement that these costs will be paid by the lessee separately and in
				addition to the monthly lease payments. Costs for such items, whether normally
				capitalized or not, which are paid separately by the lessee in order to reduce
				the lease price, shall be treated as a down payment and shall be added in the
				computation of the lease price. Trade-in is treated as a down payment and is
				defined for the purpose of this rule as tangible personal property which is
				traded by the lessee to the lessor in order to reduce the lease price. The
				value of the trade-in shall be added in the computation of the lease price. The
				lease price shall not include any manufacturer's rebate or refundable deposit.
Effective for leases entered into on or after July I, 1997,
				  the lease price shall not include manufacturer's rebate, refundable deposit,
				  title fee, registration fee, vehicle lease tax imposed under this rule, federal
				  excise taxes attributable to the sale of the vehicle to the owner or to the
				  lease of the vehicle by the owner, optional service or warranty contracts
				  subject to tax under Iowa Code section 422.43(6), insurance, or any finance
				  charge imposed on these excluded items. Any item excluded from the taxable
				  lease price shall be documented by the owner by maintaining an adequate record
				  of the amount of each item excluded. If a lessor and lessee enter into an
				  agreement that the tax imposed under this rule shall be paid by the lessee,
				  either in a lump sum payment or as part of the monthly lease payments, the
				  total cost of the tax shall not be included in the computation of the lease
				  price for the purpose of imposing the tax under this rule. Deposit is defined
				  for the purpose of this rule as a security which is refundable based upon the
				  terms of the lease. The lease price shall not include a roll-over deficiency
				  from a previously purchased or leased vehicle to the extent it can be shown
				  that tax had been paid on the amount to be rolled over from the previously
				  purchased or leased vehicle. For instance, lessee A has a previously purchased
				  vehicle with an outstanding loan balance of $4,000. Lessee B has a previously
				  leased vehicle with a total of outstanding payments of $4,000. As part of the
				  previous transactions that resulted in these outstanding balances, use tax was
				  previously paid on the $4,000 balances by lessees A and B. Each lessee now
				  wishes to lease a new vehicle and pay the outstanding balance owed by each as
				  part of the monthly lease payments for the new vehicles. The balances for each
				  lessee may be rolled over in the lease costs to be paid by the lessees.
				  However, the amount of the balances that are rolled over are excluded from each
				  of the computations of the lease price under this rule.
Example 1. Iowa lessor leases a vehicle on January 20, 1997,
				  for use in Iowa for a period of 36 months. The total lease price is $18,814.00
				  which includes all capitalized costs that were negotiated as part of the lease.
				  Incidence of the tax is upon the lessor The lessor and lessee did not negotiate
				  nor did they agree to include the cost of the motor vehicle lease tax as part
				  of the lease price. The total lease price to be reported by the lessor for
				  computation of the tax at the time of registration or titling of the vehicle is
				  $18,814.00. The motor vehicle lease tax due on this lease would be $940.70
				  ($18,814.00 x 5%) payable by the lessor to the county treasurer at the time of
				  registration or titling of the vehicle. The monthly lease payment to be paid by
				  the lessee is $522.61 ($18,814.00 divided by 36 months).
Example 2. Iowa lessor enters into a lease with Dave Jones on
				  January 8, 1997, for the lease of a vehicle for use in Iowa for a period of 36
				  months. The monthly lease payments for the vehicle are computed to include
				  rustproofing, floor mats, and various other capitalized costs. However, based
				  on an agreement between Dave Jones and the lessor, costs of the mud flaps and a
				  stereo system are not included in the monthly lease payments. Instead, the
				  lessor and Dave Jones negotiate and agree to allow Dave Jones to pay the total
				  for the mud flaps and stereo separately. Dave Jones executes a check payable to
				  the lessor for the total sum of such fees. The total sum paid in the separate
				  check issued by Dave Jones for the mud flaps and stereo is considered a down
				  payment and must be included in the computation of motor vehicle lease tax as a
				  cost that is part of the total lease price.
Tax due under this rule for a fixed-term lease will be due on
				  the entire lease term contracted for between the parties. Tax on a
				  variable-term lease shall be based on the entire initial term stated in the
				  lease.
Tax on a qualifying lease under this rule will be due at the
				  time the vehicles subject to the lease is required to be registered or titled.
				  Tax on any optional lease periods will be considered due at the time the
				  optional lease period is exercised under the lease. Tax on transactions
				  requiring registration or titling of a vehicle in this state will be remitted
				  to the county treasurer or department of transportation at the time of
				  registration or titling. Tax on transactions not involving a vehicle or
				  vehicles having to be registered or titled in this state will be remitted to
				  the department of revenue. Such transactions include the re-lease of the same
				  vehicle or vehicles involving the same lessor and lessee or exercise of an
				  option under a lease by a lessee.
Incidence of motor vehicle lease tax falls upon the
				  owner/lessor of the vehicle. Therefore, the lessee cannot invoke any exemptions
				  from the motor vehicle lease tax.
Reporting and remittance of tax due to the Iowa department of
				  revenue will be remitted on or before 15 days from the last day of the month
				  that the tax becomes due. Failure to timely report or remit any of the tax when
				  due under this rule will result in penalty and interest being imposed on the
				  tax due pursuant to Iowa Code sections 423.18 and 423.23.
The county treasurer or the state department of
				  transportation shall require every applicant to have a registration receipt for
				  a vehicles subject to this tax and to submit the total lease price computed in
				  the manner indicated in subrule 31.5(2) to be reported on a form designated by
				  the director of revenue. Also see 701-34.9(423).
On or before the tenth day of each month, the county
				  treasurer or the state department of transportation will remit to the
				  department of revenue the amount of tax collected during the preceding
				  month.
Example 3. Licensed lessor located in Iowa contracts with Joe
				  Smith to lease a new automobile for use in Iowa for a contract period of 12
				  months. Motor vehicle lease tax would be due by the lessor payable to the
				  county treasurer at the time of registration based on the lease price for the
				  12-month lease period.
Example 4. Licensed lessor located in Iowa contracts with Joe
				  Smith to lease a used automobile for use in Iowa for a contract period of 12
				  months. Motor vehicle lease tax was due and paid to the county treasurer at the
				  time of registration based on the lease price for the 12-month period. Prior to
				  the expiration of the 12-month lease period, the lease is terminated. Upon
				  return of the vehicle the lessor uses the vehicle for a company car. The lessor
				  cannot receive a refund of the motor vehicle lease tax that was paid for the
				  portion of the remaining lease period because, under the statute, refunds of
				  motor vehicle lease tax are not allowed. In addition, the lessor would be
				  required to pay use tax on the fair market value of the vehicle for use of that
				  vehicle for a purpose other than for lease. See Iowa Code section 423.4(16) and
				  701-31.4(422,423) and 32.11(423).
Example 5. Licensed lessor located in Iowa leases a vehicle
				  for a 24-month period. Motor vehicle lease tax is paid on the lease price for
				  the 24-month period. After 18 months, the lease is terminated. The lessor
				  cannot receive a refund of the tax paid on the remaining lease period.
Example 6. On January 20, 1997, a licensed lessor located in
				  Iowa leases an automobile to Sally Jones for use in Iowa for a contract period
				  of 12 months with additional 30-day lease options which can be exercised after
				  the 12-month lease has been fulfilled. The lessor must pay motor vehicle lease
				  tax on the lease price for the 12-month period payable to the county treasurer
				  at the time of registration. In addition, the 30-day option periods are
				  considered to be extensions of the original lease. As a result, the lessor must
				  pay motor vehicle lease tax to the Iowa department of revenue on each 30-day
				  lease option, due at the time exercised by Sally Jones. Tax must be remitted to
				  the Iowa department of revenue on or before 15 days from the last day of the
				  month in which the tax became due.
Example 7. On March 17, 1997, a licensed lessor located in
				  Iowa leases a fleet often automobiles to XYZ insurance company for use in Iowa
				  for a lease period of 12 months. Motor vehicle lease tax is due on the lease
				  price for each of the ten vehicles for the 12-month lease period payable to the
				  county treasurer.
Example 8. Licensed lessor located in Illinois enters into a
				  lease with Sally Smith on January 8, 1997, to lease an automobile for a lease
				  period of 12 months. With 4 months remaining on the lease, Sally moves to Iowa
				  and the vehicle is titled in Iowa. Motor vehicle lease tax would be due on the
				  date of use in Iowa based on the lease price for the remaining 4 months under
				  the lease. The tax due would be payable by the lessor to the county treasurer
				  at the time the vehicle is registered or titled in Iowa. However, credit would
				  be allowed for a similar tax previously paid on the lease for the lease period
				  at issue, paid by the lessor to another state to be applied against the Iowa
				  lease tax due, if incidence of the tax paid to the other state also fell upon
				  the lessor This credit against Iowa lease tax would be allowed regardless of
				  the tax base used by the other state for the computation of the tax previously
				  paid. If the tax qualifies for the credit by meeting the previously mentioned
				  criteria, credit against the Iowa tax owed may be computed by completing the
				  following steps:
Step 1. compute the Iowa lease tax based on the remaining
				  lease period from the date the vehicle enters Iowa through the expiration date
				  of the lease. See subrule 31.5(2).
Step 2. Determine the amount of tax paid to the other state
				  for the remaining lease period. To determine this, do the following:
1. Divide the total amount of tax paid to the
				other state by the entire term of the lease. This will result in the amount of
				monthly tax paid on the lease.
2.
				Multiply the monthly tax paid by the months remaining on the lease term from
				the date the vehicle entered Iowa through the expiration date of the lease.
Step 3. compare the amount of tax paid to the other state for
				  the remaining period (result in Step 2) to the amount of tax due to the state
				  of Iowa for the remaining lease period (result in Step I). The amount of Iowa
				  vehicle lease tax due, if any, will depend upon whether the other state will
				  allow for a refund of the tax previously paid.
1. If the other state will refund the tax
				previously paid for the remaining lease period, then the amount of Iowa vehicle
				lease tax computed in Step 1 is due.
2. If the tax paid to the other state for the
				remaining lease period is greater and the other state will not refund the tax
				previously paid for the remaining lease period, then no additional Iowa lease
				tax is due.
3. If the amount of tax
				due to the state of Iowa for the remaining lease period is greater and the
				other state will not allow a refund of the tax previously paid, then the
				difference between the amount of tax due to the state of Iowa for the remaining
				lease period and the tax paid to the other state for the remaining lease period
				is the amount owed (result in Step I - result in Step 2).
Example 9. Licensed lessor located in Minnesota enters into a
				  lease with Joe Smith on November 21, 1997, to lease an automobile for a lease
				  period of 12 months with 30-day option periods to be exercised at Joe Smith's
				  discretion at the conclusion of the initial 12-month lease period. After one
				  year and 10 days under the lease, Joe moves to Iowa. The vehicle is titled in
				  Iowa. Motor vehicle lease tax is due and payable by the lessor to the county
				  treasurer on a prorated basis for the days remaining on the exercised option
				  period. If incidence of the tax previously paid to the other state was on the
				  lessor, credit would be allowed for a similar tax previously paid by the lessor
				  to the other state for the lease period at issue to be applied against the Iowa
				  lease tax due (see Example 8). If additional option periods are exercised by
				  Joe under the lease, motor vehicle lease tax will be due at the time the option
				  is exercised, payable by the lessor to the Iowa department of revenue. Tax must
				  be remitted to the Iowa department of revenue on or before 15 days from the
				  last day of the month in which the tax became due.
Example 10. Iowa lessor enters into a lease with Sally Jones
				  on August 11,1996, for use of a vehicle in Iowa. The lease is for a period of
				  12 months. Motor vehicle lease tax is not due on this because the lease was
				  entered into prior to January 1, 1997, the effective date of the motor vehicle
				  lease tax.
Example 11. Iowa lessor enters into a lease with Joe Smith on
				  January 1, 1996, for use of a vehicle in Iowa. The lease is for a period of 12
				  months and contains 30-day options that may be exercised by Joe Smith at the
				  conclusion of the initial 12-month period. On January 1, 1997, Joe Smith
				  exercises a 30-day option. Motor vehicle lease tax is not due on the exercised
				  option period because the option is an extension of the original lease which
				  was entered into prior to January 1, 1997, the effective date of the motor
				  vehicle lease tax.
Examples 12 and 13 offer guidance for computing the tax
				  imposed in this rule for leases entered into prior to July 1, 1997.
Example 12. Lessor and lessee located in Iowa enter into a
				  qualifying lease agreement on March 9, 1997. The price negotiated by the
				  parties for the lease is $9,120, which will be paid by the lessee in 36 monthly
				  installments. The lessor and lessee also agreed that the lessee will separately
				  pay by personal check the total cost of each of the following items: tax, $456;
				  title, $35; license, $164; and tinted windows, $225. The total lease price of
				  the leased vehicle, including the items separately paid by personal check by
				  the lessee is $10,000. The amount to be reported to the county treasurer at the
				  time of registration or titling of the vehicle is $10,000. The amount of tax
				  due from the owner/lessor of the vehicle at the time of registration or titling
				  to the county treasurer is $500 ($10,000 x 5% = $500).
Example 13. Lessor and lessee located in Iowa enter into a
				  qualifying lease agreement on June 24, 1997. The lessor and lessee agree that
				  the lessee will provide a down payment, trade-in, and pay the tax, title, and
				  license as a capitalized cost over the term of the lease agreement. The total
				  lease price, including the down payment, trade-in, and capitalized costs, is
				  $10,000. To compute the total lease price to be reported to the county
				  treasurer when the lease price includes tax as a negotiated capitalized cost of
				  the lease to be paid by the lessee, the owner/lessor may multiply the total
				  lease price of $10,000 by the factor of 1.0526316 which results in the sum of
				  $10,526.32. The total of $10,526.32 is the total lease price to be reported by
				  the owner/lessor to the county treasurer or department of transportation at the
				  time of registering or titling of the vehicle. The amount of tax due from the
				  owner/lessor of the vehicle at the time of registration or titling to the
				  county treasurer or department of transportation is $526.32 ($10,526.32 X 5% =
				  $526.32).
Effective July 1, 1997, the following examples may be used
				  for guidance in computing the lease price and motor vehicle lease tax imposed
				  under this rule.
Example 14. Lessor and lessee located in Iowa enter into a
				  qualifying lease agreement on July 12, 1997. The price negotiated by the
				  parties for the lease is $9,120, which will be paid by the lessee in 36 monthly
				  installments. The lessor and lessee also agreed that the lessee will separately
				  pay by personal check the total cost of each of the following items: tax,
				  $467.25; title, $35; license, $164; and tinted windows, $225. However,
				  effective July 1, 1997, tax, title fees, and license fees are not to be
				  included in the computation of the lease price. As a result, the amount to be
				  reported to the county treasurer at time of registration or titling of the
				  vehicle is $9,345 ($9,120 - the total monthly payments + $225 -cost of the
				  tinted windows = $9,345). The amount of tax due from the owner/lessor of the
				  vehicle at the time of registration or titling to the county treasurer is
				  $467.25 ($9,345 x 5% = $467.25).
Example 15. Lessor and lessee located in Iowa enter into a
				  qualifying lease agreement on August 11, 1997. The lessor and lessee agree that
				  the lessee will provide a down payment, trade-in, and pay the tax, title,
				  license, pin striping, and cost of an upgraded stereo system as capitalized
				  costs over the term of the lease agreement. The total lease price, including
				  the down payment, trade-in, and capitalized costs, but excluding the tax,
				  title, and license to be paid by the lessee in the monthly lease payments, is
				  $10,000. The total of $10,000 is the total lease price to be reported by the
				  owner/lessor to the county treasurer or department of transportation at the
				  time of registering or titling of the vehicle. The amount of tax due from the
				  owner/lessor of the vehicle at the time of registration or titling to the
				  county treasurer or department of transportation is $500 ($10,000 x 5% =
				  $500).