April 11, 2017 Georgia legislature sends governor bill to amend the title ad valorem tax base for leased motor vehicles On March 31, 2017, the Georgia General Assembly passed House Bill 340 (HB 340), which, if enacted, would amend the definition of the term "fair market value of the motor vehicle" for purposes of calculating the title ad valorem tax (TAVT) on leased motor vehicles (Ga. Code Ann. Section 48-5C-1(a)(1)). HB 340 would add a new provision, subparagraph (E), that specifies "[f]or a new motor vehicle that is leased, the total of the base payments pursuant to the lease agreement" to the definition. In effect, the amendment would change Georgia from an "up-front" state, where the transaction tax for leased motor vehicles is based on the value of the vehicle,1 to an "accelerated lease stream" state, where the tax is based on the total of the lease payments with the tax due, in-full, on the first day of the lease. HB 340 does not include specific provisions addressing how the new definition is to be administered, thereby raising a number of issues and questions related to the TAVT for leases of new motor vehicles.2 HB 340 was sent to Governor Nathan Deal (R) on April 7, 2017. If the Governor signs or does not veto the bill, the new statutory language becomes effective on January 1, 2018. Generally, the Governor has 40 days from the end of the legislative session to sign or veto a bill. Implications Under the new statutory language, for lease agreements with a defined lease period and set number of payments (closed-end leases), the measure of tax for TAVT purposes would be the total of all lease payments as agreed in the lease. Closed-end leases comprise nearly 100% of retail consumer automobile lease agreements. As noted, the new statutory language does not specifically address important questions with regard to closed-end leases; namely how early lease terminations will be treated, and how the TAVT will be calculated when a lessee intends to finance the tax. For early terminations, a number of states that follow the "accelerated lease stream" method of taxing leases provide a standardized process for recovering the amount of "unearned" tax. HB 340 does not include specific provisions for obtaining refunds of overpayments of TAVT in the situation of early lease termination. For transactions in which the tax is financed over the term of the lease in order to reduce the amount of up-front, out of pocket costs, a small but important mathematical conundrum exists for the lessor and lessee if the tax cannot be calculated until the lease payment amount is determined, and if the lease payment cannot be determined until the amount of the tax is calculated. Moreover, for leases that do not have a defined lease period or set number of payments (open-end leases), the measure of the TAVT is less clear. These types of leases are favored by commercial fleet leasing companies and include so-called terminal rental adjustment clause (TRAC) lease agreements, which are prevalent in the commercial motor vehicle leasing industry. Unlike closed-end leases, the total amount ultimately paid by the lessee under an open-end lease is typically unknown at the time the lease commences. Although the minimum number of payments under an open-end lease is usually 12 or 13, the average number of payments actually made may exceed 30 or 40. Thus, the new statutory language raises the question of how the TAVT is to be calculated when the lease period and total number of payments is unknown at the inception of the lease. To address this issue, some states with "accelerated lease stream" rules for taxing leases have elected to tax open-end leases in a manner similar to an "up-front" method. If HB 340 ultimately does become law, the Georgia Department of Revenue may propose rules and regulations, or provide other guidance to address unanswered questions. EY's sales and use tax teams will continue to monitor the status of the bill and will provide periodic updates as additional information becomes available. ———————————————
——————————————— 1 Specifically, the current statutory language defines fair market value of a lease of a new motor vehicle as "the agreed upon value of the vehicle pursuant to the lease agreement or the average of the current fair market value and the current wholesale value of a motor vehicle for a vehicle listed in the current motor vehicle ad valorem assessment manual utilized by the state revenue commissioner in determining the taxable value of a motor vehicle under [Ga.] Code Section 48-5-442 … ." Ga. Code Ann. Section 48-5C-1(a)(1)(D). 2 Note also that, while HB 340 includes language repealing conflicting laws, it does not specifically strike the definition that currently applies to leases of new motor vehicles or any other provisions of the statute. It's uncertain how existing code sections that may conflict with HB 340 will be identified in implementing the new statutory language. | |||||||||
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