Managing the Financial Side of Commercial Fleets

14 Ways to Minimize Fleet Tax Liabilities

March 2016, by Mike Antich - Also by this author

Photo by Steve/Pixabay.
Photo by Steve/Pixabay.

The key concerns about fleet taxation revolve around inconsistency of vehicle taxation due to varying state tax regulations. Some states will tax the lease stream and some will tax the purchase of the vehicle for lease up front, while others will continue the hybrid treatment of taxing multiple payments up front.

Many jurisdictions have opted to generate new revenues through motor vehicle-related taxes, such as higher vehicle registration/license plate fees, emissions inspection fees, additional taxes on tires and batteries, and new environmental fees/surcharges for tire disposal and oil recycling. In addition to the expense of new and increased taxes, there is also a hidden corporate expense of increased tax administration.

FF asked four subject-matter experts on fleet taxation how a company can minimize the tax liabilities of its fleet operations. Here are 14 suggestions*:

1. Use OEM Incentives to Reduce a Vehicle's Capitalized Cost

Rental tax is calculated based on your lease payments. To reduce lease payments, you want to have a lower cap cost. If you apply your motor company incentives to your cap cost versus receiving them as a check, this will reduce your cap cost, which in turn reduces lease payments and rental tax.

James Thompson, strategic consulting manager, Finance Analytics & Data Visualization for Element

2. Tax Implications of Vehicle Relocation to Another State

Lessees transfer vehicles among drivers as well as transfer employees to different business units. When a state change is involved, the vehicle will need to be titled and registered in the new jurisdiction. This could result in sales and personal property taxes due with the new registration. A lessee should analyze all costs to consider if moving the vehicle is cost effective versus getting a new vehicle.

John Shevlin, director of taxation for LeasePlan USA

At a Glance

All states and other governmental jurisdictions are looking for ways to generate more revenues with new taxes. Outlined are 14 ways that companies can minimize fleet tax liabilities. 

*Consult with your company's tax professional before implementing any of these tips. 

3. Taxes Can Be Reduced By Reducing Fleet Expenses

In general, reducing any of your fleet-related expenses will, in turn, reduce tax exposure. In most states, maintenance transactions will be taxed. Reduce maintenance costs by cycling your vehicles at a reasonable mileage in order to avoid the more serious maintenance issues. There are also many taxes associated with fuel. Putting efforts in place to reduce fuel consumption can have a big impact on tax exposure.

James Thompson of Element

4. Reduce Taxation of Specialty Vehicles

Consult with your fleet management company on specialty vehicles or circumstances to help identify possible benefits in handling them in a particular way.

Jeremy Giblin, senior director – controller for Wheels

5. Don't Finance Up-Front Sales Taxes

A benefit of leasing is that it allows the lessee to manage cash flow. In some states, choosing to include one-time charges in the capitalized cost does allow expenses to be spread over the life of the lease. However, these financed sales tax amounts could be taxed a second time, which could result in tax-on-tax.

John Shevlin of LeasePlan USA 

6. Optimize Utilization to Reduce Tax Liability on Idle Assets

If you have a high percentage of idle assets compared to your active fleet, you’re incurring a tax liability for vehicles that aren’t contributing to top line performance. The first step in this is to determine the right amount of spare vehicles needed for your business. Once you have that number in place you should quickly reassign or dispose of any vehicles that become inactive. This will reduce the total cost of ownership, part of which is your tax liability.

James Thompson of Element

7. Properly Cancel Vehicle Registrations

Every registration should be properly canceled once a vehicle’s lease ends. Several states use the Department of Motor Vehicles’ (DMV) records to generate personal property tax assessment and billings. Fleets will incur additional property tax charges after the end of a lease if a vehicle’s registration remains active in the DMV database. Other states require the license plate be returned in order to cancel the registration. Most license plates remain on the old vehicle.

Understanding the consequences of these changes can help fleet managers minimize unnecessary or perhaps duplicate tax charges.

John Shevlin of LeasePlan USA

8. Develop a Long-Term Comprehensive Tax Strategy

It is hard to recommend any single strategy because there are so many different variables. We recommend that each client creates a long-term, comprehensive tax strategy that is developed together with advice from competent professionals and takes into account the client’s industry among other factors. Further, once that is in place, they should constantly monitor the tax environment and the economy in general and adjust their planning accordingly if any changes occur.

Bryan Wilson, controller, ARI

9. Identify all State-Level Tax Exemptions & Regularly Review

Reach out to your internal tax team and collect all state level exemptions your company may be entitled to and provide to your leasing company upon integration. This includes looking at vehicle specific usage by jurisdiction to review whether or not an exemption based on usage may exist. There should also be a periodic review with their tax teams to ensure they are up to date on new or changing exemptions.

Jeremy Giblin of Wheels

10. Garaging Address can Reduce Rental Tax

Often, businesses are located inside city limits, while drivers often live in suburban or even rural locations. Rental taxes are based on the garaging address of the vehicle. Urban areas often charge rental taxes above and beyond the state tax rate. If the driver takes the vehicle home at night, make sure to list the driver’s home address as the garaging address rather than the office location. By doing this, you may be able to avoid some additional taxes.

James Thompson of Element

11. Validate Driver Addresses

It is important to validate addresses for each driver. An incorrect ZIP code can increase the sales tax rate and personal property tax mileage rate.

John Shevlin of LeasePlan USA

12. Tax Reduction from Leasing vs. Owning Assets

The first way to minimize fleet tax li-ability is to lease your fleet rather than own. In most states, you will generally pay tax on what you use during the lease rather than paying the full tax on the full cost of the vehicle when you purchase it.

Jeremy Giblin of Wheels

13. Leasing Incurs Rental Tax in Only 28 Days

Another upside of leasing is that rental tax is only allowed by 28 states. Leasing, instead of purchasing your vehicle, can produce tax savings over the lease term. When buying a vehicle, you are charged sales tax at the time of purchase on the entire cap cost of the vehicle. Fleets that do not use the vehicle for its full useful life will tend to overpay in taxes. If you lease your vehicles, you will incur rental tax that is spread across monthly rental payments. In a leasing scenario the fleet only pays taxes for the time the vehicle is used.

James Thompson of Element

14. Consider Costs for Fleet Buyouts

If a lessee decides to change the fleet management company provider, it is easy to ask that all vehicles be bought out by the new provider. The same analysis should be completed similar to address changes to determine if it is cost effective for the new provider to purchase the vehicle from the former provider or simply let the lease run its contractual course.

John Shevlin of LeasePlan USA

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