Fleet Management 2025 Forecast: Fleet Taxation
Photo via Tax by Phillip/Flickr.
The key concerns about the future of fleet taxation revolve around inconsistency of vehicle taxation due to varying state tax regulations.
In addition, most tax regulations were codified prior to the development of the Internet. Many taxing authorities view the opportunity to tax online services as a new revenue channel to offset budgetary shortfalls. These services are currently untaxed, but there have been repeated efforts to tax consumer-based online services, which can easily be extrapolated to include fleet-related online services.
Two subject-matter experts on fleet taxation provide their perspective on future trends. Here are their forecasts:
Strong Pressure to Increase Tax Revenues
By Thomas Tallarito, director of tax and accounting operations at Donlen
“In this world, nothing can be said to be certain except death and taxes,” so said Ben Franklin. That being said, taxes may be certain, but they certainly aren’t consistent. I see a continuation of the difference in taxing vehicles between states. Some 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.
There may be a move in more than one state, similar to what Georgia did in 2013 with the Title and Ad Valorem Tax (TAVT), to combine personal property tax with the sales tax or go to hybrid or up front, where states will get more tax on the front end. As for a reduction of taxes on the industry, I don’t see that happening since the states will continue to need more revenue from taxes to provide services.
Speaking of services, this is the area where taxing authorities will be looking for an increase in revenue since most states don’t tax most services. Taxing of services can bring about an increased cost to the lessee for many services fleet leasing companies currently provide.
Currently, services really aren’t taxed unless they are specifically stated as taxable services in the laws of each state. This differs from tax on tangible property (things you can physically touch) where all is taxable unless specifically exempted.
With the increased flexibility afforded due to technology, we could see a move to a more fluid handling of tax on leases to allow for different handling based on specific client needs. For example, if a client plans on leasing a vehicle for a period of time that’s barely more than a year, it would prefer to pay tax on the stream. However, if the plan is to lease the vehicle for five to 10 years or more, then an up-front payment of tax would most likely be more beneficial.
Some of the fleet leasing companies may need to adjust their systems and tax software slightly to handle the flexibility; however, it would certainly be worth the effort to some customers. Of course, for any of this to happen, states would have to allow this alternative handling, which may not be in their best interests.
Currently, there are few states that allow this flexibility in handling, once a method was chosen. The state of Illinois recently moved to change its handling of tax on certain types of leases on certain types of vehicles from up front on the purchase price to up front on the lease payments, which will certainly reduce the amount of tax paid on many leases.
The individual consumer will see this change effective Jan. 1, 2015, when the due at signing amount is considerably less than they are used to paying. The thought process is that consumers will turn over leases more often because they are not paying as much up front. It remains to be seen whether that will actually happen. If it does, what will the effect be on new-vehicle production and prices, as well as used-vehicle prices?
Fleet Taxation Trends
By Ron Ditzel, tax manager at Element Fleet Management
Transfer Pricing: Leasing companies continue to expand their reach into other countries and many have more than one entity within their organization structure, both of which can create transfer pricing challenges if there are intercompany transactions.
Both the U.S. and Canada have been increasing their focus on transfer pricing and will continue to do so. Their focus has been not only on cross-border transactions, but also transactions within each country’s borders. Transfer pricing documentation is the main line of defense in an audit and must demonstrate compliance with regulatory requirements for appropriate methodologies. It is important for companies to be familiar with each country’s requirements and stay abreast of changes as transfer pricing continues to evolve.
Services and the Cloud: Leasing companies continue to offer more online services/products to their customers and more states are beginning to apply current tax laws to these types of online services/products.
One issue is that states are continually relying on outdated tax laws to include these online services/products as taxable without consideration of the nuances of what is actually being provided. Looking ahead, states will need to update their tax laws to account for the changing environment of how services/products are provided online.