Chapter 9-7 continued Sales and Use Tax on Motor Vehicle Leases Directive 4(b): Legal expenses or other costs incurred by a motor vehicle lessor in connection with repossession following the lessee’s default are not lease or rental charges subject to tax when they are recovered from the lessee. Issue 4( c): What are the sales tax consequences when the lessee of a motor vehicle fails to make monthly payments or otherwise defaults on his or her obligations under the lease? Directive 4( c): For sales tax purposes, a motor vehicle lessor must report lease payments on an accrual rather than a cash basis. If tax is remitted on accounts later determined to be worthless and written off as bad debts, the lessor may file a claim for reimbursement of tax paid on such amounts in accordance with TIR 92-2. Issue 4(d): What are the sales tax consequences for a lessor applying a security deposit to past due lease payments, charges on termination of a lease, and legal or other costs incurred in connection with repossession following the lessee’s default? Directive 4(d): A security deposit is not subject to tax when paid by a lessee to a lessor of a motor vehicle. However, absent explicit agreement in the written lease to the contrary, the Department will consider security deposits retained by the lessor to be applied to the lessee’s obligations in the following order (1) outstanding lease payments,(2) termination charges and (3) legal expenses or the other costs incurred by the lessor in connection with repossession. Security deposits so applied are subject to tax in accordance with Directives 4(a) and 4(b) above. 9:84