Can someone use a vehicle titled to another consenting owner as a trade-in, or trade a personally owned vehicle toward a new lease?

Plain-English summary

This 2008 Texas letter is partially superseded. Its first answer said an out-of-state vehicle that had paid no Texas sales tax could qualify as a trade-in if it had not yet used Texas public roads. STAR later labeled that policy inaccurate. The 2019 ruling published as STAR 201909041L explains that a vehicle never used or taxed in Texas cannot create the deduction merely by obtaining a Texas title.

The rest of the letter addressed who must own a trade-in. The replacement-vehicle buyer and trade-in titleholder did not have to be the same person if the titled owner knew of and consented to the transaction. The letter gave examples of a parent contributing a titled vehicle to a child's purchase and a sole shareholder contributing a personally titled vehicle toward an S corporation's purchase.

The same principle applied to leasing. A person could trade a vehicle they owned toward a new vehicle they intended to lease, as long as the trade-in reduced the price of the vehicle titled to the leasing company. But a lessee could not trade a vehicle they merely leased because they had no title or ownership interest until purchasing it and paying the tax due.

What this means for you

Buyers using someone else's vehicle

The surviving guidance permits a third-party titled owner to supply the trade-in with knowledge and consent. The vehicle cannot sit on an open title: the person transferring it must have completed title and tax obligations.

Customers entering a vehicle lease

A personally owned vehicle can reduce the price of the new vehicle acquired by the leasing company. A currently leased vehicle cannot be treated as yours to trade unless you first buy it and pay the applicable sales tax.

Dealers and title processors

Do not use this letter's Question 1 for out-of-state vehicles. STAR expressly superseded that answer on January 21, 2020 and directs readers to STAR 201909041L.

Common questions

Q: Can a parent trade a vehicle toward a child's purchase?

A: The letter says yes if the parent holds title, knows of the transaction, and consents.

Q: Can a shareholder's vehicle reduce the taxable price of an S corporation's purchase?

A: Yes, under the same titled-owner knowledge and consent principle described in the letter.

Q: Can I trade my own car toward a vehicle I will lease?

A: Yes, if your car reduces the purchase price of the new vehicle titled to the leasing company.

Q: Can I trade the car I currently lease?

A: Not while you are only the lessee. The letter says you must first acquire title and pay the sales tax due.

Citations and references

• Tex. Tax Code §§ 152.022, 152.023
• STAR 201909041L (later ruling that caused partial supersession; named in prose only, without an unverified internal link)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=MVT
• Opinion: https://star.comptroller.texas.gov/view/200802498L

Original ruling text

STAR Superseded Information

Supersede type: partial

Document superseded on: 01/21/2020

Issue(s) that caused the document to be superseded: trade-in deduction for vehicle registered in another state (question #1)

Reason(s): Error:-inaccurate statement of policy- a trade in deduction is only applicable if use tax is due; if vehicle is not used upon Texas public roads then no use tax is due; hence, no trade-in deduction can be taken for a vehicle that was never taxed in Texas. See STAR 201909041L.

February 1, 2008

Subject: 07288661-Trade In Sales Tax Credits

Dear ***:

This is in response to your e-mail questions concerning using a trade-in to
reduce the taxable value of a vehicle being purchased.

Question 1: Can a trade-in reduce the taxable value if the car is registered in
another state having paid no Texas Sales Tax?

Response: Yes, provided the vehicle has not been used upon the public roads of
Texas prior to the vehicle being used as a trade-in.

Section 152.022 of the Texas Tax Code imposes a 6.25 percent use tax on the
total consideration for a motor vehicle purchased outside of Texas and brought
into Texas for use on the public highways of Texas by a Texas resident or other
person who is domiciled or doing business in Texas.

In lieu of the 6.25 percent use tax imposed under Section 152.022, Section
152.023 imposes a $90.00 new resident use tax on each motor vehicle brought
into Texas by a new resident to Texas, provided the motor vehicle has been
previously registered in the new resident's name in some other state or foreign
country.

Question 2: Can a trade-in registered in another person's name be used to
reduce the taxable value of another person’s vehicle?

Response: A motor vehicle that is traded to a seller is not required to be in
the name of the purchaser of the new vehicle and the trade-in can reduce the
amount subject to motor vehicle tax, provided the title owner has knowledge of
and consents to the transaction.

For example, a person (other than a licensed dealer)who has purchased a vehicle
cannot transfer legal title to that vehicle until he takes title to and pays
the tax on the vehicle; therefore, a person cannot transfer (trade-in) a
vehicle that is on an “open title” that has not been legally titled to the
purchaser.

However, a parent can trade in a vehicle titled in the parent’s name for a
vehicle being purchased by a son or daughter; or a sole stockholder in an S
corporation may trade in a vehicle titled in the name of the stockholder for a
vehicle purchased by and title to the S corporation.

Also, a person who has title to a vehicle in his name can trade in that vehicle
for a vehicle that he intends to lease, provided the traded-in vehicle reduces
the sales price of the new vehicle titled to the leasing company. However, a
lessee cannot trade in a vehicle that he is leasing for a vehicle that he
wishes to purchase, since a lessee has no right, title or interest in the
leased vehicle unless and until the lessee purchases the leased vehicle and
pays the sales tax due at that time. Also, be aware that if the seller of the
new vehicle purchases the leased vehicle, the leased vehicle still cannot be
used as a trade-in until the sales tax has been paid.

For online access to the section of the Tax Code and rules noted above go to:
www.window.state.tx.us/taxinfo/mtr_veh/mv_su.html. Scroll down to either
"Statues" or “Rules” and click to open

I hope this information helps. If you have further questions, please e-mail
them to [email protected], or you may reach me by phone at (800)
531-5441, ext. 3-4986.

Sincerely,

Ken Koch
Tax Policy Division
Comptroller of Public Accounts

From: ***
Sent: Friday, October 12, 2007 4:13 PM
To: Tax Help

To whom it may concern:

With regard to Texas Sales Tax due on the sale of a motor vehicle:

1. Can a trade in reduce the taxable value if the car is registered in another
   state having paid no Texas Sales Tax?

2. Can a trade in registered in another person's name be used to reduce the
   taxable value of another persons vehicle?

Can you please answer or direct me to the correct answer. I have search the
websites, talked to various people @ the DMV, TX DOT, State Comptrollers office
as well as the county tax assessor and numerous different answers.

Thanks,