Does a franchised car dealer owe Texas sales tax on a ground lease for the land where it operates its dealership and stores vehicle inventory?

Plain-English summary

A trade association of Texas franchised motor vehicle dealers asked the Comptroller whether its members owe sales tax on ground leases for the land their dealerships operate on. Texas Department of Motor Vehicles (TxDMV) rules require licensed franchised dealers to have designated land for parking, storing, and displaying their vehicle inventory as part of the dealership premises. A representative ground lease showed a dealer leasing land for a 5-year term (with two 5-year renewals) to use as its dealership and showroom, paying all operating expenses itself.

The Comptroller ruled the ground lease is nontaxable — an ordinary real property lease, not a taxable "motor vehicle parking and storage service":

• Texas taxes charges for motor vehicle parking and storage, including leasing a "parking facility" (defined as a lot or garage where parking is offered for a fee to the public). Rule 3.315(h) presumes a parking-facility lease is taxable.
• But the dealership's leased land isn't a parking facility in that sense — it's the dealer's own business premises, where the dealer stores its own inventory as a licensing requirement, not a place where the public pays to park.
• Under a prior Comptroller decision, taxable parking/storage requires "some element of service" that is "parking related" — attendants, security, cleaning, maintenance, etc. Here, the lessor provides none of that; the dealer itself operates and maintains the premises.
• Because no portion of the ground-lease payment is attributable to a parking/storage service, the entire lease is a nontaxable real property lease.

The ruling extends detrimental reliance relief not just to the requesting association but to its member dealers with identical facts — an unusually broad grant for a private letter ruling.

What this means for you

Franchised motor vehicle dealers leasing dealership property

Storing your own vehicle inventory on leased land you operate and maintain yourself is not a taxable "parking service," even though state licensing rules require you to have that designated storage/display space. The key distinguishing factor is that the lessor isn't providing parking-related services to you.

Commercial landlords leasing to businesses that store or park inventory/equipment

If your tenant operates and maintains the leased premises itself — with no parking attendants, security, cleaning, or similar services from you — that supports treating the lease as an ordinary nontaxable real property lease rather than a taxable parking facility rental, even if vehicles or equipment happen to be stored there.

Trade associations seeking guidance for their membership

This ruling shows the Comptroller will, in the right circumstances, extend detrimental reliance relief beyond the named requester to similarly situated members of a trade association — worth exploring when facts are truly uniform across a membership group.

Common questions

Q: Is a lease taxable just because motor vehicles are parked or stored on the leased property?
A: No — per this ruling, the determining factor is whether the lessor provides a parking-related service element (attendants, security, cleaning, maintenance); storing inventory on land the tenant operates itself doesn't make the lease a taxable parking service.

Q: Are all parking facility leases in Texas presumed taxable?
A: Yes as a starting presumption under Rule 3.315(h), but per this ruling that presumption doesn't apply where the leased property isn't a parking facility in the first place — here, a dealership's own operating premises, not a public-fee parking lot.

Q: Can a private letter ruling protect anyone other than the taxpayer who requested it?
A: Usually not, but per this ruling the Comptroller expressly extended detrimental reliance relief to the requesting trade association's member dealers with identical facts — an exception to the general single-taxpayer rule.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.0101(a)(4) (Taxable Services — motor vehicle parking and storage, including lease of a parking facility)
• 34 Tex. Admin. Code Rule 3.315(a)(2) (Parking facility defined — real property structure where parking is offered for a fee)
• 34 Tex. Admin. Code Rule 3.315(b) (Motor vehicle parking and storage services taxable)
• 34 Tex. Admin. Code Rule 3.315(d) (Real property lease bundled with parking/storage services — taxable portion attributable to the service)
• 34 Tex. Admin. Code Rule 3.315(h) (Presumption that a parking facility lease/rental is taxable)

Cited prior guidance:

• Comptroller's Decision No. 30,794 (1994) — taxable parking/storage requires a parking-related "element of service"

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201705004L

Original ruling text

May 12, 2017

Re: Private Letter Ruling No. 151270029

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters. [ENDNOTE 1] We are responding to your May 6, 2016 request. In accordance with Rule 3.10, the Taxpayer Bill of Rights, the Comptroller will give detrimental reliance relief to TAXPAYER and those member dealers with identical facts.

Facts Presented

The facts below are derived from your initial private letter ruling request, our subsequent telephone conversations, and the representative ground lease provided as a supplement to your request.

The TAXPAYER is an organization comprised of franchised motor vehicle dealers in Texas. A franchised motor vehicle dealer is a person engaged in the business of buying, selling, or exchanging new motor vehicles at an established and permanent place of business under a franchise in effect with a manufacturer or distributor. [ENDNOTE 2]

The Texas Division of Motor Vehicles (TxDMV) licenses franchised motor vehicle dealerships. To obtain a retail license from TxDMV, a dealership must satisfy certain requirements. One requirement of that license is that dealers must have a building and land for the parking, storage, and display of motor vehicle inventory. [ENDNOTE 3]

The Texas Occupations Code defines a dealership as the physical premises and business facilities on which a franchised dealer operates the dealer’s business, including the sale and repair of motor vehicles. [ENDNOTE 4]

TxDMV rules require a retail dealer to have an area designated as display space for the dealer’s inventory. These requirements provide, for example, that “the display area must be located at the dealer’s business address or contiguous with the dealer’s address. A non- contiguous storage lot is permissible only if there is no public access and no sales activity occurs at the storage lot. A sign stating the dealer’s name and the fact the property is a storage lot is permissible.” [ENDNOTE 5]

In addition to satisfying TxDMV requirements, franchised motor vehicle dealers must also maintain reasonable operating standards as set forth in the applicable franchise agreements. The relevant operating standards include necessary and sufficient real estate for the sale and storage of new and used motor vehicles.

A franchised motor vehicle dealer may lease the real property and improvements on which it operates its business. In the representative ground lease provided with this private letter ruling request, the dealer agrees to use the leased property only as an automobile showroom and dealership. The initial term of the ground lease is five years, with two five- year renewal periods. During the term of the lease, the dealer agrees to pay all expenses of operation of the leased premises.

Ruling and Analysis

Our restatement of your question is shown below, followed by our ruling and analysis.

Question: Does a franchised motor vehicle dealer licensed by the TxDMV owe sales and use tax on a ground lease of real property that the dealer uses to store motor vehicles held in inventory in accordance with TxDMV rules?

Ruling: A franchised motor vehicle dealer licensed by the TxDMV does not owe sales and use tax on a ground lease of real property that the dealer uses to store motor vehicles held in inventory in accordance with TxDMV rules.

Analysis:

A real property lease, including any improvements, is not subject to sales tax. Sales tax is due on a charge for the parking and storage of motor vehicles, including the lease or rental of a parking facility. Section 151.0101(a)(4) and Rule 3.315(b).

Rule 3.315(a)(2) defines a parking facility as “a real property structure, such as a lot or garage, whether improved or unimproved, where parking is permitted for a fee. The term includes areas, which are specifically designed and used for parking, but may at times be rented or leased for purposes other than parking.”

Rule 3.315(d) and (h) address when a lease of real property constitutes a motor vehicle parking and storage service. Subsection (d) addresses those transactions in which real property is transferred to the lessee along with the provision of motor vehicle parking and storage services. For these transactions, the portion of the lease amount attributable to motor vehicle parking and storage services are subject to sales tax. Subsection (h) provides that the rental or lease of a parking facility is presumed to be taxable.

Comptroller’s Decision No. 30,794 (1994) provides further guidance regarding when a contract is a real property lease or the provision of a motor vehicle parking and storage service and, thus, taxable. This hearing states that because motor vehicle parking and storage services are subject to sales tax as a service “at least some element of service must be involved in the transaction sought to be taxed, and that such service must be parking related.”

When a franchised motor vehicle dealer licensed by the TxDMV leases or rents real property on which it operates its dealership, no part of the charge is attributable to a parking or storage service. Although the dealer stores inventory on the leased property, the dealer is not leasing or renting a parking facility; the leased premises are not a location where parking is provided for a fee. See Rule 3.315(a)(2). In addition, the lessor does not provide any “element of service.” The lessor does not provide parking attendants, security, cleaning, or maintenance. See Comptroller’s Decision No. 30,794. The dealer is responsible for the operation and maintenance of the premises.

A lease of real property and improvements (including a parking lot or garage) is only taxable if some part of the rental amount is attributable to a motor vehicle parking and storage service. The ground lease between the dealer and the lessor is the lease of real property and is not subject to Texas sales and use tax.

Comptroller’s Decisions cited can be found the Comptroller’s State Tax Automated Research (STAR) system. The Texas Tax Code, Texas Administrative Code, and the STAR system are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/taxhelp/ and reference Private Letter Ruling #151270029.

Sincerely,

Tax Policy Division –Indirect Taxes

Texas Comptroller of Public Accounts

ENDNOTES

1. Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.

2. Texas Transportation Code Section 503.001(8).

3. Texas Transportation Code Section 503.032.

4. Texas Occupations Code Section 2301.002(8).

5. 43 Texas Administrative Code Section 215.140(11).