Could a lessor claim a fair-market-value deduction for a vehicle transferred to the lessee under an open-end lease?

Plain-English summary

A vehicle transferred to the lessee under the open-end lease was a conditional sale and could not support the lessor's fair-market-value deduction.

The lessor was not treated as retaining title for business or personal use. Conditional-sale treatment also prevented double tax: the lessee could take title without additional payment by crediting tax paid when the vehicle was initially titled in the lessor's name.

What this means for you

The agreement's transfer economics affected both deduction eligibility and whether title transfer generated a second tax.

Common questions

Q: Could the lessor use the vehicle as a deduction?
A: No.

Q: Did the lessee pay tax again at title transfer?
A: No, assuming the original tax had been paid correctly.

Citations and references

• Texas Tax-General Annotated art. 6.03(D)(3)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=MVT
• Opinion: https://star.comptroller.texas.gov/view/7906L2024C08

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

June 5, 1979

Dear ***:

Thank you for providing a copy of CORP A's "open end lease agreement" together
with your request concerning motor vehicles eligible to be used as fair market
value deductions.

When a motor vehicle leased under CORP A's "open end lease agreement" is
transferred to the lessee, the transaction is treated as a conditional sale for
motor vehicle sales tax purposes. This has two results. First, the lessor is
not deemed to have retained title to the vehicle for "personal or business
purposes" within the meaning of the fair market value provision, TEX. TAX. -
GEN. ANN. art.6.03(D)(3) (Vernon's Supp. 1978-1979), and the vehicle may not be
used to reduce the taxable consideration paid for a new lease vehicle.

Second, characterizing the transaction as a conditional sale means that the
Motor Vehicle Sales Tax is due only once. Therefore, the lessee may take title
to the vehicle without additional payment of tax, because he is permitted to
take credit for the amount of tax paid when the vehicle was initially titled in
the lessor's name.

I hope that this information will assist you to take advantage of the fair
market value deduction provision whenever it is applicable. This reply is
restricted to the facts as you have presented them; other facts, although
similar, might lead to a different result.

If you have any further questions, please don't hesitate to write to the Motor
Vehicle Sales Tax Division, or to call 512/475-6897.

Sincerely,
Patricia Brockway
Division Attorney
Motor Vehicle Sales Tax Division