Could a lessee's trade-in reduce Texas motor vehicle sales tax when a dealer sold the new vehicle to a third-party lessor?

Plain-English summary

The Texas Comptroller allowed a lessee's own vehicle to function as a trade-in when a dealer sold a new vehicle to a third-party lessor, but only to the extent the trade-in reduced what the lessor paid the dealer.

The letter's example used an $18,000 new vehicle and an $8,000 vehicle supplied by the lessee. The dealer sold the new vehicle to the third-party lessor for $10,000 plus the lessee's $8,000 vehicle. Motor vehicle sales tax was due on the $10,000 paid by the lessor.

The letter separately said motor vehicle tax law did not tax lease payments unless the lease contract qualified as a sale under § 152.001(c). It described special lease taxation for qualifying interstate motor vehicles, trailers, semitrailers, or charter buses under Chapter 157, and said passenger cars did not qualify.

What this means for you

Motor vehicle dealers

The trade-in reduced the tax base only through an actual reduction in the third-party lessor's payment to the dealer.

Vehicle lessors

The lessor's cash payment, after the trade-in value was applied, was the taxable amount in the letter's example.

Dealership accountants

Document the new vehicle's full price, the lessee's trade-in value, and the resulting amount paid by the lessor.

Common questions

Q: Could the lessee's trade-in reduce the lessor's taxable purchase?

A: Yes, to the extent it reduced the lessor's payment to the dealer.

Q: What was taxed in the example?

A: $10,000, after applying an $8,000 trade-in against an $18,000 vehicle.

Q: Were ordinary passenger-car lease payments taxed?

A: The letter said no under the cited motor vehicle provisions, unless the lease qualified as a sale.

Citations and references

• Tex. Tax Code §§ 152.001(c), 152.002
• Texas Motor Vehicle Rule § 3.79
• Texas Tax Code Chapter 157

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=MVT
• Opinion: https://star.comptroller.texas.gov/view/8506L0643E04

Original ruling text

June 4, 1985

Dear ***:

Thank you for writing to ask our opinion, on the application of a trade-
in on a leased motor vehicle.

The situation you describe involves the sale of a motor vehicle by your
client, who is a car dealer, to a third-party lessor who will lease the
vehicle to a customer (lessee). The lessee wishes to trade-in a motor
vehicle on the new leased vehicle.

Your questions are as follows:
(1) Is a sale from ABC, Inc. to a third-party lessor a retail sale subject
to the motor vehicle sales tax and if so, does the total consideration, as
defined in Sec. 152.002 of the Tax Code, include the value of the motor vehicle
taken by ABC, Inc. as a "trade-in" or is the amount paid by the third-party
lessor to be reduced by the value of the traded vehicle pursuant to Tax Code
Section 152.002(b)(5)?

Answer: In our opinion, the "trade-in" taken by ABC, Inc. can be used to reduce
the tax due on the sale of the vehicle from ABC, Inc., to the third-party lessor,
only to the extent that it reduces the amount paid ABC, Inc., by the third-party
lessor. The following example illustrates an allowable trade-in. The sales price
of the new vehicle is $18,000. The lessee's vehicle is valued at $8,000. ABC, Inc.
sells the new vehicle to the third party lessee for $10,000 plus the lessee's
vehicle valued at $8,000. Motor vehicle sales tax is due on the $10,000 paid by
the third-party lessor.

(2) In the event the Comptroller rules that the above-described transaction is not
subject to the motor vehicle sales tax, then we would request a ruling as to whether
or not the lease payments from the customer to the third-party lessor are subject to
the motor vehicle sales tax, or any other tax?

Answer: There is no provision under the motor vehicle tax law to tax lease payments
unless the lease contract qualifies as a sale under Tex. Tax Code Ann. SEC. 152.001(c).
Enclosed is our Motor Vehicle Rule SEC. 3.79 relating to motor vehicle leases and
sales Leases of motor vehicles are taxed only if the vehicle qualifies as an interstate
motor vehicle, trailer, semitrailer or charter bus under Tex. Tax Code Ann. ch. 157.
Passenger cars do not qualify.

This opinion is based on the facts presented. If there are additional or different facts,
the opinion may change.

If you have any questions or need more information, please call us at 1-800-252-5555
toll free from anywhere in Texas. You may write us at the Tax Administration Division.

Sincerely,

Tax Policy Section
Tax Administration Division