Did common ownership exempt motor-vehicle and equipment leases between sister corporations from Texas tax?

Plain-English summary

Two corporations were wholly owned by one individual but had separate federal employer identification numbers and filed separate C-corporation returns. One bought forklifts, computers, and motor vehicles, then leased them to the other.

The Comptroller said Texas Tax Code Section 151.346's intercorporate-services exemption did not apply to leases of motor vehicles or tangible personal property. Common ownership did not change the tax result.

For a motor vehicle bought by a lessor for a lease longer than 180 days, the lessor owed motor-vehicle tax on its purchase price at acquisition, and later lease payments were not taxed. For a financing lease of tangible personal property, tax had to be collected when the lessee took possession or when the first payment became due, whichever occurred first, with taxable charges determined under Rule 3.294(e).

Because the lessor had paid sales tax when buying the equipment, the letter said it should seek a vendor refund by supplying a resale certificate. If the lessor had not put the equipment to taxable use before leasing it, it could instead claim a credit on its sales-tax return for the purchase price on which tax was paid, while retaining documentation.

What this means for you

Related companies did not receive special lease treatment merely because the same person owned both. The tax timing depended on whether the property was a motor vehicle or tangible personal property under a financing lease.

Common questions

Did Section 151.346 exempt these leases? No.

Were long-term motor-vehicle lease payments taxed? No. The letter placed motor-vehicle tax on the lessor's purchase price at acquisition for leases longer than 180 days.

When was tax due on the financing lease of equipment? At possession or the first payment due date, whichever came first.

Could the lessor recover sales tax paid when it bought the equipment? The letter described a vendor refund using a resale certificate and, if there had been no taxable use, a sales-return credit supported by records.

Citations and references

• Texas Tax Code § 151.346 — intercorporate-services exemption that did not cover the leases
• 34 Tex. Admin. Code Rule 3.294(b)(4) — resale-certificate refund route identified in the letter
• 34 Tex. Admin. Code Rule 3.294(e) — taxable charges and timing for the financing lease
• 34 Tex. Admin. Code Rule 3.338 — credit and documentation cited by the Comptroller

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9105L1110C11

Original ruling text

May 23, 1991

Dear *****:

This is in response to your recent request for a written opinion
regarding the tax consequences of a situation you described in
your letter and during our telephone conversation today as:

Two corporations are 100% owned by one individual (sister
corporations). One corporation buys equipment such as
forklifts, computers and motor vehicles. The forklifts and
computers leased under the terms of financing leases to the
sister corporation, and the motor vehicles are leased under
the terms of an operating lease to the sister corporation.
Both corporations have separate FEI numbers and file separate
C-Type corporate returns. The leasing corporation (lessor)
paid Texas sales tax on the equipment and motor vehicles at
time of purchase.

You specifically asked if the lease payment charged by the leasing
corporation (lessor) to the sister corporation (lessee) is subject
to additional sales taxes. Also, does the transaction qualify for
exemption under Texas Tax Law Section 151.346, which relates to
intercorporate services.

First, as I mentioned to you during our telephone conversation,
the exemption provided in Section 151.346 of the Tax Code for
intercorporate services does not apply to leases of motor vehicles
or to leases of tangible personal property.

Motor vehicles which are purchased by a lessor to be leased for
more than 180 days are subject to motor vehicle tax based upon the
purchase price of the vehicle to the lessor. The tax is the
responsibility of the lessor at the time of purchase. Subsequent
lease payments are not taxed in Texas. The fact that the lessor
and lessee are sister corporations will not affect the taxability
of the transaction.

Under the terms of a financing lease of tangible personal property
tax must be collected at the time the lessee takes possession or
when first payment is due, whichever is earlier. See section (e)
of Rule 3.294 for taxable charges contained in the lease. The
taxability of a lease of tangible personal property will not
change because the lessor and lessee are sister corporations.

In the situation you have presented, where the leasing corporation
has paid sales tax on the equipment at the time of purchase, the
corporation should apply for a refund from the vendor by providing
the seller with a properly completed resale certificate. See
section (b)(4) of Rule 3.294. Also, if the equipment was not put
to any taxable use by the lessor before it was leased to the
sister corporation, credit may be claimed on the lessor's sales
tax return for the purchase price of the equipment on which tax
was paid. Documentation must be maintained for taxes paid to the
vendor. See Rule 3.338.

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, you may call
me toll free at 1-800-531-5441, extension 5-0330. The regular
number is 512/463-4600, or write Tax Administration Division.

Sincerely,

Bettie U. Peterson
Tax Administration Division