How did Texas tax a purchased portfolio of peanut- and cotton-wagon agreements?

Plain-English summary

The Texas Tax Administration Division addressed a proposed purchase of a manufacturer's portfolio of agreements covering non-titled peanut and cotton wagons.

Under the historical definitions, the manufacturer's existing agreements were rentals even if they lasted longer than 180 days. Rentals to farmers could qualify for the farm-trailer exemption, but agricultural cooperatives did not qualify for processing, packing, or marketing their members' products.

If the buyer signed new or renegotiated agreements for more than 180 days, the arrangements could be leases. The buyer would pay tax on trailers not eligible for exemption, could claim exemption for trailers leased to farmers, and would not tax the lease receipts.

If the buyer continued the original agreements, they remained rentals. The buyer needed a motor vehicle retailer's permit, collected tax on cooperative rentals, and could accept exemption certificates from qualifying farmers. The letter also described a minimum tax liability equal to tax on the vehicle purchase price, satisfied through tax collected on rentals or credits for tax that would have been collected on exempt rentals.

What this means for you

Equipment lessors and portfolio buyers

The identity of the original lessor as manufacturer and whether agreements were continued or renegotiated changed the historical result.

Farmers and agricultural cooperatives

The letter distinguished a farmer's qualifying use from a cooperative's processing, packing, or marketing of members' products. STAR warns that exemption documentation later changed.

Common questions

Q: Could the portfolio buyer issue a resale certificate?

A: The letter did not give a simple resale-certificate answer; it described tax or exemption treatment based on whether the agreements became leases or remained rentals.

Q: Did all agricultural users qualify for exemption?

A: No. The letter denied the described exemption to agricultural cooperatives for work on members' products.

Q: Could bookkeeping classification turn a lease into a conditional sale?

A: No. The letter said contract terms, not accounting treatment, controlled.

Citations and references

• The letter referenced enclosed farm-trailer and motor-vehicle lease rules but did not identify their numbers or reproduce them.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=MVT
• Opinion: https://star.comptroller.texas.gov/view/9106L1113E06

Original ruling text

ALERT: This document may be affected by changes to the Tax Code which was amended by H.B. 268, 82nd Reg. Legislative Session, 2011. The amendment required persons claiming a sales tax exemption for certain agricultural and timber products to apply for and provide a registration number issued by the Comptroller, effective 01/01/2012.

June 3, 1991

Dear **:

I apologize for the delay in responding to your letter
asking about the tax consequences of purchasing the lease
portfolio of another lessor who is also the manufacturer of
the leased equipment.

According to your factual situation, the leased equipment
consists of non-titled peanut and cotton wagons used by
farmers and agricultural cooperatives. All of the leases
are considered "true leases" by the current lessor, and
sales taxes have been collected from the lessees on each of
their rental payments.

You ask whether ** would have to pay
sales tax to the seller if it purchases the portfolio or if
it could issue a resale certificate. You also ask whether
** would be required to collect tax from the lessee on
rental payments and what the effect would be if **
reclassified the leases as conditional sales rather than
true leases. You also ask if there are tax exemptions for
this type of equipment.

The peanut and cotton wagons are classified as motor
vehicles and are not subject to the general limited sales
taxes. Under the motor vehicle sales and use tax law a
distinction is made between rentals and leases. Rental
receipts are subject to tax while lease receipts are not
taxed.

A rental includes an agreement whereby the owner of a motor
vehicle gives another the use of the vehicle for
consideration for not longer than 180 days; and, also an
agreement for any time period whereby the original
manufacturer of a motor vehicle gives another the use of the
motor vehicle for consideration.

A lease is an agreement, except a rental, whereby a motor
vehicle owner gives exclusive use of the motor vehicle to
another for longer than 180 days for consideration.

There is an exemption for farm trailers rented for use
primarily for farming and ranching which includes
processing, packing or marketing of agricultural products by
the farmer. The farmer should provide an exemption
certificate instead of paying tax to the owner in order to
document the exempt use of the vehicle. An agricultural
cooperative is not entitled to the exemption for trailers it
uses in processing, packing or marketing its members'
products.

Farm trailers purchased to be leased to farmers and ranchers
for farming and ranching purposes are also exempt. I am
enclosing the rule covering the exemption for farm trailers.

The transactions between the original manufacturer of the
motor vehicles and the farmers and agricultural cooperatives
are rentals. The rentals to the farmers qualify for
exemption.

Without the benefit of having the contracts to look at, our
general feeling is that ** could handle the tax
responsibilities in one of two ways.

If ** purchases the portfolio and new leases are signed or
the leases are renegotiated and the terms of the new
agreement include a time period of more than 180 days, **
would simply pay tax on the purchase of trailers that are
not eligible for exemption. ** could claim an exemption
for trailers leased to farmers. The receipts from the new
leases would not be taxable.

However, if ** purchases the portfolio and continues with
the original agreements, the transactions continue to be
rental. ** would be required to obtain a motor vehicle
retailers permit and to continue to collect tax on the
taxable rentals to the agricultural cooperatives but could
obtain exemption certificates from farmers instead of
collecting tax.

Instead of paying the motor vehicle sales tax on trailers
that are not eligible for exemption, ** would establish a
minimum tax liability that would be equal to the tax on the
purchase price of the vehicles. The liability would be
satisfied through the collection and remitting of tax on the
rental receipts or by credit for the amount of tax that
would have been collected except for exempt rentals. When
the rental receipts equaled the purchase price, the minimum
tax liability would be considered paid.

The classification of leases as either "true leases" or
"conditional sales" is determined by the terms of the lease.
Generally, a contract is considered a conditional sale at
the inception of the contract only if it provides that title
will transfer to the lessee. Otherwise, the contract is
considered a lease until the lessee exercises an option to
purchase for a nominal sum. Most often, it cannot be
determined whether a contract is a lease or conditional sale
until the lease is terminated and the lessee does or does
not exercise a purchase option. How you account for the
lease on your books does not affect the classification for
tax purposes. I am also enclosing the rule covering motor
vehicle leases and sales.

This opinion is based on the facts presented. Other facts
though similar may provide a different result.

If you have other questions or need more information please
call or write. The toll-free number is 1-800-531-5441; my
extension is 3-4675. The regular number is (512) 463-4675.

Sincerely,

Tom Soto
Tax Administration