Did a dealer-lessor and a second lessor each owe Texas vehicle tax when the leased vehicle and contract were sold days after lease inception?

Plain-English summary

The Texas Tax Administration Division said the dealer made taxable use when it entered an operating lease, so the dealer-lessor's vehicle acquisition was taxable.

When the dealer later sold the leased vehicle and lease contract to a second lessor, another taxable vehicle sale occurred, even though the parties anticipated the second sale and completed it only days later.

The lessee's personal vehicle did not qualify as a trade-in because the factory or factory importer selling the new vehicle did not receive the old vehicle as consideration.

What this means for you

Vehicle lessors and motor vehicle dealers

The historical tax applied to each vehicle sale; a short holding period did not collapse the two transactions.

Lease facilitators and fleet accountants

The trade-in reduction failed when the actual seller did not receive the old vehicle.

Common questions

Q: Was the dealer-lessor's acquisition taxable?

A: Yes.

Q: Was the sale to the second lessor also taxable?

A: Yes.

Q: Did the lessee's old vehicle qualify as a trade-in?

A: No.

Citations and references

• Texas Tax Code § 152.002(b)(5) — cited for a seller receiving the trade-in as consideration.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=MVT
• Opinion: https://star.comptroller.texas.gov/view/9408L1311G07

Original ruling text

August 12, 1994

Dear **:

Thank you for your letter concerning the tax impact of a lessee's
own personal vehicle being traded in toward the lessors purchase
of a motor vehicle.

I understand your situation to be that the dealer acquires a vehicle
and leases that vehicle to a customer. The lease contract indicates
that the dealer is the lessor and the customer is the lessee. I assume
that the lease contract is an operating lease (as opposed to a
financing agreement).

Then, at a some future point the dealer sells the vehicle and the
lease contract to ***. The time lapse between the
inception of the lease and the sale of the vehicle to **
is generally no more than a few days.

In this state the sale to the lessor is the taxable transaction. An
operating lease is not taxable. A dealer makes a taxable use of a
vehicle by entering into a contract to lease a vehicle.

The lessee's own vehicle will not be eligible to use as a trade-in
for tax deduction in your situation. This is because a trade-in must
be received by the seller of the new vehicle as all or a part of the
consideration paid on the sale (action 152.002(b)(5) of the Texas Tax
Code). Here, the seller is the factory (or the factory importer). The
seller does not receive the trade-in vehicle.

As discussed, the sale to the dealer/lessor is a taxable transaction.
Motor vehicle sales tax Is a tax imposed on each sale transaction. When
a lessor sells a vehicle (that is leased under an operating lease) to a
second lessor another taxable sale transaction has occurred. Although the
dealer's sale to ** is anticipated, this sale is also taxable.

I am sure you will want to examine your purchase/lease procedure to
avoid both *** and the dealer from incurring a tax liability.

This opinion is based on the facts you submitted. Other facts, though
similar, may yield different results.

You may call me toll free at 1-800-531-5441, ext. 3-4684. The direct line
is 512/463-4684. You may also write to Tax Administration, Comptroller
of Public Accounts.

Sincerely,

Curt Swenson
Tax Administration Division

NOTE: Previous Accession Number 9408505L