Could a lessee-owned vehicle reduce the taxable value of a lessor's vehicle purchase without the dealer physically possessing the trade-in?

Plain-English summary

These related Texas Tax Policy letters explained when a lessee-owned vehicle could reduce the taxable value of a lessor's purchase.

The reduction failed when the dealer received the full cash price and did not take the old vehicle as consideration, even if title passed through the dealer to a lease facilitator.

The letters described a qualifying structure in which the lessor provided the lessee's old vehicle to the dealer as consideration and paid only the cash difference. The facilitator then separately bought the old vehicle from the dealer using funds loaned by the lessor.

The November follow-up clarified that the dealer did not need physical possession. But the seller's books had to show acceptance of the trade-in, the credit allowance, and sale of the old vehicle to the facilitator.

What this means for you

Vehicle lessors, lessees, and lease facilitators

Paper title movement alone was not enough. The old vehicle had to be real consideration in the lessor's purchase.

Motor vehicle dealers and fleet accountants

The seller's books and records had to match the claimed trade-in economics.

Common questions

Q: Did the dealer need physical possession?

A: No.

Q: Did paying the full cash price qualify?

A: No, if the old vehicle was not part of the seller's consideration.

Q: Did the letters identify another possible reduction?

A: Yes, the historical fair-market-value deduction under § 152.002(c).

Citations and references

• Texas Tax Code § 152.021 — cited for tax on total consideration.
• Texas Tax Code § 152.002(b)(5) — cited for excluding a vehicle taken by the seller as consideration.
• Texas Tax Code § 152.002 and § 152.002(c) — cited for trade-in and fair-market-value deductions.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=MVT
• Opinion: https://star.comptroller.texas.gov/view/9511906L

Original ruling text

November 28, 1995

Dear ** :

Thank you for your response to my letter on the taxability of a motor vehicle
purchase where the purchased vehicle is to be leased and a trade-in vehicle is
involved. I agree with you that the seller's physical possession of the tradein
vehicle is not a requirement for the vehicle to qualify as a trade-in
deduction. If the description of an acceptable way to take the deduction in my
letter of September 27, 1995, is otherwise met, then I agree that the trade-in
vehicle may be used as a deduction in determining the taxable value of the
lessor's purchase. We will expect that the seller's books and records reflect
the acceptance of the trade-in, the credit allowance for the trade-in, and the
sale of the tradein to the lease facilitator.

This opinion is based on the facts presented here and in my letter of September
27, 1995. Please feel free to contact me if you have any questions. My phone
number is 463-4684.

Sincerely,

Curt Swenson
Tax Policy Division

September 27, 1995

Dear ** :

Thank you for coming in to discuss the taxability of a motor vehicle purchase
where the vehicle is to be leased and a possible trade-in vehicle is involved.

In the situation you described, a lessor will purchase a vehicle from a dealer.
The lessor will lease the vehicle under an operating lease. The purchase and
lease are arranged through a licensed lease facilitator. Payment from the
lessor (the purchaser) to the dealer (the seller) will be in the form of two
checks (or drafts) totalling the cash sales price.

The lessee owns a vehicle that you wish to use as a tradein deduction in the
lessor's purchase transaction. You propose that the certificate of title to the
"trade-in" vehicle be assigned by the lessee (the "trade-in" vehicle owner) to
the dealer who will then assign the document to the lease facilitator.

The lease facilitator will pay to the lessor the value of the "tradein"
vehicle. The lessee will receive value for the "trade-in" in the form of a
reduced lease price. Generally, the lease facilitator will then resell the
"trade-in" vehicle.

Section 152.021 of the Tax Code provides that motor vehicle sales tax is
computed on the total consideration paid for the motor vehicle. Section
152.002(b)(5), in defining total consideration, excludes the value of a motor
vehicle taken by a seller as all or a part of the consideration for sale of
another motor vehicle. In the situation you described, the dealer (the seller)
received full payment in cash (in the form of two checks or drafts) for the
sale of the new vehicle. The dealer did not receive the tradein as part of the
consideration for the sale of the new vehicle. Thus, in this situation the Tax
Code's requirement is not met for the tradein vehicle to reduce the taxable
value of the lessor's purchase.

However, the lessee's own vehicle could be used as a trade-in deduction in the
following situation. The lessor will purchase a vehicle from a dealer. The
lessor will lease the vehicle under an operating lease agreement. The purchase
and subsequent lease of that vehicle are arranged through a licensed lease
facilitator. The lessor will provide to the dealer the lessee's own old
vehicle as consideration for the purchase of the new vehicle. The dealer will
receive only the cash net difference from the lessor for the purchase of the
new vehicle.

Separately, the lease facilitator will enter into a purchase agreement with the
dealer to purchase the old trade-in vehicle. The lease facilitator would enter
into a loan agreement with the lessor (as a lender) to fund the lease
facilitator's purchase of the older trade-in vehicle from the dealer. The
lessor would then fund the dealer on behalf of the lease facilitator. The
lease facilitator would then satisfy his debt to the lessor. The trade-in
requirements set forth in Section 152.002 would be met.

This is only one way that the taxable value of the lessor's purchase could be
reduced. There may be others, including using fair market value deduction as
provided in Section 152.002(c). Fair market value deduction is the deduction
available to dealers, lessors and rental companies where the value of a vehicle
retired from service reduces the taxable value of a replacement vehicle without
the retired vehicle having to be traded in to the seller.

Please feel free to contact me if you have any questions. My phone number is
463-4684.

Sincerely,

Curt Swenson
Tax Policy Division