Was a vehicle sale-leaseback subject to Texas motor vehicle sales tax when it was really a financing arrangement?

Plain-English summary

The Texas Tax Policy Division said a sale-leaseback that was really financing rather than a lease was not subject to motor vehicle sales tax, even if the Texas certificate of title transferred.

The conclusion depended on the lessee retaining the characteristics of ownership: possession; responsibility for maintenance, property tax, and insurance; principal-and-interest accounting; note-payable treatment; depreciation; and a nominal end-of-term buyback.

What this means for you

Fleet owners and equipment finance companies

Substance controlled the historical result. A title transfer alone did not make the financing arrangement a taxable vehicle sale.

Accountants and lessors

Both sides' books and allocation of principal and interest were part of the stated ownership analysis.

Common questions

Q: Did transferring title automatically create tax?

A: No.

Q: Was every sale-leaseback exempt?

A: No. The letter required the lessee to retain all listed ownership characteristics.

Citations and references

• The letter did not identify a statute or administrative rule by number.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=MVT
• Opinion: https://star.comptroller.texas.gov/view/9603L1406G06

Original ruling text

March 14, 1996

Dear **:

A sale leaseback transaction that is in reality a
financing arrangement and not a lease, is not subject to the Motor Vehicle
Sales Tax although a transfer of Texas Certificate of Title may occur. This is
provided the lessee retains all the characteristics of ownership before and
after the sale leaseback transaction including:

1) the equipment remains in the possession of the lessee;

2) the lessee is responsible for all maintenance, property taxes and insurance
on the equipment;

3) the lessee booked the payments to the lessor as part principal and part
interest expenses and carries the leases on their books as notes payable;

4) the lessor treats the payments as loan payments, allocating part to principal
and part to interest:

5) the lessee takes the depreciation expense on the equipment, and

6) the lessee can "buy back" the equipment at the end of the lease term for a
nominal amount.

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

If you have any questions or need additional information, do no hesitate to call
me at 1-800-531-5441, ext. 3-4986, or write to Comptroller of Public Accounts,
Tax Policy Division, Austin, Texas, 78774.

Sincerely,

Ken Koch
Tax Policy Division

NOTE: Previous Accession Number 9603137L