How did Texas tax a trust's acquisition of long-term operating leases, related vehicles, and beneficial interests?

Plain-English summary

The Texas Tax Policy Division assumed the contracts were operating leases longer than 180 days, not conditional sales.

The dealer made taxable use when it entered the leases, so the dealer's vehicle purchases were taxable. Assigning the lease contracts to the trust was the transfer of intangibles and was not subject to motor vehicle sales tax.

The related vehicle transfers could qualify for resale treatment because the trust had not originated the leases. But the trust needed to be a licensed motor vehicle dealer and could not make taxable use. Re-leasing a unit was the letter's example of taxable use.

The purchase and later sale of beneficial interests in the trust were not subject to motor vehicle sales tax because the trust remained the same legal entity.

What this means for you

Vehicle lessors and securitization trusts

The historical analysis separated the lease contract, the titled vehicle, and the beneficial interest into different transferred assets.

Licensed dealers and structured-finance teams

Dealer status and post-transfer vehicle use determined whether title could be taken for resale without tax.

Common questions

Q: Was assigning the lease contract taxable?

A: No. It was an intangible transfer.

Q: Could the trust take vehicle title tax-free?

A: Only if it was a licensed dealer and made no taxable use.

Q: Were sales of beneficial interests taxable as motor vehicle sales?

A: No, under the stated same-entity assumption.

Citations and references

• Texas Tax Code Chapter 152 — cited for motor vehicle transactions.
• Texas Tax Code Chapter 151 — distinguished as applying to other tangible personal property and services.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=MVT
• Opinion: https://star.comptroller.texas.gov/view/9607L1428A09

Original ruling text

July 15, 1996

Dear ***:

Mr. Hamilton has asked me to respond to your inquiry
concerning the taxability of the transfer of vehicles acquired for lease.

It is my assumption that the contracts involved are
operating leases and not conditional sales, and that the contracts all exceed
180 days in length.

In your situation a lease is executed between a motor
vehicle dealer, as lessor, and an applicant, as lessee. A trust (TRUST) will
acquire the lease and the related lease vehicle from the dealer. The
certificate of title to the leased vehicles will be issued in the name of TRUST
or in the name of the trustee for TRUST. TRUST, as assignee of the leases,
will become the lessor under the leases. You stated that Company A will own
100% of the beneficial interest in TRUST. Company A may either sell the
beneficial interest in the trust or pledge as security the beneficial interest
in the trust.

Question One:
You first asked if Texas tax is due on TRUST's
acquisition of titles to the leased vehicles.

Response:
Motor vehicles are taxed under Chapter 152 of the Tax
Code. Certain other tangible personal property and services are taxed under
Chapter 151 that was referenced in your letter. The two chapters apply tax to
leases differently. Chapter 152 taxes the sale to the lessor on a motor
vehicle purchased to be leased for more than 180 days under a single contract.
The lease contract is not subject to motor vehicle tax.

By entering into a lease contract the dealer made a
taxable use of the vehicle. As such, the dealer's purchase of the vehicle to
be leased is subject to motor vehicle sales tax. The transfer of the lease
contract to TRUST from the dealer is the transfer of an intangible (the
contract) and not subject to motor vehicle sales tax.

The transfer of the motor vehicle for consideration
between the dealer and the trust may be taxable. However, because TRUST did
not make a taxable use of the vehicle (it was the dealer and not the trust that
made the taxable use by entering into the lease contract), the trust may take
title for resale without incurring a tax liability if the trust is a licensed
motor vehicle dealer. If TRUST is not a licensed dealer or makes a taxable use
of the vehicle (by releasing the unit, for example), TRUST would owe motor
vehicle tax.

Question Two:
You next asked if the gross receipts received by
Company A from the transfer of beneficial interest in TRUST is subject to motor
vehicle sales tax.

Response:
It is my understanding that TRUST is organized as a
legal entity and that it remains the same entity upon the transfer of the
interest in the trust.

The purchase of the beneficial interest in the trust is
not subject to motor vehicle sales tax.

Question Three:
You also asked if the gross receipts received by the
Transferees from subsequent transfers of the beneficial interests in TRUST are
subject to the motor vehicle sales and use tax.

Response:
The payment received from subsequent sales of the
beneficial interest in TRUST is not subject to motor vehicle sales tax.

This response is based on the facts presented. If
there are additional or different facts, this response may change.

If you have any questions please contact me by calling
1-800-531-5441, extension 3-4684, or by writing the Tax Policy Division.

Sincerely,

Curt Swenson
Tax Policy Division

NOTE: Previous Accession Number 9607500L