Can a lessee use a currently leased vehicle as a trade-in toward another leased vehicle for Texas motor vehicle tax purposes?

Plain-English summary

The Texas Comptroller ruled that a customer could not use a vehicle they merely leased as a trade-in toward another leased vehicle.

Returning the old vehicle to its lessor was not a transfer to the seller of the new vehicle as consideration. The answer stayed the same if the new-vehicle dealer bought the old vehicle from the lessor in a separate transaction.

The lessee could create a trade-in only by first purchasing the old vehicle at lease end, paying motor vehicle sales tax on that purchase, and then transferring it in the new vehicle purchase transaction. Tax previously paid by or for the lessor did not become a credit for the lessee's purchase.

What this means for you

Vehicle lessees

You do not own the leased vehicle simply because you have used it. A taxable buyout and title acquisition must occur before you can trade it as your vehicle.

Dealers

Keep the lessor-to-dealer acquisition separate from the customer's new purchase. A separate dealer purchase of the old lease vehicle does not reduce the customer's taxable consideration.

Common questions

Q: Does returning the old lease vehicle count as a trade-in?

A: No.

Q: What if the new dealer buys the old vehicle from the lessor?

A: That separate transaction still does not create a trade-in for the customer.

Q: Can the customer buy out the old lease and then trade it?

A: Yes, but the customer first owes tax on the buyout and receives no credit for tax paid by the lessor.

Citations and references

• The letter cites no specific statute or administrative rule.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=MVT
• Opinion: https://star.comptroller.texas.gov/view/200508247L

Original ruling text

September 8, 2005

To: **

Dear **:

I am responding to your email regarding motor vehicle taxes. You have
customers that are stating that dealerships can use a leased vehicle as a
trade-in towards another leased vehicle.

The Tax Code provides that the taxable value of a vehicle purchase may be
reduced by the value of a vehicle received by the seller as all or part of the
consideration paid for the new vehicle in a single transaction

Generally, what we see is that the former Lessee turns in his old lease vehicle
to the lessor (often through a local dealer). In this situation the old
vehicle clearly may not be used as a deduction. It is not provided to the
seller of the new vehicle as consideration in the new sale transaction.

We also see where the selling dealer of the new vehicle may purchase the old
vehicle from the lessor in a separate transaction. The old unit may not be
used as a trade-in in that it is not part of the purchase transaction.

If the lessee were to purchase the old vehicle at the conclusion of his lease
and then trade the unit in on his new vehicle purchase transaction, he would
first owe motor vehicle sales tax on his purchase of the old unit at the
conclusion of the lease. This is a taxable purchase transaction in itself.
He would not receive credit for any tax paid by or on behalf of the lessor.

A complete set of rules, along with the text of the Tax Code, and a wealth of
other information is available through our web site at
http://www.window.state.tx.us/taxinfo/sales/. You may also wish to view our
State Tax Automated Research (STAR) site, which provides access to numerous
letter rulings, policy decisions, hearings and court cases on this subject as
well as any other subject of interest. This site may be found at
http://cpastar2.cpa.state.tx.us:8765/index.html.

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

Our goal is to provide you with prompt, professional service. Please take a
moment to complete our on-line survey at
http://aixtcp.cpa.state.tx.us/surveys/tpsrvc .

If I can be of further assistance, please call me at 1-800-531-5441, extension
5-9913. You may also write to Tax Policy Division, Comptroller of Public
Accounts, P.O. Box 13528, Austin, TX 78711-3528. My e-mail address is
[email protected].

Sincerely,

Elias Amaya
Tax Policy Division