Can a Texas fleet lessor retitle retired out-of-state vehicles as 'Title Only' and use their value to reduce tax on replacement vehicles?

Plain-English summary

The Texas Comptroller gave a fleet lessor a split answer about retired vehicles brought into the Texas title system.

First, obtaining a Texas "Title Only" certificate did not trigger motor vehicle use tax. Section 152.022 applies to an out-of-state retail purchase used on Texas public highways by a Texas resident or person domiciled or doing business in Texas. The company said the retired vehicles would not be driven on Texas highways between retitling and sale, so no use tax was due at that step.

Second, those vehicles could not supply the fair market value deduction used to reduce tax on replacement vehicles bought for the Texas leasing fleet. Although the company would obtain Texas titles and offer the retired vehicles for sale, they had never been used or taxed in Texas. The Comptroller read § 152.002(c) and Rule 3.73(b) to require Texas use and prior exposure to Texas motor vehicle tax, not a last-minute Texas title alone.

What this means for you

Fleet leasing companies

Moving an out-of-state retired vehicle into Texas's title records does not manufacture a replacement-vehicle tax deduction. The Comptroller tied the deduction to a retired vehicle that was used for business or personal purposes in Texas and whose acquisition was subject to Texas motor vehicle tax.

Dealers and title processors

A Title Only transaction and a fair-market-value deduction answer different questions. No highway use can eliminate use tax on retitling while the same lack of Texas use prevents the vehicle from reducing the taxable consideration of a replacement purchase.

Accountants and tax professionals

Trace both vehicles' histories. The replacement vehicle must be used in Texas, but the Comptroller also inferred parallel Texas-title, use, and tax requirements for the retired vehicle to avoid a deduction for property that had never entered the Texas tax base.

Common questions

Q: Why was no use tax due when the company obtained Texas titles?

A: The company represented that the retired vehicles would not be used on Texas public highways before sale, so the highway-use condition in § 152.022 was absent.

Q: Was a Texas certificate of title enough for the deduction?

A: No. The Comptroller said the retired vehicles also needed Texas business or personal use so their acquisition was subject to Texas motor vehicle sales and use tax.

Q: Did § 152.002(c) expressly state every Texas-use condition?

A: No. The ruling acknowledged that the statute did not expressly say the retired vehicle's title and use must be in Texas, but treated those conditions as logical inferences needed to avoid a deduction for a vehicle never used or taxed in Texas.

Q: Could the company sell the retired vehicles at out-of-state auctions?

A: The proposed facts included auctions both inside and outside Texas. The ruling's denial turned on the lack of Texas use and tax history, not the eventual auction location.

Citations and references

• Tex. Tax Code §§ 152.002(c), 152.003, 152.022
• 34 Tex. Admin. Code Rule 3.73(b)
• Castleman & Castleman Consulting, LLC v. Internet Money Ltd., 546 S.W.3d 684 (Tex. 2018)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=MVT
• Opinion: https://star.comptroller.texas.gov/view/201909041L

Original ruling text

September 6, 2019

RE: Private Letter Ruling No. 20181217142934

*, Taxpayer No. *

Dear ****:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters. [ENDNOTE: (1)] We are responding to your request dated Dec. 12, 2018, and supplemental information provided in conference calls on Jan. 11 and March 13, 2019. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on using retired vehicles for a fair market value deduction to reduce motor vehicle sales tax when purchasing new motor vehicles for lease.

Facts Presented

The relevant facts are based on the information provided by taxpayer’s representative *, on behalf of their client * (Taxpayer). Taxpayer is engaged in the business of leasing motor vehicles in Texas for a period of greater than 180 days. Taxpayer is an entity wholly owned by COMPANY.

Taxpayer purchased motor vehicle and related long-term lease rights from licensed new motor vehicle dealers. The dealers purchase new motor vehicles from a motor vehicle manufacturer and receive the Manufacturer’s Statement of Origin from the manufacturer. The dealers then hold the vehicles in inventory to sell or lease to customers. The dealers and customers execute leases, the terms of which exceed 180 days. At the same approximate time as the execution of the leases, the dealers sell the leased vehicles and assign the lease rights to Taxpayer.

When Taxpayer purchases motor vehicles for lease in Texas from the dealers, it may avail itself of a fair market value deduction to reduce the motor vehicle sales tax due on these vehicles. Currently, the Taxpayer uses its retired vehicles that are titled and registered in Texas in its name and offered for sale at the time of lease termination as fair market value deductions against the motor vehicle sales tax due on the Taxpayer’s purchases of new motor vehicles for lease. In each instance the Taxpayer, by and through the dealers acting pursuant to a power of attorney, submit a completed Form 130-U reflecting the information of the retired vehicle(s) used as a fair market value deduction. All of the Taxpayer’s fair market value deductions are derived from vehicles that were titled and registered in Texas at the time of lease termination as well as the time of subsequent sale.

The Taxpayer is contemplating the use of retired vehicles titled in its name outside of Texas at the time of lease termination as fair market value deductions by obtaining a Texas certificate of title prior to the sale of these retired vehicles. The Taxpayer intends to sell some of these vehicles at auctions in and outside of Texas. The retitling of these retired vehicles in Texas will occur by the Taxpayer obtaining a Texas certificate of title, “Title Only”, for each vehicle before the ultimate disposition of the retired vehicle.

Taxpayer does not pay Texas motor vehicle sales and use tax on these “Title Only” vehicles. The retired vehicle will not be used on the public highways of Texas by a Texas resident or other person who is domiciled or doing business in Texas between the time at which such vehicle is retitled in Texas and time at which the vehicle is sold.

Questions, Rulings, and Analysis

Our restatement of your questions are shown below, followed by our responses and analysis.

Question One: Are Taxpayer’s out of state retired motor vehicles that are retitled in Texas (Title Only) subject to Texas motor vehicle sales and use tax upon retitling?

Ruling One: No, Taxpayer’s out of state retired motor vehicles that are retitled in Texas (Title Only) are not subject to Texas motor vehicle sales and use tax upon retitling.

Question Two: Are Taxpayer’s retired motor vehicles, which are retitled in Texas (Title Only) and offered for sale, eligible for use as fair market value deductions toward the motor vehicle sales tax due on purchases of new motor vehicles for lease in Texas?

Ruling Two: No, Taxpayer’s retired motor vehicles that are retitled in Texas (Title Only) and offered for sale, are not eligible to be used as fair market value deductions toward the motor vehicle sales tax due on the purchase of new motor vehicles for lease in Texas.

Analysis: Texas Tax Code Section 152.022 (Tax On Motor Vehicle Purchased Outside This State) imposes a motor vehicle use tax on a motor vehicle purchased at retail sale outside this state and used on the public highways of this state by a Texas resident or other person who is domiciled or doing business in this state. Taxpayer stated that the retired motor vehicles will not be used on the public highways of Texas, so no motor vehicle use tax will be due upon retitling (Title Only).

Tax Code Section 152.002(c) (Total Consideration) states that a person who is in the business of selling, renting, or leasing motor vehicles, who obtains the certificate of title to a motor vehicle, and who uses that motor vehicle for business or personal purposes may deduct its fair market value from the total consideration paid for a replacement vehicle if:

The person obtains the certificate of title to the replacement motor vehicle;

The person uses the replacement motor vehicle for business or personal purposes; and

The replaced motor vehicle is offered for sale.

Comptroller Rule 3.73(b) (Qualifying for Fair Market Value Deduction and Determination of Fair Market Value for Replaced Vehicles) further explains that the certificate of title for the retired motor vehicle must be a Texas certificate of title. The rule states:

“For purposes of computing motor vehicle sales tax, a person who is engaged in the business of selling, renting, or leasing motor vehicles may deduct the fair market value of a replaced motor vehicle that is titled in Texas from the total consideration that is paid for a replacement motor vehicle.” (emphasis added).

The Comptroller added the emphasized language to this regulation in 2002 as part of a series of clarification changes.

In addition, the use of the retired motor vehicle for business or personal purpose must have been in Texas so that the acquisition of the retired motor vehicle was subject to the Texas motor vehicle sales and use tax. Because Taxpayer stated that the retired motor vehicles will not be used in Texas, and thus not subject to the Texas motor vehicle sales and use tax, the retired motor vehicles will not be eligible to be used as fair market value deductions toward the motor vehicle sales tax due on the purchase of replacement motor vehicles purchased in Texas.

The agency is aware that Tax Code Section 152.002(c) does not explicitly state that the certificate of title for the retired motor vehicle must be from Texas or that the use of the retired motor vehicle must be in Texas. The agency is also aware that it cannot add additional restrictions that are not in the statute. However, in the exercise of its statutory duty to supervise the collection of motor vehicle taxes, to establish rules for the determination of taxable value of motor vehicles, and to administer the motor vehicle tax, the agency may make logical inferences to effect clear legislative intent or to avoid an absurd or nonsensical result that the Legislature could not have intended. See Section 152.003; Castleman & Castleman Consulting, LLC v. Internet Money Ltd., 546 S.W.3d 684, 688 (Tex. 2018).

Section 152.002(c) does not explicitly state that the certificate of title to the replacement motor vehicle must be from Texas or that the use of the replacement vehicle must be in Texas. However, those conditions are logical inferences, since those are the conditions under which a person in the business of selling, renting, or leasing motor vehicles would need to use the deduction provided by Section 152.002(c).

The same logical inferences should be made for the retired vehicle. To read the statute otherwise would allow a fair market value deduction for a retired motor vehicle that has never been taxed in Texas. The legislature could not have intended to reduce the consideration and tax paid on a replacement motor vehicle to be used in Texas by the fair market value of a retired motor vehicle that was never used or taxed in Texas.

Therefore, Taxpayer’s retired motor vehicles that are retitled in Texas using “Title Only” and offered for sale without being used in Texas, are not eligible to be used as fair market value deductions toward the motor vehicle sales tax due on the purchase of replacement vehicles purchased in Texas.

The Texas Tax Code and Texas Administrative Code are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling No. 20181217142934.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Accounts

ENDNOTE:

1. Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.