When could a Texas lessor use a retired lease vehicle's fair market value to reduce tax on a replacement vehicle?

Plain-English summary

A qualifying lessor could use a retired lease vehicle's fair market value to reduce the historical taxable price of a replacement vehicle, but only under specific conditions.

The retired vehicle had to be Texas-titled in the company's name, returned from business or personal use, and offered for sale within the stated period. The replacement also had to be acquired after August 31, 1977, for Texas business or personal use and titled in the company's name.

A vehicle sold to its lessee under a lease-purchase or conditional sale did not qualify because the lessor retained title only as security. A residual-value arrangement was treated similarly when the lessee took title, but the retired vehicle could qualify if it was instead sold to an unrelated third party.

If the retired vehicle had not yet sold, historical Rule .022 used the title owner's book value when it left business or personal use. The letter accepted the remaining lessee guarantee as the lessor's book value for this purpose.

What this means for you

The deduction depended on actual replacement-fleet facts, Texas title, how the old vehicle left service, who ultimately bought it, and documented value. The letter also required a special affidavit because the retired vehicle was not traded to the replacement seller.

Common questions

Q: Did a lease-purchase vehicle qualify?
A: No, when the lessee took title under the agreement.

Q: What if an unrelated third party bought the retired vehicle?
A: The letter said it could qualify.

Q: Could the company request refunds for missed deductions?
A: Yes. It had to make a separate written request with vehicle descriptions, Form 31 tax receipts, and the qualifying vehicles' descriptions and fair market values.

Citations and references

• Texas Tax-General Annotated art. 6.03(D)(3)
• Motor Vehicle Rule .038
• Motor Vehicle Rule .022

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=MVT
• Opinion: https://star.comptroller.texas.gov/view/7905L2024C04

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

BOB BULLOCK
Comptroller May 17, 1979

Dear ***:

Thank you for your letter of May 2, 1979. I'm glad to be able to explain
how
CORP A may take advantage of the fair market value deduction provision of
the Motor
Vehicle Retail Sales and Use Tax Law, TEX. TAX.-GEN. ANN. art.
6.03(D)(3).

Provided that CORP A qualifies as engaging in business under Motor
Vehicle Rule .038,
a copy of which is enclosed, the fair market value deduction is available
as set
out below. The purchase price of a vehicle acquired for lease in Texas
after
August 31, 1977, may be reduced by the fair market value of a retired
lease
vehicle provided: the retired lease vehicle has been titled in Texas in
CORP A's
name, and returned from business (lease) or persona use, and offered for
sale
no more than year prior to being used as a fair market value deduction.
The replacement vehicle must be purchased for business (lease) or
personal use
in Texas after August 31, 1977, and titled in Texas in CORP A's name.

You should be aware that the fair market value of a lease vehicle which
has
been sold to a lessee under a lease-purchase or conditional sales
agreement
may not be used to reduce the taxable purchase price of a new lease
vehicle.
This is because the lessor is not considered to hold the vehicle for
"business
or personal use" within the meaning of the statute when he merely retains
title
as security in a conditional sale or lease-purchase. A lease in which
the
lessee guarantees the vehicle to be worth some residual value at the end
of
the lease, and the lessee takes title at the end of the lease by
satisfying
that value, is treated similarly to a lease-purchase. The lessee is
permitted
to take credit for motor vehicle sales tax paid when the vehicle was
titled
in the lessor's name and the vehicle is not eligible as a fair market
value
deduction to reduce the taxable purchase price of a new lease vehicle.
If,
however, the residual value or guarantee is satisfied by selling the
vehicle
to an unrelated third party, the vehicle may be used as a fair market
value
deduction.

Rule .022, a copy of which I have enclosed, states that when a replaced
vehicle
has not been sold prior to the purchase of a new vehicle, the fair market
value
of the replaced vehicle is "the book value of the vehicle on the title
owner's
books at the time the vehicle is retired from business or personal
use..."
The "lessee's book value," which you describe as the remaining portion of
the
lessee's guarantee to CORP A of the vehicle's value, would qualify as an
acceptable
lessor book value for purposes of computing the fair market value
deduction.

Since the retired lease vehicle is not traded to a seller, a special
Seller,
Donor, or Trader's Affidavit for Dealers and Lessors must be used to
document
the fair market value deduction. I have enclosed some of the affidavits.
Additional affidavits may be obtained from any County Tax
Assessor-Collector's
office in Texas, or if it is more convenient, I will be glad to send you
a supply.

A separate, written request for a refund of Motor Vehicle Sales Tax must
be
made with regard to any vehicles purchased by CORP A after August 31,
1977, which
you believe were eligible for fair market value deductions that were not
taken.
The request should include a description of each vehicle eligible for the
fair
market value deduction, the Form 31 tax receipts showing the amount of
tax paid
on each vehicle and the description and fair market value of each vehicle
qualified to reduce the tax liability of the vehicle claimed for refund.
Please
mail the refund request to the attention of the Motor Vehicle Sales Tax
Division.

This response is restricted to the facts as you have presented them.
Other
facts, although similar, might lead to a different response.

I hope that this information will be of assistance to you in doing
business in
Texas. If you have any further questions in this matter, I will be glad
to
discuss them. You may write to me at the Motor Vehicle Sales Tax
Division or
call 512/475-6897, or call toll free from anywhere in Texas
1-800-252-5555.

Sincerely,
Patricia Brockway
Division Attorney
Motor Vehicle Sales Tax Division