How did Texas apply sales and use tax to vehicles bought for lease or brought into Texas under an out-of-state lease?

Plain-English summary

The Texas Motor Vehicle Sales Tax Division said purchasing a vehicle for lease was not exempt. Sales tax applied to the lessor's original purchase, while later lease payments were not taxed.

When a vehicle bought outside Texas was brought into Texas for highway use by a Texas resident, domiciliary, or business, complementary use tax applied. The vehicle operator was liable, and tax was based on the original purchase price after qualifying trade-in or fair-market-value deductions.

The letter allowed credit for legally imposed sales or use tax paid to another state, including tax paid by the lessor and documented for the lessee. For monthly out-of-state tax, credit extended only through the time the vehicle entered Texas.

The letter historically defined a lease as exclusive use exceeding 180 days and a rental as 180 days or less. Its 4% rates are obsolete.

What this means for you

Vehicle lessors, lessees, and fleet operators

Out-of-state leasing did not create a blanket Texas exemption when the vehicle entered Texas for use.

Fleet accountants

The letter required proof of other-state tax and calculated credit only for tax paid by the time of Texas entry.

Common questions

Q: Was a lessor's purchase exempt?

A: No.

Q: Who owed use tax on the vehicle brought into Texas?

A: The operator.

Q: Is the letter's 4% rate current?

A: No.

Citations and references

• The letter described the Texas motor vehicle sales and use tax framework without identifying section numbers.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=MVT
• Opinion: https://star.comptroller.texas.gov/view/7906L2022D04

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

BOB BULLOCK
Comptroller June 19, 1979

Dear ***:

Your letter requesting a Texas tax exemption number has come to me for
reply.
Since motor vehicle registration procedures and fees are administered by
the
Texas Department of Highways and Public Transportation, I am also sending
them a copy of your letter.

Texas assesses a 4% Motor Vehicle Sales Tax on every retail sale of a
motor
vehicle in the state. Purchases for lease are not exempt. The tax is
based
on the original purchase price, less any credit for a trade-in or fair
market
value deduction, and is paid to the appropriate county tax
assessor-collector
at the time of titling and registration. Subsequent lease payments are
not
taxable.

Texas assesses a complementary 4% Use Tax on every motor vehicle
purchased at
retail sale outside the state and brought into Texas for use upon the
highways
by someone residing in, domiciled in, or doing business in Texas. The tax
is
the obligation of the operator, and is paid to the county tax
assessor-collector
at the time of titling and registration. Thus, if LEASING CO. A brings a
motor
vehicle into the state to operate, it will be liable for the tax.

The use tax is based on the original purchase price, less trade-in or
fair
market value deduction. Credit is given for any legally-imposed sales or
use tax which the operator (either lessor lessee) can demonstrate was
paid to another state on that vehicle; lessees may take credit for taxes
paid by the lessor. At the time the vehicle is to be registered, the
operator
must submit documentation of tax paid in the form of a tax receipt, or a
statement from the lessor. In the case of a vehicle leased out-of-state
and
taxed on a monthly basis, we can allow credit for tax paid up to the time
the vehicle is brought into Texas.

You should be aware that in Texas a motor vehicle lease is defined as the
agreeing by the owner to give exclusive use of a motor vehicle to another
for consideration and for a period of time exceeding 180 days under such
agreement. Renting is defined as giving exclusive use for 180 days or
less.
Since the motor vehicle tax is administered differently when a motor
vehicle
is rented rather than leased, I have enclosed an explanatory brochure on
renting and leasing. Please let me know if you are or will be renting
motor
vehicles in Texas so that the appropriate forms to register as a rental
company can be mailed to you. I have also enclosed a brochure which
explains
the fair market value deduction referred to above which may be used under
certain circumstances to reduce the tax base on a motor vehicle.

If you have any further questions on Texas motor vehicle tax, please
write
the Motor Vehicle Sales Tax Division, or call 512/475-6897.

Sincerely,
Victoria Bailey
Motor Vehicle Sales Tax Division