How did Texas tax financing leases of motor vehicles and a wheeled compressor?

Plain-English summary

The Texas Tax Administration Division addressed financing leases of a sweeper truck, a half-ton pickup, and a wheeled compressor.

For the motor vehicles, the letter described a financing lease as lasting more than 180 days and ending with a must-purchase clause or a purchase option substantially below fair market value. Lease payments were not separately subject to motor vehicle tax. When title passed, the lessee owed the historical 6% tax on total consideration: lease payments plus the buyout, excluding separately stated financing or interest charges. The lessee could deduct tax the lessor paid when originally purchasing the vehicle.

The wheeled compressor was movable specialized equipment rather than a motor vehicle for this analysis. Its financing lease was treated as a sale subject to applicable state and local limited sales and use tax.

What this means for you

Vehicle lessors and lessees

The letter deferred vehicle tax until the financing-lease purchase and allowed a credit for tax paid at the lessor's original purchase. Verify current treatment and documentation.

Equipment lessors

Not every wheeled asset followed motor vehicle tax. The compressor followed the separate sales-and-use-tax rules cited in the letter.

Common questions

Q: Were the vehicle lease payments taxed separately?

A: No, under the historical treatment described.

Q: What entered the vehicle tax base when title passed?

A: Lease payments plus the buyout, excluding separately stated financing or interest charges.

Q: How was the compressor treated?

A: As movable specialized equipment subject to applicable state and local sales and use tax.

Citations and references

• 34 Tex. Admin. Code Rule 3.294 — cited for rental and lease of taxable items.
• 34 Tex. Admin. Code Rule 3.88 — cited for movable specialized equipment.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=MVT
• Opinion: https://star.comptroller.texas.gov/view/9104L1098D02

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

JOHN SHARP
Comptroller April 8, 1991

Dear **:

Thank you for your recent letter regarding the tax consequences of
the lease of a motor vehicle and a lease of equipment.

As I understand your letter, the leases in question are financing
leases; title passes at the end of the lease term.

I will address items #1 and #2 together because both are motor
vehicles (a sweeper truck and a 1/2 ton pick up truck). A lease
of a motor vehicle is for a period of time greater than 180 days.
A financing lease of a motor vehicle has an option to purchase at
an amount substantially less than fair market value or a must-
purchase clause at the end of the lease term. Lease payments are
not subject to motor vehicle tax in Texas.

The purchaser (lessee) will owe the 6 percent motor vehicle tax on
the total consideration paid, that is, the sum of the lease
payments plus the "buy-out" amount paid at the end of the
financing lease. Separately stated, financing or interest charges
are not included. The purchaser (lessee) may deduct the amount of
tax paid by the lessor at the time the vehicle was originally
purchased.

The compressor with wheels is specialized equipment and is subject
to the applicable state and local limited sales/use tax. A
financing lease is treated like a sale for the purpose of
sales/use tax. See Rule 3.294, Rental and Lease of Taxable Items
and 3.88, Moveable Specialized Equipment.

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

If you have any questions or need additional information, you may
call me toll free at 1-800-531-5441, extension 5-0330. The regular
number is 512/463-4600, or write me at Tax Administration Division.

Sincerely,
Bettie U. Peterson
Tax Administration Division