When do statutory mergers, partnership contributions, debt assumptions, and lease transfers trigger Texas motor vehicle tax?

Plain-English summary

The Texas Comptroller analyzed a multi-step corporate reorganization involving statutory mergers, transfers to new partnerships, capital contributions, debts, and vehicle leases.

The clearest surviving principles were:

• Vehicles previously titled in Texas could move by statutory merger without motor vehicle sales tax under Rule 3.64(b)(5).
• A genuine capital contribution with no consideration was not a taxable vehicle sale.
• Debt forgiveness or assumption in exchange for a motor vehicle was consideration and made the transfer taxable.
• Unrelated business debt moving between the same entities was not automatically consideration for the vehicles.
• Assigning a lessee's obligations under operating leases longer than 180 days did not itself create motor vehicle tax; exercising a purchase option or buying out the lease and taking title did.

The general sales-tax side also treated a transfer of an entire business's operating assets as a possible occasional sale under § 151.304(b)(2) and Rule 3.316(d).

The letter's separate $10 gift-tax results for affiliated-entity vehicle transfers are superseded. STAR says the 2009 gift-tax legislation restricted qualifying gifts, so this page does not present those outcomes as current.

What this means for you

Corporate reorganizations

Labeling a transaction a merger or contribution is not enough. Document the statutory merger, prior Texas titles, absence or presence of consideration, and the relationship between assumed debt and the transferred vehicles.

Partnership formations

The letter distinguished a newly formed partnership continuing the contributor's business from other structures, but some of its fallback gift-tax analysis is obsolete. Obtain current advice for entity-to-entity vehicle transfers.

Fleet and lease teams

An assignment of long-term lease obligations is different from a title transfer. Tax exposure arises when a party buys the vehicle or when vehicles move between lessors for consideration.

Common questions

Q: Are vehicles moved in a statutory merger taxable?

A: The letter said no under Rule 3.64(b)(5) when the vehicles were previously titled in Texas.

Q: Does assumed debt always create vehicle tax?

A: No. Debt assumed in exchange for the vehicle is consideration; unrelated liabilities transferred alongside the vehicles were treated differently.

Q: Is the letter's $10 intercompany gift tax still valid?

A: No. STAR expressly marks that issue superseded by the 2009 statutory change.

Q: Does a lessee's purchase option matter?

A: Yes. The letter said tax was due on consideration paid when the lessee bought out the lease and took title.

Citations and references

• 34 Tex. Admin. Code Rule 3.64(b)(5)
• Tex. Tax Code §§ 151.304(b)(2), 152.025
• 34 Tex. Admin. Code Rule 3.316(d)
• Texas House Bill 2654, 81st Legislature (effective September 1, 2009)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=MVT
• Opinion: https://star.comptroller.texas.gov/view/9704364L

Original ruling text

STAR SUPERSEDED INFORMATION
Accession No. - and
9704695L
Supersede type - partial
Document superseded on - 5/20/2013
Issue(s) that caused the document to be superseded - Motor vehicle gift tax on
transfer between corporations or affiliated entities
Reason(s): Statutory change - House Bill 2654, 81st Regular Legislative Session
amended Texas Tax Code Section 152 to limit the motor vehicle gift tax to a
limited group of individuals or entities. (Effective Sept. 1, 2009)

April 17, 1997

Dear ***:

Thank you for your correspondence of March 25, 1997 concerning the tax
consequences of transferring motor vehicles and other assets between various
affiliated entities. Your queries are restated below followed by my answers.

Situation 1: A will form a new 100% owned subsidiary corporation ("F"). A will
then cause B to merge into F in a statutory merger with F as the surviving
entity. All the assets of B will be transferred to F due to the merger by
operation of law. Subsequent to the merger of B and F, F will transfer all of
its assets (including motor vehicles) to LP in exchange for a 5% partnership
interest in LP.

1) Neither B, F nor LP will be subject to motor vehicle sales tax upon
the transfer of motor vehicle assets from B to F and subsequently to LP in
exchange for F receiving a partnership interest in LP.

Motor vehicles transferred as the result of the statutory merger of two or more
companies are not subject to motor vehicle sales tax, provided all of the motor
vehicles have been previously titled in Texas. Rule 3.64(b)(5).

The transfer of motor vehicles from F to LP for no other consideration than F's
receiving an interest in LP is not subject to motor vehicle sales tax, provided
LP is a newly formed partnership that is to continue in the same business as F
prior to the transfer. If LP is not a newly formed partnership, then a $10
gift tax is due on each transfer from B to LP. Section 152.025 of the Tax
Code.

2) Neither F nor LP will be subject to the general sales tax on the
transfer of all the assets of F to LP in exchange for F receiving a partnership
interest in LP.

Assets transferred as the result of the statutory merger of two or more
companies are not subject to sales tax. First, if F receives no consideration
from LP in exchange for the tangible personal property it contributes, then no
sale has occurred and no sales tax is due. Moreover, even if there was
consideration, the transfer of the entire operating assets of F into LP would
be exempt as an occasional sale of the entire operating assets of a business or
of a separate division, branch, or identifiable segment of a business. Section
151.304(b)(2) of the Tax Code; Rule 3.316(d).

Situation 2: Corporation C will merge into parent A corporation pursuant to a
statutory merger, with A being the surviving entity. All of C's assets
(consisting almost exclusively of motor vehicles) will be transferred to A by
operation of law. Subsequent to the merger of C into A, A will contribute all
of the assets previously owned by C to LP, first being contributed by A to D
and E (in the same ratios as A has ownership interests in LP) and then from D
and E to LP. The contribution of assets from A to D and E, and from D and E to
LP, will be for no consideration.

3) Neither C nor A will be subject to the motor vehicle sales tax upon the
transfer of motor vehicle assets resulting from the statutory merger of C into
A.

Motor vehicles transferred as the result of the statutory merger of two or more
companies are not subject to motor vehicle sales tax, provided all of the motor
vehicles have been previously titled in Texas. Rule 3.64(b)(5).

4) Neither C nor A will be subject to the general sales tax upon transfer
of all assets resulting from the statutory merger of C into A. Assets
transferred as the result of the statutory merger of two or more companies are
not subject to sales tax.

5) Neither A, D, E or LP will be subject to the motor vehicle sales tax
upon the transfer of motor vehicle assets occurring due to the capital
contribution for no consideration of such assets from A (through D and E) to
LP.

The transfer of motor vehicles from A to D and E for no consideration is not
subject to motor vehicle sales tax, however, such a transfer will be subject to
the $10 gift tax under Section 152.025 of the Tax Code. The transfer of the
motor vehicles from D and E to LP in exchange for an interest in the
partnership is not subject to either the motor vehicle sales tax or the gift
tax, provided LP is a newly formed partnership which is to continue in the same
business as D and E.

6) Neither A, D, E or LP will be subject to the general sales tax upon the
transfer of all assets occurring due to the capital contribution for no
consideration of such assets from A (through D and E) to LP.

First, if A receives no consideration from D and E in exchange for the
tangible personal property it contributes, then no sale has occurred. Likewise,
if D and E receives no consideration from LP in exchange for the tangible
personal property it contributes, then no sale has occurred.

If consideration is given, then the contributions to LP by D and E of tangible
personal property are still exempt as joint ownership transfers, provided tax
has already been paid on the tangible personal property, and that the transfers
are made pursuant to good faith, bona fide contractual relationships between
the transferors and transferee (and not simply to avoid limited sales tax). The
partners, after the transfers, own joint or undivided interests in the property
they contributed.

7) Neither A, C, D, E or LP will be subject to the motor vehicle sales tax
resulting from the transaction described above due to the vehicles being
retitled only once; that is, that the title documents will show the prior owner
as C and the subsequent owner as LP, with no intervening titling occurring.

Any motor vehicles transferred from C directly to LP for no consideration are
subject to the motor vehicle gift tax under Section 152.025 of the Tax Code.

8.(a) Clarify whether vehicles transferred from one entity to another will be
subject to motor vehicles sales if they are subject to a lien and/or a
liability.

(b) If vehicles transferred subject to liabilities does trigger a motor vehicle
sales tax obligation, does the definition of such liabilities include:

(i) Debts owed with respect to the motor vehicle at issue?

(ii) Operating lease obligations related to the motor vehicle when such
contractual lease obligations are transferred to another entity?

(iii) Any liabilities unrelated to the motor vehicle assets (such as trade
accounts payable and other debt) transferred along with the motor vehicles?

A contribution to capital is not taxable as long as there is no consideration
given by the entity receiving the contribution. The forgiveness of debt or the
assumption of debt in exchange for a motor vehicle is clearly the exchange of a
motor vehicle for consideration, a taxable transaction, and not a tax free
contribution to capital. However, debt transferred from one corporation to
another that has no relationship to the motor vehicles being transferred
between the same two entities is not an assumption of debt in exchange for
motor vehicles, and therefore, not subject to the motor vehicle sales tax.

Operating leases that exceed 180 days are not subject to motor vehicle tax,
thus, any assignment or transfer of a lessee's obligation is not subject to
motor vehicle tax. However, if a lessee exercises a purchase option in a lease
or for any reason, buys out the lease contract and takes title to the leased
vehicle, sales tax is due on the consideration paid to the lessor. There is
also no motor vehicle sales tax due by the lessor on the assignment of the
leases, however, there may be motor vehicle sales or gift tax due on any
transfer of the vehicles between lessors, depending on whether there is any
consideration involved in the transactions.

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, do not hesitate to
call toll free 1-800-531-5441, extension 3-4986, or write to Comptroller of
Public Accounts, Tax Policy Division, Austin, TX 78774.

Sincerely,

Ken Koch
Tax Policy Division