Did a Texas lessee owe tax again when buying a vehicle from the lessor at the end of an operating lease?

Plain-English summary

The Texas Comptroller said an operating lease followed by a lessee buyout involved two taxable transactions.

The lessor's purchase was the initial taxable transaction. If the lessee paid tax on that purchase, the payment was made on the lessor's behalf.

When the lessee later exercised the purchase option, another taxable sale occurred. Motor vehicle sales tax applied to the residual amount paid to the lessor.

The body did not decide standard presumptive value or a mandatory-purchase contract, despite those subjects appearing in STAR metadata.

What this means for you

Vehicle lessees and lessors

Paying tax connected to the lessor's original purchase did not eliminate tax on a later operating-lease buyout.

Fleet accountants

Separate the lessor's acquisition from the lessee's later purchase and preserve the residual-price documentation.

Common questions

Q: Was the buyout taxable?

A: Yes.

Q: What was the tax base?

A: The residual amount paid to the lessor.

Q: Did the letter decide standard presumptive value?

A: No.

Citations and references

• The letter referred to the Texas Tax Code without identifying a section number.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=MVT
• Opinion: https://star.comptroller.texas.gov/view/9707565L

Original ruling text

July 10, 1997

Thank you for your inquiry concerning the taxability of the purchase of the
motor vehicle at the end of the lease contract.

Generally, most lease contracts we see are operating leases and not sales
contracts. Usually, an option may be exercised to purchase the vehicle at the
end of the lease or the lessee may turn the vehicle back to the lessor.

Under the Tax Code each sale of a motor vehicle is subject to tax. The lessors
purchase is the initial taxable transaction. Any tax paid by the lessee on
that purchase would be paid on behalf of the lessor. Subsequently, if the
lessee purchases the vehicle at the end of an operating lease from the lessor,
another taxable transaction has occurred. Motor vehicle sales tax is due on
the amount paid the lessor for the vehicle (the residual).

If you have any questions please contact one of our tax specialist by call
1-800-252-1382, toll free.

Sincerely,

Curt Swenson
[email protected]