How did Texas tax a sole proprietor's motor vehicles leased to a corporation for more than 180 days versus rented for 180 days or less?

Plain-English summary

The Texas Comptroller distinguished long-term motor vehicle leases from short-term rentals and from leases of other tangible personal property.

For one contract exceeding 180 days, the lessor's vehicle purchase was taxable under Chapter 152 and the lease itself was not. That result applied both where the sole proprietor had already paid tax while using the vehicles and later leased them to a corporation, and where the proprietor bought new vehicles specifically for the long-term lease.

A vehicle bought for leasing could not be acquired for resale. The 1998 letter quoted a 6 1/4% purchase tax rate and a dealer-to-county payment process; STAR expressly warns that the quoted rates are obsolete.

A contract for 180 days or less was a taxable rental. Long-term leasing alone required no motor vehicle tax permit, but short-term rentals required a motor vehicle rental permit.

The letter contrasted Chapter 152 motor vehicles with forklifts, office equipment, and other tangible personal property taxed under Chapter 151.

What this means for you

Vehicle leasing companies and related businesses

The historical tax point for a contract longer than 180 days was the lessor's purchase, not the corporation's lease payments.

Rental companies

The 180-day-or-less classification changed both the taxable transaction and the permit requirement.

Sole proprietors

Prior taxable business use did not make the later long-term lease payments taxable under this letter.

Common questions

Q: Were lease payments taxed for a contract over 180 days?

A: No.

Q: What was taxed instead?

A: The lessor's vehicle purchase.

Q: What happened at 180 days or less?

A: The contract was a taxable rental and required a rental permit.

Q: Are the rates in the letter current?

A: No. STAR expressly warns that they are obsolete.

Citations and references

• Texas Tax Code Chapters 151 and 152

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=MVT
• Opinion: https://star.comptroller.texas.gov/view/9810874L

Original ruling text

ALERT: The tax rates cited in this article are no longer the current motor vehicle sales tax
or motor vehicle rental tax rates.

October 8, 1998

Dear Mr. **:

Thank you for your letter concerning the taxability of leased motor vehicles. The lease and rental of a motor vehicle is taxed differently than the lease of other tangible personal property.

In the first situation, a sole proprietor has paid motor vehicle sales tax on vehicles that it uses in the sole proprietorship business. At a later date the vehicles are leased to a corporation. You asked if tax is due on the lease payments and if the fact that these are motor vehicles as opposed to other equipment changes any result.

Motor vehicles are taxed under Chapter 152 of the Tax Code. Other tangible personal property such as forklifts and office equipment are taxed under Chapter 151. The lease of a motor vehicle is not a taxable transaction under Chapter 152. A lease contract is defined as an agreement to give exclusive use for a period in excess of 180 days under a single contract. The lessor's purchase is taxable. That tax has been satisfied in this situation by the lessor.

If the contract period is for 180 days or less, the contract is deemed a rental and the rental contract would be taxable.

In the second situation the individual will purchase motor vehicles to lease to the corporation. No prior use will be made.

Here again, so long as the contract period is for greater than 180 days, the lessor's purchase is the taxable transaction. The tax is 6 1/4% of the purchase price and is paid by the purchaser/lessor to the Texas dealer who will then remit the tax to the local County Tax Assessor-Collector when the title is transferred. The motor vehicle lease is not subject to tax. A motor vehicle purchase for lease may not be made for resale.

No motor vehicle tax permit is required if your client only long term leases. If they rent for periods of 180 or less where the rental contract is then taxable, a motor vehicle rental permit is required.

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

If you have any questions please feel free to call me or one of our Tax Specialist at 1-800-252-1382.

Sincerely,

Curt Swenson

Tax Policy Division