Motor Vehicle Rental Tax Guide

When you purchase a motor vehicle for your rental fleet, you must register and title it with the county tax assessor-collector (CTAC). Although motor vehicle sales tax is not due on a vehicle while it is kept in your rental fleet, a minimum motor vehicle rental tax (minimum tax) liability is established for the vehicle.

Depending on the status of your rental permit account ("qualified" or "non-qualified"), you may be able to defer payment of your minimum tax liability when you register a vehicle for your rental fleet.

Your minimum motor vehicle rental tax liability is equal to 6.25 percent of the taxable value of a vehicle you buy to rent.

For example, if you buy a vehicle for $11,000 and your trade-in or the fair market value deduction (FMVD) is worth $4,400, the taxable value of the vehicle is $6,600 ($11,000 minus $4,400). In this example, your minimum tax liability would be $412.50 ($6,600 multiplied by 6.25 percent).

If your rental permit account is qualified, you can defer paying your minimum motor vehicle rental tax liability. You can also deduct the value of a trade-in or the fair market value (FMV) of a replaced vehicle from the price of a vehicle purchased for rental. You must pay the >Texas Emissions Reduction Plan (TERP) surcharge at the time of registration, if applicable.

When you defer your minimum tax liability, Form 130-U, Application for Texas Title and/or Registration (PDF), will show the vehicle’s purchase price, the value of any vehicle used as a trade-in or for a FMVD, and your minimum motor vehicle rental tax liability. You will also provide your rental permit number. If purchasing from a dealer, the application must be signed by both the purchaser and the seller.

You can satisfy the minimum motor vehicle rental tax liability by collecting tax when you rent the vehicle and reporting and paying the tax to the Comptroller’s office. If you retire the vehicle from rental service and have not collected enough motor vehicle rental tax to satisfy the minimum tax liability, you must pay the difference to the Comptroller’s office.

Note: Giving false information on title transfer documents is a third degree felony (PDF).

If your rental permit account is non-qualified, you must pay your minimum tax liability within 30 days after you take delivery of a vehicle, or bring a vehicle into Texas, to avoid penalties.

If you pay tax at registration, you can keep the motor vehicle rental tax you collect from your customers until you have reimbursed yourself for the full amount of your minimum tax liability.

You must complete Form 130-U (PDF) to register a rental vehicle.

Form 130-U (PDF) documents a motor vehicle transfer and is used by the CTAC, and the Comptroller’s office, to calculate the amount of motor vehicle tax due and includes sections for information about you, the vehicle, the seller, and the tax computation. It also includes a tax statement section to document your rental permit number and election to use the FMVD.

You and the seller must sign Form 130-U (PDF) only if the seller holds a general distinguishing number issued under Transportation Code Section 503.021, Dealer General Distinguishing Number, or the seller has complied with Transportation Code Sections 501.028, Signatures, or 501.072, Odometer Disclosure Statement.

The purchase or use of a diesel-powered motor vehicle with a gross registered weight of more than 14,000 pounds is subject to the Texas Emissions Reduction Plan (TERP) surcharge. This surcharge is paid at the time of registration with the CTAC at a rate of 2.5 percent on model year 1996 and older vehicles or 1 percent on models years after 1996. The TERP surcharge must be paid at the time of titling and registration for both qualified and non-qualified rental permit accounts.

Note: Do not collect the TERP surcharge from your customers on rental contracts.

If you buy a replacement rental motor vehicle before you sell the retired vehicle, you can claim the FMVD on the retired vehicle if it is offered for sale and is no longer being used. Since you may not know the price the vehicle will sell for, you can use the depreciated book value as the FMV as long as it is based on generally accepted accounting principles (GAAP). You cannot make an adjustment later if the vehicle sells for more or less than the depreciated book value.

The FMVD can only be claimed by qualified rental permit account holders. Non-qualified rental account holders must have an actual trade-in to reduce the taxable value of a rental vehicle.

If you are eligible to take the FMVD and have sold a retired vehicle before purchasing a replacement vehicle, you can take a deduction equal to the sales price of the retired vehicle.

For example, if you sold a vehicle for $5,000, its FMV is $5,000.

If the Comptroller’s office determines that your book value is not based on GAAP, the FMV will be the purchase price you paid for the vehicle less depreciation at the rate of 2 percent per month for the first 36 months and 1 percent per month for its remaining depreciable life.

When you retire a rental vehicle or take it out of service, you must make sure that you have paid your minimum motor vehicle rental tax liability for the vehicle.

• If you paid your minimum tax when you registered the vehicle, you do not owe additional tax when you retire the vehicle from rental service.
• If you registered a vehicle tax-deferred and have collected and remitted motor vehicle rental tax equal to or greater than your minimum tax liability, you will not owe additional tax when you retire the vehicle.

If you have not satisfied the minimum motor vehicle rental tax liability, however, you must pay any tax still due with your next motor vehicle rental tax return. You must report the retired vehicle and calculate your tax liability on your return. Any unremitted portion of your minimum tax liability is added to your total motor vehicle rental tax due for the reporting period.

The minimum motor vehicle rental tax liability is reduced by the amount of motor vehicle rental tax the title owner collects and remits to the Comptroller’s office.

Other credits can be applied to satisfy the minimum motor vehicle gross rental tax liability:

• The rental of a motor vehicle to a public agency, church, qualified child care facility, farm trailer, farm machine, trailer used in timber operations or timber machine to offset the minimum motor vehicle rental tax liability.
• The amount of tax your customer collects, and remits on the rental of a motor vehicle to a rental permit holder who re-rents it. A verification certificate is used to document the credit.
• The amount of motor vehicle rental tax collected and remitted to another state.

When you rent a motor vehicle to someone who will then rent it to someone else, your customer must collect motor vehicle rental tax from their customer. The tax your customer collects from their customer can be credited against your minimum tax liability for the rental vehicle.

Form 14-305 (front), Motor Vehicle Rental Tax Verification Certificate (PDF), documents a rent for re-rental.

• Your customer must complete Section I (Rent for Re-Rental: Verification of Gross Rental Receipts Tax Collected in Texas) of the certificate at the end of the rental contract to you to show how much motor vehicle rental tax they collected.
• You must complete Section II (Reimbursement of Sales or Use Tax Verification) of the certificate to show your customer how much of your minimum tax was paid when you registered the vehicle. The title owner can then contract with the possession owner for reimbursement from motor vehicle rental tax collected.

Once both Sections I and II are complete, the verification certificate should show the amount of sales or use tax paid when the vehicle was registered, the motor vehicle rental tax collected on rental of the vehicle, and the amount of reimbursement received from your customer.

Note: Both you and your customer must keep a copy of the verification certificate for at least four years.

If you register a rental vehicle tax-deferred and it is later destroyed or stolen and you are not able to recover its value, any remaining minimum tax liability is dismissed, and you will not owe additional tax.

You must report vehicles whose minimum motor vehicle rental tax liabilities have been dismissed on your rental tax return.

Note: You cannot use the FMVD when you replace a destroyed or stolen vehicle.

Each vehicle registered tax-deferred must generate enough motor vehicle rental tax to satisfy your minimum rental tax liability for the vehicle.

Note: Tax collected and remitted from one vehicle’s rental receipts cannot be used to pay your liability for a different vehicle.

Similar to credits against your minimum rental tax liability, if you pay motor vehicle sales or use tax on a rental vehicle, you can retain the motor vehicle rental tax you collect to recover the sales or use tax you paid. Motor vehicle sales and use tax is calculated the same way as your minimum rental tax liability. If you pay motor vehicle sales or use tax, it means that you did not originally register the vehicle as a rental vehicle.

You cannot recover more tax than you paid when you registered the vehicle.

For example, if you paid $1,000 in motor vehicle sales or use tax at registration, you can retain no more than $1,000 in motor vehicle rental tax.

To recover the rental tax paid, deduct the gross receipts derived from the rental of the motor vehicle on your rental tax return.

For example, you collect $400 in rental receipts on a vehicle on which you paid motor vehicle sales or use tax. If these receipts were from a short-term rental, include the $400 with your "total short-term contract receipts" on your return, but reduce your "taxable short-term contracts receipts" by $400, thus reimbursing yourself $40 ($400 multiplied by 10 percent).

If these receipts were from a long-term rental, include the $400 with your "total long-term contract receipts" on your return but reduce your "taxable long-term contract receipts" by $400, thus reimbursing yourself $25 ($400 multiplied by 6.25 percent).

If you paid motor vehicle sales tax on a motor rental vehicle, you can only use receipts from rentals of that specific vehicle to recover the tax you paid. You cannot recover tax from rental receipts for a different vehicle.

If you reimburse the title owner for tax paid on a motor vehicle rented to you for re-rental, you can recover the tax from the motor vehicle rental tax you collect.