An operating lease agreement is an agreement by an owner (i.e., lessor) to give exclusive use of a motor vehicle to a lessee for a consideration for a specified period of more than 180 days. Under the terms of an operating lease agreement, a lessor remains the title owner of a motor vehicle and a lessee has no ownership rights.
The following situations involving operating lease agreements are frequently presented to the tax assessor-collector (CTAC).
Tax is imposed on the leasing company’s Texas purchase of a motor vehicle and is due at the time of titling and registration. Tax is calculated on the leasing company’s purchase price. The leasing company may use the fair market value deduction to reduce the vehicle’s taxable value.
No tax is due on the lease payments made by the lessee under a lease agreement. Also, no tax is due by the lessee on the purchase of a motor vehicle for lease in Texas. Any tax paid by the lessee when the motor vehicle was titled and registered in Texas was paid in the name of and for the lessor.
If a new Texas resident brings a leased motor vehicle into Texas, the new resident owes the $90 new resident tax. The vehicle may be registered in the lessor’s name and still qualify for the new resident tax as long as the new resident is named as the lessee under the lease agreement. No credit is allowed against the new resident tax for tax paid to another state.
When a motor vehicle is leased in another state and the lessee is a Texas resident or is domiciled or doing business in Texas and brings the motor vehicle into Texas for use, the lessee (as the operator) owes motor vehicle use tax. This includes a Texas resident assuming a lease on an out-of-state vehicle and bringing it into Texas.
The use tax is based on the price the lessor paid for the motor vehicle, regardless of any use or depreciation of the motor vehicle subsequent to the purchase and prior to its use in Texas. Credit is given for any tax the lessor or the lessee paid to another state, Puerto Rico or any U.S. possession or territory. Either the lessor or the lessee must document and show record of tax payments.
Some states collect motor vehicle tax due in full at the time of lease, while other states allow the tax to be paid as part of the monthly lease payments. Credit is allowed for tax paid on a monthly basis up to the time the motor vehicle is brought into Texas, if paid by the same lessee. The credit is limited to tax paid prior to the motor vehicle’s entry into Texas and credit cannot be allowed at the time of registration for tax payments not yet made to the other state. At the end of the lease, however, the lessee may request a refund from the Comptroller’s office of up to the amount of additional tax paid to the other state.
If the lessee is paying tax on lease payments, the lessee may not have a receipt available from the other state. Documentation showing the tax collected per lease payment may be in the form of a statement from the lessor or a copy of the lease agreement.
Motor vehicle tax is due from the lessee at the time of titling and registration on the purchase of the motor vehicle from the lessor, since a new taxable sale (second transaction) has occurred, whether the vehicle was leased in Texas or out of state. The tax is based on the amount (option) paid at the conclusion of the operating lease agreement and standard presumptive value (SPV) procedures may apply. The lessee cannot claim a credit for tax paid in the lessor’s name for the lessor’s Texas purchase of the leased vehicle.
A lessee who purchased a leased vehicle brought into Texas may claim a credit for either the use tax or the new resident tax paid by the lessee against any tax due on its purchase. The Texas tax, title, and registration receipt is the only acceptable proof of Texas tax paid.
On occasion, a lease may qualify as a conditional sale as described below.
In a conditional sale (lease/purchase) agreement, one taxable sale has occurred. The lessor retains title to the vehicle while payments are being made by the lessee. To be a conditional sales agreement, it must meet one of the following conditions:
If the contract terms do not firmly establish, at the onset, that the contract is a conditional sale, the lessor owes tax on the acquisition of the vehicle. When the lessee later takes title under such a conditional sale agreement, the tax due from the lessee is recalculated based on the lessee’s total consideration which includes the down payment, sum of the lease payments and any payment made at the end of the lease. SPV procedures may apply. Only separately stated finance charges, carrying charges, service charges, or interest may be excluded from the sales price to determine the sales tax due. The lessee receives credit for the tax paid up front at the time the motor vehicle was initially titled in the lessor’s name if this person is the initial lessee/purchaser.
A re-lease of a motor vehicle on which Texas tax was paid and the title owner does not change is not a taxable event since no sale has occurred.
A Terminal Rental Adjustment Clause (TRAC) Lease is a contract where there is a residual dollar amount the lessee is obligated to pay, whether the lessee purchases the vehicle, or the vehicle is sold to a third party.
If the lessee takes title to the vehicle for an amount other than a nominal amount, tax is due on the amount paid by the lessee since a new sale has occurred. SPV procedures may apply.
If the vehicle is acquired for a nominal amount under the TRAC agreement, see Conditional Sale (Lease/Purchase) Agreement on this page.