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I‘HEA~TORNEYGENE- 

.OF TEXAS 

W’IIA WIJiSON 

*x-roRNEY GENERAL 

October ~9, 1959 

Honorable Robert S. Calvert Opinion No. W-711 

Comptroller of Public Accounts 

Capitol Station. Re: Amount of eales tax due 

Austin, Texas on, the lease and eubsequent sale of a motor 

Dear Mr. Calvert: vehicle., 

In your letter, of June 3, 1959, you request an. 

opinion of this office on the above question.’ You outIine 

the situation prompting this Inquiry as follows: 

“It Is our understanding that Ben Griffin Leasing 

Company purchases motor vehlcles.whlch they reglster In their name and pay sales taxes .thereon. 

The Company then leases the motor vehicles to Indlvlduals or companies for a certain consideration 

then at the..end of the lease contract, the motor 

vehicle Is often sold to the Lessee.” 

You then cite ~a particular Instance of this arrangement, In which the Leasing Company (which we may call Lessor) 

on May 27, 1957, leased to Customer (or Lessee).a 1957 cad; 

lilac. The agreement provlded that Customer would pay Lessor 

a total of $250 per month, each payment comprising a lease 

charge of $38 and a Depreolation Reserve ~of $212. The lease 

could be terminated by either party at the end of any 81xmonth period, .by giving thirty days’ notice. Other than this, 

there is no specific duration 

on page 1 that the 1st and 24t R 

cried; hqwever, it Is spec$fle$ 

monthly payments were due at 

the time of delivery of the vehicle, and the agreement was 

actually~in effect for, twenty-four .months, terminating on May 

.27, 1959. At that time, an Invoice was prepared as follows: 

“Final Settlement on Cost Service Lease 

Agreement #217 on 1957 Cadillac Sedan 

.DeVille Mtr #5762 089296 at expiration 

of Lease Agreement, May, 27, 1959 

“Original Value (Schedule A) $ 6,155.00 

Less Depreciation Reserve Paid 

(24 payments @ $212.00) 

: Rook Value as of Mayo 27, 195.9 
Honorable Robert S. Calvert, Page 2 Opinion No. WW-711 

"Purchased by Customer, under 

:'::terms of Lease Agreement 

State Tax, Title and License 

Transfer 

Total Amount Due Ben Griffin 

Leasing Cc.... 

$ 1,067.oo 

37.20 

$ 1,104.20,, 

This sale was pursuant to paragraphs 5 and 6'of 

Agreement, reading as follows: 

"5. Lessor will sell each automobile as soon 

as possible after the expiration of this agreement or any extension thereof with'tespect to 

such automobile and determine the rebate or deficiency hereinafter provided which shall be.paid 

by the responsible party~ within thirty.days after 

the date of the sale. . ; .It is agreed'that the 

disposition of the used or, replaced automobiles 

is a part of the service to be rendered by the 

Lessor. However, Customer shall have, the option. 

to sell or dispose of such used or replaced automobiles if he so elects. If sold by Lessor, 

Lessor will use its 'best efforts to ofitain full 

market price for the automobile. 

thk 

“6. Lessor agrees to set up to the credit of 

each automobile the reserve as set forth in paragraph 2. The total reserve.thus accumulated from 

monthly payments on the automobile by Ctstomer 

shall be deducted from the original ,cost of the 

automobile when leased and the balance shall be 

the ~book value of the automobile. If the sale 

price of the automobile exceeds'such book value 

Lessor shall refund the difference to Customer. 

If the sale price is less than such.book value. 

Customer shall pay the difference Tao Lessor." 

A letter to 0~‘;; office from the Ben Griffin Fleet 

Leasing Co., dated August 6, 1959, in response to hour in-. 

wiry, contains the following Information: 

"The balance due by the customer at the end 

of the Lease, as shown on our invoice,:.was. 

$1067.00. We zharged the customer $37.20 kor 

State Tax, Title.and License Transfer, based on . 

a valuation of the 1957 Cadillac of $3,300.00. 

We established thisvaluation by the N. A. D. A. 

Official Used Car Guide.!' 
Honorable Robert S. Calvert;Page 3 Opinion No..ti-711 

Subsequently, on August 11, 1959, you wrote u0 a 

supplemental letter, referring to your original request and, 

proceeding In part as follows: 

*After submitting the question, we received the'.: 

enclosed Equipment Lease Agreement. between the 

Dalworth Leasing Comp~any and the Texas Industries, Inc. As explained in alletter Reed 

Stewart, Tax Assessor-Collector, Tarrant County, 

wrote to us on July 6, 1959, a copy of wQich is .‘ 

enclosed, he has'been asked to accept Seller's 

and Purchaser's Affidavits on four motor vehicles showing that they were being sold by the 

Dalworth Leasing Company to Texas Industries, 

Inc., for a consideration of $1.00 on each motor 

vehicle. 

"The Dallas County Tax Assessor-Collector's 

Motor Vehicle Sales and Use Tax Report for the 

month of January 1959, shows the Dalworth Leasing Company purchased the four motor vehicles 

from Southwestern Financial Corporation and paid 

sales taxes thereon, for which he Issued the 

following receipts: 

"430052V - $3.08. 

f;t$w&v~- 9.88 

-. 9.88 

430057 - 9.88 

"In writing your Opinion, also advise whether 

the Seller’s’;and Purchaserls Joint Affidavits 

covering the Sales from Dalworth Leasing Company 

to Texas Industries, Inc. should show the actual 

value of':each motor~vehicle.at:the:time ofthe 

sale or the $1.00 as referred to in the letter 

we received from Mr. Stewart.". . . 

The Dalworth Leasing agreement, some.,seven pages In 

length, provides ,in substance that lessee will pay to lessor 

rental charges specified in separate schedules. (These 

schedules were not submitted by the lessor.) The lease term 

was 72 months, unless sooner terminated under other provisions. Paragraph (9) provides as follows: 

ATIO~~~~)u~~~SPO~IT~~~~~~ EQUIPMENT UPON TEFIMINth t i tion of this Agreement, 

m shall have the right in its sole'discretion: 
Honorable Robert S. Calvert, Page 4 Opinion No. W-711 

"(a~) to purchase all or any part 

dh'the LEASED EQUIPMENT leased hereunderat the net cost thereof tb the 

LESSOR, as specified in Schedule A, 

A-l, etc., less amortizat~ion charges 

set forth in Schedule B of this Agreement; or 

"(b) to c~ontinue this Agreement in 

effect as to all or any part of the 

LEASED EQUIPMENT until such time as 

such equipment has been fully amor: 

tized on the books of LESSOR in actordance with the amortization rates ,provided In Schedule B, at which time the 

LESSEE 'shall,have the right to purchase such equipment for the sum of 

One 90llar ($1.00); or 

"(c) surrender: all:of tiny part of 

the LEASED EQUIPMRNT, at such place a8 

may be agreed upon, to LESSOR for sale 

as hereinafter provided. 

I, . . . 

"Any LEASED EQUIPMENT which shall, as of the 

datebf purchase by LESSEE, have been fully 

amortized on the books of LESSOR, in accordance 

with the amortization rates provided in Schedule 

B shall be valued at the sum of One Dollar ($1.00) 

for the purpose of such purchase, by the LESSEE." 

Paragraph 9 further provides that, if the net proceeds 

from sale are less than Lessorp's~ net cost less amortization, 

Lessee shall reimburse Lessor for any deficiency. If the proceeds exceed such adjusted net; Lessee,- if not in default, 

should receive such excess. Lessee is obligated to purchase 

any returned'leased equipment .not sold within thirty days. 

Article 7047(k), Vernon's Civil Statutes, at the 

time in question, levied a motor,vehicle retail sales tax of 

1.1% "of the total consideration paid-or to be paid to the 

seller by the buy~er. . . .whether such consideration be In the 

nature of cash, credit, 

combination of these." 

or exchange of other property, or 8~ 

(Section 1 (a).) Your inquiries resolve themselves into,a question of what the term "total consideration" would encompass, when these leased vehicles are 

ultimately sold to the lessee. 
Honorable Robert S. Calvert, Page 5 Opinion No. 9-711 

To answer your question, it is first necessary to 

determine the,nature of the two tran%%ctions; that Is, 

whether they are actual leases with options to purchase, as 

they purport to be, or whether they are in reality, conditional sales, disguised as leases. .~ 

A conditional sale has been described as a contract 

for sale of personal property under which possession is delivered to the buyer but title is.retained by the seller 

until the condition (usually. payment of the purchase price) 

is performed.' (78 C.J.S., iSa:l;e:s;,:sec. 553;). Another',, 

definition is.that a conditional sale,is a contract for the 

bailment or leaslng,of goods by: which the bailee or lessee 

is obligated&t6 pay a sum substantially equivalent to the. 

value of the goods, the bailee or lessee thereupon becoming, 

or having the.optlon to become, the owner of the goods upon' 

full.compliatice with the contract,. (Ibid) A lease, on the 

other hand, as used here, would result in a bailment. 8 

C.J.S., Bailments, sec. 2. See Trimount Coin Machine Co..v. 

Johnson; Sup;,Jud.Ct. Me. (1956), 124 A.2d 753. 

Classification Df~certain transactions as conaitlonal sales or,as leases with options is often difficult 

Under,the "Pennsylvania Rule", transactiona such as here 

involved (i.e., ~renting personal property, particularly automobiles, rith options to purchase at the end of the term for 

a nominal' consideration) are honored as the leasesthey pur-, 

z;yt to be (Jacobson v. Lintz. Sup.Ct.Penn. (1936), 183 A. 

even though they armiittedly, in substance, conditio;al sales (G.M.A.C. v. Horton, C.c..A., Third Circuit 

(.1936), 85 F12mr However, this rule seems 'to be, as 

&$zcged by one court, "an anomaly in the law". (In re 

Dist.Ct. Maryland, (1929), 31 F.2d 197.) Tmjority 

view is to look through form to the substan;zeo; ",h; ytract 

and the underlying intent of the parties. 

Bailments, sets. 3).(b), (c), (d); 37~A Tex.Jur., Saiei,'Lec. 

60; 6 Am.Juy., Bailments, sets. 28, 29, 35 and 38; 47 Am.Jur., 

Sales, sec. 836. 

We quote from a casenote in 7 T:L.R; 329: 

y 

"The important problem of the court in interpreting a contract of this sort is to asaertain the 

intentions of the parties, not from the name they.' 

give to the transaction, but from the provisions of 

the agreement as a whole. (authority) Only a fe$v 

courts give weight to the name employed in the contract. (authority). .Nhere there lsno agreement 

to take,, but the les&e or vendee has an option at 

. 
Honorable Robert S. Calvert, Page 6 Opinion No. WW-711 

the end of the term to buy and apply the installments on the purchase price, the amount of the :. 

Installments is of primary importance. If the 

Installments are unreasonable as rent, and at the 

end of the term amount to the sale price of the 

chattel, the transaction is usually held to be a 

sale. (authorities) The same result follows if 

acceptance of the option requires the added payment of a nominal sum. (authorities). . ." 

In addition to the authorities above cited, see 

annotations in 17 A.L.R. 1434; 43 A.L.R. 1257;. 92 A.L.R. 321; 

and 175 A.L.R. 1382. 

Willys-Over~land Co. of California v. Chapman, Tex. 

Civ.App. w) 20b S W y(o [no writ history), Is the most 

nearly analogou)s Texas'case &at we have found. In that 

case, defendant contracted to pay appellant, an out-of-state 

corporation, a total consideration of $595.00, payable monthly, 

"for the rental hire and use" of an automobile. Upon full 

compliance, defendant lessee couid exercise an option to buy 

the automobile for a further consideration of $5. The contract was made and possession delivered In California. :During 

the lease period, and in voilation of the contract, defendant 

removed the automobile to Texas, and sold It tom a bona fide 

purchaser. It was contended that defendant was a mere bailee 

under the contract and could thtis not pass good title. In 

holding against this contention, the court said (page 981): 

"It (the contract) is referred to by appellants as a lease contract and is so designated by 

the contract its~elf. Rut while it is in form of 

bailment for hire, it provides for and had in 

view by its terms a sale of the automobile upon 

the conditions stated." 

The court further holds that, by virtue of Art. ,5654 

(now Art. 5489), R.C.S., such conditional sale arrangements 

are, in Texas, specifically made chattel mortgages. 

Tne agreements about which you inquire contain elements common to both leases and conditional sales. In neither 

case is the lessee absolutely obligated to keep and pay for 

the vehicles. .Each has the option of terminating the lease, 

by complying with,the applicable provisions; and returning the 

vehicle to the lessors for sale. However; in a true lease, 

the rights and obligations of the parties would normally terminate coincidentally with the agreement. Here, there is a 

further contingent liability: if the sale price received by 

the lessor for the returned vehicle Is less than lessor's 
Honorable Robert S. Calvert, Page 7 . QpLnlon' No. WW-711 

"book value" (Griffin) or ".unamortized cost" (Dalworth) ,of 

the unit, then lessee must pay him the difference, thus ihdemnifying lessor against any loss upon final disposition. If 

this sale price exceeds lessor's interest, lessee receives 

such excess. Also, the~total.amounts payable under the agreements, when lessee's option to purchase is exercised, will 

equal then actual value of the vehicles, just asif the transactions had been open conditional sales or chattel mortgages. 

The final consideration is purely nominal In the Dalworth, 

agreement, and substantively so In the Griffin agreement, 

since In the latter zLt is less than one-third the then actual 

value of the vehicle. Finally, during the lease'perlod, virtually every responsibility and incident of ownership, or 

condltlonal ownership, is placed upon lessee. It Is his duty 

under each contract for example to license the vehiales, to 

pay costs of maintenance, and to arrange insurance coverage. 

In llghtof the cited authorities, and considering 

the import and actual results of the agreements, we believe 

the conclusion is inescapable that the parties cqntemplated 

the ultimate sale of the vehicles, in which the agreements 

culminated, as the heart of the transactions. It Is unnecessary to decide~whether they are simple conditional. sales or 

are, by virtue of Art. 54&g> chattel mortgages. In either 

event, the "total consideration" to be used as a basis for the 

sales tax should Include the total amounts'~paid by lessee 

under each agreement. The Seller's and Purchaser's Joint 

Affidavits should reflect this total amount pald.ln each case 

as "total consideration." 

SUM&lARY 

Whe~re motor vehicles are transferred und 

der so-'called lease agreements, .and ares later 

sold to lessees.thereunder for nominal considerations, the.transactions constitute iconditional sales 'or'chattel mortgages. ,The. 

Vehicle,Sales Tax on "total consideration" 

paid in exchange for vehicles should be calculated on the total amounts paid lessor by 

lessee,under such agreements; and these should 

be'the amounts reflected'in the Seller's and. 

Purchaser's Joint Affidavits. 

Yours very.truly, 

WILL' WILSON 

Attorney General.. 

.~.. 
Honorable Robert S. Calvert, Page 8 Opinion fro. WW-711 

JRI:bct 

APPROVED: 

OPINION COMMITTEE: 

Geo. P. Blackburn, Chairman 

Robert T. Lewis 

J. Arthur Sandlin 

Bob E. Shannon 

REVIEWED FOR THE ATTORNEY GENERAL 

By,: W. V. Geppert 

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