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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 PublicAccounts 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 situationprompting this Inquiry as follows:

“It Is our understandingthat Ben Griffin Leasing Companypurchases 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~aparticular Instance of this arrangement, In which the Leasing Company (whichwe may call Lessor)
on May 27, 1957, leased to Customer (orLessee).a 1957

### cad; lilac. The agreementprovlded that Customer would pay Lessor a total of $250per month, each payment comprisinga lease charge of $38 and a DepreolationReserve~of$212. The lease could be terminatedby either party at the end 

### of any 81xmonth period,.bygiving thirty days’ notice. Other than this, there is no specificduration **on**page 1 that the 1st and 24t Rcried;hqwever, it Is spec$fle$ monthly payments were due at the time of delivery of the vehicle, and the agreementwas actually~in effect for, twenty-four.months,terminating on May .27, 1959. At that time, an Invoice was prepared as follows:
“Final Settlementon Cost Service Lease Agreement #217 on 1957 Cadillac Sedan .DeVilleMtr #5762 089296 at expiration of Lease Agreement,May,27, 1959 “OriginalValue (Schedule

### A) $ 6,155.00 Less DepreciationReserve Paid (24payments @ $212.00) : RookValue as of Mayo27, 195.9Honorable Robert S. Calvert, Page 2 Opinion No. WW-711

"Purchased by Customer,under :'::terms

of Lease Agreement StateTax, 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 thereofwith'tespect to such automobile and determine the rebate or deficiencyhereinafterprovided which shall be.paid by the responsibleparty~ within thirty.daysafter 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 shallhave,the option. to sell or dispose of such used or replaced automobiles if he so elects. If sold by Lessor, Lessor will use its 'bestefforts to ofitainfull 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.thusaccumulated from monthly payments on the automobileby Ctstomer shall be deducted from the original ,costof the automobilewhen leased and the balance shall be the~bookvalue of the automobile. If the sale price of the automobile exceeds'suchbook value Lessor shall refund the difference to Customer. If the sale price is less than such.bookvalue. Customer shallpay the difference Tao Lessor."

A letter to 0~‘;;

office from the Ben Griffin Fleet Leasing Co., dated August 6, 1959, in response tohourin-. wiry, contains the following Information:

"The balance due by the customerat 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 submittingthe 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'sAffidavits on four motor vehicles showing that they were being sold by the Dalworth Leasing Company to Texas Industries, Inc., for a considerationof $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 SouthwesternFinancial 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

PurchaserlsJoint Affidavits covering the Sales from Dalworth Leasing Company to Texas Industries, Inc. should show the actual value of':each

motor~vehicle.at:the:timeofthe sale or the $1.00 as referred to in the letter
we received fromMr. Stewart.".

. . The Dalworth Leasing agreement, some.,seven pages In length,provides ,insubstancethat lessee will pay to lessor rental charges specified in separate schedules. (These scheduleswere not submittedby the lessor.) The lease term was 72 months, unless sooner terminatedunder other provisions. Paragraph (9)provides as follows:
ATIO~~~~)u~~~SPO~IT~~~~~~ EQUIPMENT UPON TEFIMINth t i tion of this Agreement,
m shallhave 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 leasedhereunderat the net cost thereof tb the LESSOR, as specified in ScheduleA, 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 equipmenthas been fully amor: tized on the books of LESSOR in actordance with the amortizationrates ,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 suchplace a8 may be agreedupon, to LESSOR for sale
as hereinafterprovided. 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 amortizationratesprovided 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 furtherprovides 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'leasedequipment .notsold within thirty days.

Article 7047(k), Vernon's Civil Statutes,at the time in question, levied a motor,vehicleretail sales tax of 1.1% "of the total considerationpaid-or to be paid to the sellerby the buy~er.

. . .whether such considerationbe In the nature of cash, credit, combinationof these." or exchange of otherproperty, or 8~ (Section 1 (a).) Your inquiries resolve themselves into,a question of what the term "total consideration"would encompass,when these leasedvehicles 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 salehas been described as a contract for sale of personal property under which possession is delivered to the buyer but title is.retainedby the seller until the condition (usually. payment of the purchaseprice) is performed.' (78 C.J.S., iSa:l;e:s;,:sec. 553;). Another',, definition is.that a conditional sale,isa contract for the bailment or leaslng,of goods by: which the bailee or lessee is obligated&t6pay a sum substantiallyequivalent 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 otherhand, 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.
ClassificationDf~certain transactionsas conaitlonal sales or,as leaseswith options is often difficult Under,the "PennsylvaniaRule", transactiona such as here involved (i.e.,~rentingpersonal 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 (Jacobsonv. 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 'tobe, 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 importantproblem 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). .Nherethere 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 purchaseprice, the amount of the :. Installments is of primary importance. If the Installmentsare unreasonable as rent, and at the end of the term amount to the saleprice 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 Californiav. 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 contractedto pay appellant, an out-of-state corporation,a total considerationof $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 considerationof $5. The contract was made and possession delivered In California.:During the leaseperiod, and in voilation of the contract,defendant removed the automobile to Texas, and sold It tom a bona fide purchaser. It was contended that defendantwas 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 forhire, it provides for and had in view by its terms a sale of the automobileupon the conditions stated."

The court furtherholds that, by virtue of Art. ,5654 (nowArt. 5489), R.C.S., such conditional sale arrangements are, in Texas, specificallymade chattelmortgages.

Tne agreementsabout 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. .Eachhas the option of terminating the lease, by complyingwith,the applicableprovisions; and returning the vehicle to the lessors for sale. However; in a true lease, the rights and obligationsof the parties would normally terminate coincidentallywith the agreement. Here, there is a further contingent liability: if the saleprice received by the lessor for the returnedvehicle Is less than lessor'sHonorable Robert S. Calvert, Page 7

. QpLnlon' No. WW-711

"book value" (Griffin)or ".unamortized cost" (Dalworth),of the unit, then lesseemust pay him the difference,thus ihdemnifying lessor against any loss upon final disposition. If this saleprice exceeds lessor's interest, lessee receives such excess. Also, the~total.amountspayableunder the agreements, when lessee's option to purchase is exercised,will equal thenactual value of the vehicles, just asif the transactionshad been open conditional sales or chattelmortgages. The final considerationis purely nominal In the Dalworth, agreement,and substantivelyso In the Griffinagreement, since In the latter zLtis less than one-third the then actual value of the vehicle. Finally, during the lease'perlod,virtually every responsibilityand incident of ownership, or condltlonalownership, 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~whetherthey 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'sJoint Affidavits shouldreflect this total amountpald.ln each case as "total consideration."

SUM&lARY

Whe~re motor vehicles are transferredund der so-'called

lease agreements, .andareslater sold to lessees.thereunderfor nominal considerations,the.transactionsconstituteiconditional sales 'or'chattel mortgages. ,The. Vehicle,SalesTax on "total consideration" paid in exchange for vehicles shouldbe calculated on the total amountspaid 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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