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THE A-ITORNEY GENERAL 

OF TEXAS 

AURTIN. TNXAS 78711 

August 26. 1974 

! 

The Honorable Robert S. Calvert 

Comptroller of Public Accounts 

State of Texas 

Austin, Texas 

Opinion No. H- 380 

Re: Taxation of rented 

automobiles under 

Article 6.01. TaxationGeneral, V. T. C. S. 

Dear Mr. Calvert: 

You have asked for an opinion on a variety of questions arising 

under the Motor Vehicle Retail Sales and Use Tax Act, Art. 6.01, 

Taxation-General, V. T. C. S., which levies a tax on the sale, rental, 

and lease of motor vehicles as follows: 

(1) There is hereby levied a tax upon every 

retail sale of every motor vehicle sold in this 

State, such tax to be equal to four percent (4%) 

of the total consideration paid or to be paid for 

said motor vehicle. In the case of a motor 

vehicle purchased to be rented or held for 

rental. the tax is levied on the gross rental 

receipts of the renting of such motor vehicle 

at the same rate as that tax levied in Article 

20.02 of this title. Provided, however, that 

where the period for rental is intended to be 

for more than 31 days, such rental is deemed 

to be a lease as defined in this Article and the 

purchaser-lessor must pay the tax on total 

consideration paid or to be paid for said motor 

vehicle. The tax on rental receipts shall be 

collected by the owner from the renter who has 

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The Honorable Robert S. Calvert page 2 (H-380) 

exclusive use of the motor vehicle for a period 

of time and has the right to direct the manner 

of use of the vehicle, whether exercised or not, 

for that period. It is unlawful and shall be a 

rmsdemeanor for the owner of the rented motor 

vehicle to advertise that the tax or any part thereof 

will be absorbed or assumed by the renter. 

You first ask whether the tax imposed by Art. 6.01, can, consistent 

with the Federal Constitution, be collected when a motor vehicle is rented 

to an employee of the federal government for use on government business. 

As long ago as 1819 in the historic case of McCulloch v, Maryland, 4 Wheat 

316. 4 L. ed. 579 (1819), the Supreme Court declared unconstitutional a 

state tax~on the Bank of the United States because, according ‘to Chief 

Justice Marshall, it amounted to a “tax on the operation of an instrument 

employed by the government of the Union to carry its powers into execution. ‘I 

In a long line of subsequent decisions the Court has consistently held that 

the federal government and its agencies are constitutionally immune from 

state exactions. First Agricultural National Bank v. Tax Commission, 392 

U.S. 339 (1968) and cases cited therein. 

Of particular relevance in answering lhe question you have asked 

is Kern-Limerick, Inc. v. Scurlock, 347 U.S. 110 (1954). In this case 

goods had been purchased for use in the construction of an ammunition 

depot for the United States; the seller of the goods paid the tax owed by 

virtue of the transaction and then brought suit for a refund. The Court 

found that under the contract in question the United States was the actual 

purchaser of the goods and then reaffirmed its earlier holdings that the 

United States cannot constitutionally be subjected to the payment of state 

sales taxes. Since the seller could not collect the tax, he could not be 

held responsible for the payment of it and was entitled to a refund. 

Kern-Limerick, Inc. v. Scurlock firmly establishes the proposition that the federal government is constitutionally immune from the 

payment of state sales taxes and that those who sell to the government may 

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The Honorable Robert S. Calvert page 3 (H-380) 

not be held responsible for collecting such taxes. Thus, the motor vehicle 

sales tax imposed by Art. 6.01 cannot be collected from the federal 

government or its agencies. When an owner of vehicles for rent has 

been adequately assured, by affidavit or otherwise, that the renter is an 

employee of the federal government acting on government business and 

within the scope of his employment, then he should not collect the sales 

tax that ordinarily would be due on the transaction. 

In your second question you ask whether any sales tax would be 

due where a renting and leasing firm supplies a vehicle held for rental 

to a customer to be used as a substitute for a vehicle leased to that 

customer but which is temporarily being repaired. The Motor Vehicle 

Retail Sales and Use Tax distinguishes between a vehicle held for rental 

and one held for lease. A vehicle is held for rental if its exclusive use 

is to be given to another for a consideration and for a period of time not 

exceeding thirty-one days under any one agreement. Art. 6.03 (E), 

Taxation-General. When a firm purchases a vehicle to be held for rental, 

it does not pay the motor vehicle sales tax; instead, the tax is levied on 

the gross rental receipts derived from rentiig the vehicle and must be 

collected by the owner from the renter. Art. 6.01 (11, Taxation-General. 

On the other hand, a vehicle is deemed to be held for lease if its exclusive 

use is to be given to another for a consideration and for a period of time 

exceeding thirty-one days. Art. 6.03 (F), Taxation-General. When a 

renting and leasing firm purchases a vehicle to be held for lease, then it 

must pay the motor vehicle sales tax on the t,otal consideration paid or to 

be paid for the vehicle; the lessee is not required to pay any tax. Art. 

6.01 (l), TaxationGeneral. When a person, or firm, engages in both 

renting and leasing, he must keep adequate records enabling the two 

types of transactions to be segregated. Art. 6.01 (7), Taxation-General. 

The answer to your second question depends, then, upon whether 

under the agreement between the parties the customer must pay anything 

more in order to have another vehicle substituted for the one he originally 

leased when repairs have become necessary. If so, any additional amounts 

paid must be considered gross receipts from the renting of a vehicle, and 

a sales tax equal to four per cent of the additional consideration paid would be 

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The Honorable Robert S. Calvert page 4 (H-380) 

owed. If no additional charge is made, then no gross receipts are 

derived from the vehicle held for rental. and no sales tax would be 

due. 

Your n;xt question concern; Art. 6.01(8), Taxation -General, 

which provides: 

(8) When the owner of a motor vehicle changes 

the status of the motor vehicle from a rental unit 

to a lease unit, the owner shall so inform the State 

Comptroller of Public Accounts of such change on 

a form to be supplied by the Comptroller, and the 

owner shall then pay the tax on such motor vehicle 

based on the owner’s book value and at the rate 

provided in this Article. 

In executing his responsibilities under this provision, the Comptroller 

has promulgated a regulation establishing a depreciation rate of two per 

cent per month to be used in determining the book value of a vehicle the 

status of which is to be changed from a rental unit to a lease unit. You 

ask whether such a regulation is valid. 

The term “book value” generally refers to the cost of merchandise 

less depreciation. Black’s Law Dictionary 227 (4th ed., 1951). It can be 

presumed that in enacting Art. 6.01(8) the Legislature used this term in 

accordance with its normal meaning. Art. 5429b-2, $2.01, V.T.C.S. 

(The Code Construction Act). But the Legislature specified no rate of 

depreciation to be used in determining the book value, nor did it authorize 

the Comptroller to do so. Instead it provided that the tax owed when the 

status of a vehicle is changed from rental to lease should be based on the 

“ownerIs book value” thereby leaving the method of arriving at the book 

value initially within the owner’s discretion. So long as the rate of 

depreciation used by the own&r is reasonable and not contrary to established 

accounting practices, it will be valid. The Comptroller cannot require 

owners to use a depreciation rate of two per cent per month, and any 

regulation attempting to do so would, in our opinion, be invalid. The 

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The Honorable Robert S. Calvert page 5 (H-380) 

Comptroller could promulgate guidelines advising owners that he will 

challenge as unreasonable the use of a particular depreciation method 

or a rate in excess of a certain amount per month, but he cannot establish 

any one rate as the only valid done. 

Your final question is whether the motor vehicle sales tax becomes 

due when the owner of the vehicle held for rental converts it to his own 

personal or business use. The owner of a vehicle held for rental is 

permitted to register it for use on the state’s highways without paying any 

sales tax. Instead, the tax is levied on the gross receipts derived from 

renting the vehicle and is paid by the renter. Art. 6.01 (l)(6), TaxationGeneral. But it is plain that the Legislature in providing for the registration of rent vehicles without payment of the sales tax did not intend to 

permit renting firms and their owners to escape payment of the sales tax 

owed on vehicles held for their personal or business use. 

Art, 6.01 imposes a tax on every retail sale of a motor vehicle. 

The term “retail sale” is defined in Art. 6.03 (B), Taxation-General, so 

as to include all sales of motor vehicles except those in which the vehicle 

is acquired for the exclusive purpose of resale or rental and not for use. 

A vehicle which was initially purchased to be held for rental but is 

subsequently converted to the personal use of the owner has not been acquired 

exclusively for the purpose of resale or rental. Therefore the original 

transaction in which it was acquired is a retail sale on which a motor 

vehicle sales tax must be paid. See Attorney General Opinion M-913 (1971). 

Our answer to your final question is in the affirmative; when a 

vehicle held for rent is converted to the personal or business use of its 

owner, the motor vehicle sales tax becomes due. 

SUMMARY 

The federal government is constitutionally 

immune from the payment of state sales taxes. 

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The Honorable Robert S. Calve.rt page 6 (H-380) 

When a motor vehicle held for rent is converted 

to the personal or business use of its owner, the 

motor vehicle sales tax becomes due. The term 

“owner’s book value” refers to the cost df a motor 

vehicle less reasonable depreciation. 

Very truly yours, 

Attorney General of Texas 

APPR&ED: \ F Ass stant 

DAVID M. KENDALL, Chairman 

Opinion Committee 

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