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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 ofTexas 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 ofquestions arising under the Motor Vehicle Retail Sales and Use Tax Act, Art. 6.01, Taxation-General, V. T. C.S., which levies atax onthe sale, rental, and lease of motor vehicles as follows: (1)There is hereby levied atax upon every retail sale of every motor vehicle sold inthis State, such tax to be equal tofour percent (4%) ofthe total consideration paid or tobe paid for said motor vehicle. In the case ofa motor vehicle purchased tobe rented or held for rental. the tax is levied on the gross rental receipts ofthe renting of such motor vehicle at the same rate as that tax levied inArticle 20.02 of this title. Provided, however, that where the period for rental is intended to be for more than 31days, such rental is deemed to be a lease as defined in this Article and the purchaser-lessor must pay the tax ontotal consideration paid or to be paid for said motor vehicle. The tax on rental receipts shall be collected by the owner from the renter whohas :

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

exclusive use ofthe motor vehicle for aperiod oftime and has the right to direct the manner of **use** ofthevehicle, whether exercised or not, for that period. Itis unlawful and shall be a rmsdemeanor for the owner ofthe rented motor vehicle toadvertise that the tax or any part thereof will be absorbed or assumed by the renter. You first ask whether the tax imposed byArt. 6.01, can, consistent with the Federal Constitution, be collected when a motor vehicle is rented toan employee ofthe federal government for use ongovernment business. As long ago as 1819in the historic case ofMcCulloch v, Maryland, 4Wheat 316. 4 L. ed. 579 (1819), theSupreme Court declared unconstitutional a state tax~on the Bank ofthe United States because, according ‘to Chief Justice Marshall, it amounted to a “tax onthe operation ofan instrument employed by the government ofthe Union to carry its powers into execution. ‘I Ina 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). Inthis case goods had been purchased for use in the construction ofan ammunition depot for the United States; the seller ofthe goods paid the tax owed by virtue of the transaction andthen brought suit for a refund. The Court found that under the contract inquestion the United States was the actual purchaser ofthe 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 tothe 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 thefederal government or its agencies. When an owner ofvehicles for rent has been adequately assured, by affidavit or otherwise, that the renter is an employee ofthe federal government acting on government business and within the scope ofhis 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 taxwould be due where a renting and leasing firm supplies avehicle held for rental toa customer to be used as a substitute for a vehicle leased tothat customer **but** which is temporarily being repaired. The Motor Vehicle Retail Sales and Use Tax distinguishes between avehicle held for rental and one held for lease. A vehicle is held for rental ifits exclusive use is to be given to another for a consideration and for aperiod oftime not exceeding thirty-one days under any one agreement. Art. 6.03 (E), Taxation-General. When afirm purchases a vehicle to beheld for rental, it does not pay the motor vehicle sales tax; instead, the taxis levied on the gross rental receipts derived from rentiig thevehicle and must be collected by the owner from the renter. Art. 6.01 (11, Taxation-General. On the other hand, avehicle is deemed tobeheld for lease ifits exclusive use is to be given to another for a consideration andfor aperiod oftime exceeding thirty-one days. Art. 6.03 (F), Taxation-General. When a renting and leasing firm purchases a vehicle tobe held for lease, then it must pay the motor vehicle sales tax onthe t,otal consideration paid or to be paid for the vehicle; the lessee is not required topay any tax. Art. 6.01 (l), TaxationGeneral. When aperson, 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 toyour second question depends, then, uponwhether under the agreement between the parties the customer must pay anything more in order tohave another vehicle substituted for the one he originally leased when repairs have become necessary. Ifso, any additional amounts paid must be considered gross receipts from the renting ofavehicle, and a sales tax equal tofour per cent of the additional consideration paid would be

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

owed. Ifno additional charge is made, then nogross receipts are derived from the vehicle held for rental. and no sales taxwould be due.
**Your** n;xt question concern; Art. **6.01(8),** Taxation -General, which provides: (8) When the owner of amotor vehicle changes

the status ofthe motor vehicle from a rental unit toa lease unit, the owner shall so inform the State Comptroller ofPublic Accounts of such change on aform tobe supplied by the Comptroller, and the owner shall then pay the tax on such motor vehicle based onthe 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 oftwo per cent per month to be used in determining the book value ofavehicle the status ofwhich is tobe changed from a rental unit toalease unit. You ask whether such a regulation is valid.

The term “book value” generally refers to the cost ofmerchandise less depreciation. Black’s Law Dictionary 227 (4th ed., 1951). Itcan 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 indetermining the book value, **nor** did it authorize the Comptroller to do so. Instead it provided that the tax owed when the **status** ofa vehicle is changed from rental to lease should be based onthe “ownerIs book value” thereby leaving the method ofarriving 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, itwill be valid. The Comptroller cannot require owners to use a depreciation rate oftwo per cent per month, and any regulation attempting todo so would, in **our** opinion, be invalid. The

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Comptroller could promulgate guidelines advising owners that hewill challenge as unreasonable the use ofaparticular depreciation method or a rate in excess ofa certain amount per month, buthe cannot establish any one rate as the only valid done.

**Your** final question is whether the motor vehicle sales tax becomes duewhen the owner of the vehicle held for rental converts it tohis own personal or business **use.** The owner ofa 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 onthe 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 inproviding for the registration of rent vehicles without payment ofthe sales tax did not intend to permit renting firms and their owners to escape payment ofthe sales tax owed onvehicles held for their personal or business use.

Art, 6.01 imposes a tax on every retail sale ofa motor vehicle. The term “retail sale” is defined inArt. 6.03 (B), Taxation-General, so as toinclude all sales of motor vehicles except those inwhich the vehicle is acquired for the exclusive purpose of resale or rental and not for use. A vehicle which was initially purchased tobeheld for rental butis subsequently converted tothe personal **use** ofthe owner has not been acquired exclusively for the purpose of resale or rental. Therefore the original transaction inwhich itwas acquired is a retail sale onwhich a motor vehicle sales tax must be paid. See Attorney General Opinion M-913 (1971).

Our answer to your final question is in theaffirmative; when a vehicle held for rent is converted to the personal or business **use** ofits owner, the motor vehicle sales tax becomes due. SUMMARY The federal government is constitutionally immune from the payment ofstate 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 tothe personal or business use ofits owner, the motor vehicle sales tax becomes due. The term “owner’s book value” refers to the cost dfa motor vehicle less reasonable depreciation. Very truly yours,

Attorney General ofTexas APPR&ED: 

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Ass stant

DAVID M. KENDALL, Chairman Opinion Committee 

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