            -      ,




                       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 eub-
                                                     sequent 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 reg-
                 lster In their name and pay sales taxes .thereon.
                 The Company then leases the motor vehicles to In-
                 dlvlduals or companies for a certain consideration
                 then at the..endof the lease contract, the motor
                 vehicle Is often sold to the Lessee.”
                  You then cite ~a particular Instance of this arrange-
       ment, 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 $212. The lease
       could be terminated by either party at the end of any 81x-
       month period, .by giving thirty days’ notice. Other than this,
       there is no specific duration cried; hqwever, it Is spec$fle$
       on page 1 that the 1st and 24tR 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 Mayo27, 195.9
Honorable Robert S. Calvert, Page 2     Opinion No. WW-711


     "Purchased by Customer, under
      :'::termsof Lease Agreement         $ 1,067.oo
       State Tax, Title and License
         Transfer                              37.20
      Total Amount Due Ben Griffin
        Leasing Cc....                    $ 1,104.20,,

         This sale was pursuant to paragraphs 5 and 6'of   thk
Agreement, reading as follows:
         "5. Lessor will sell each automobile as soon
     as possible after the expiration of this agree-
     ment or any extension thereof with'tespect to
     such automobile and determine the rebate or defi-
     ciency 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 auto-
     mobiles if he so elects. If sold by Lessor,
     Lessor will use its 'bestefforts to ofitainfull
     market price for the automobile.
         “6. Lessor agrees to set up to the credit of
     each automobile the reserve as set forth in para-
     graph 2. The total reserve.thus accumulated from
     monthly payments on the automobile by Ctstomer
     shall be deducted from the original ,costof 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 TaoLessor."
         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~anyand the Texas Indus-
     tries, 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 vehi-
     cles 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 Leas-
     ing 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’;andPurchaserls Joint Affidavits
     covering the Sales from Dalworth Leasing Company
     to Texas Industries, Inc. should show the actual
     value of':eachmotor~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.,sevenpages 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 provi-
sions. Paragraph (9) provides as follows:
     ATIO~~~~)u~~~SPO~IT~~~~~~EQUIPMENT UPON TEFIMIN-
                  th t    i tion of this Agreement,
     m      shall have the right in its sole'discre-
     tion:
Honorable Robert S. Calvert, Page 4      Opinion No. W-711


             "(a~)to purchase all or any part
         dh'the LEASED EQUIPMENT leased here-
         underat the net cost thereof tb the
         LESSOR, as specified in Schedule A,
         A-l, etc., less amortizat~ioncharges
         set forth in Schedule B of this Agree-
         ment; or
              "(b) to c~ontinuethis 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 actor-
          dance with the amortization rates ,pro-
          vided In Schedule B, at which time the
          LESSEE 'shall,havethe right to pur-
          chase such equipment for the sum of
          One 90llar ($1.00); or
              "(c) surrender:all:of tinypart 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 pro-
ceeds 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, or exchange of other property, or 8~
combination of these." (Section 1 (a).) Your inquiries re-
solve themselves into,a question of what the term "total con-
sideration" 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, condi-
tional sales, disguised as leases.                        .~

         A conditional sale has been described as a contract
for sale of personal property under which possession is de-
livered 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.compliaticewith 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 conai-
tlonal sales or,as leases with options is often difficult
Under,the "Pennsylvania Rule", transactiona such as here
involved (i.e., ~renting personal property, particularly auto-
mobiles, 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, condi-
tio;al sales (G.M.A.C. v. Horton, C.c..A.,Third Circuit
(.1936),85 F12mr       However, this rule seems 'to be, as
&$zcged   by one court, "an anomaly in the law". (In re
        Dist.Ct. Maryland, (1929), 31 F.2d 197.) Tmjority
view is to look through form to the substan;zeo; ",h;ytract
and the underlying intent of the parties.
Bailments, sets. 3).(b),(c), (d); 37~ATex.Jur., Saiei,'Lec.
60; 6 Am.Juy., Bailments, sets. 28, 29, 35 and 38; 47 Am.Jur.,
Sales, sec. 836.
           We quote from a casenote in 7 T:L.R; 329:
                                        y
           "The important problem of the court in inter-
       preting a contract of this sort is to asaertain the
       intentions of the parties, not from the name they.'
       give to the transaction, but from the provisions of
       the agreement as a whole. (authority) Only a fe$v
       courts give weight to the name employed in the con-
       tract. (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 install-
     ments 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 pay-
     ment 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~landCo. of California v. Chapman, Tex.
Civ.App. w)      20b S W y(o [no writ history), Is the most
nearly analogou)sTexas'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 con-
tract 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 toma bona fide
purchaser. It was contended that defendant was a mere bailee
under the contract and could thtisnot pass good title. In
holding against this contention, the court said (page 981):
         "It (the contract) is referred to by appel-
     lants 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 ele-
ments 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 ter-
minate 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 ".unamortizedcost" (Dalworth) ,of
the unit, then lessee must pay him the difference, thus ihdem-
nifying 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 agree-
ments, when lessee's option to purchase is exercised, will
equal thenactual value of the vehicles, just asif the trans-
actions 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 zLtis less than one-third the then actual
value of the vehicle. Finally, during the lease'perlod, vir-
tually 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 unneces-
sary 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'~paidby 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-'calledlease agreements, .and areslater
        sold to lessees.thereunder for nominal con-
        siderations, the.transactions constitute icon-
        ditional sales 'or'chattelmortgages. ,The.
        Vehicle,Sales Tax on "total consideration"
        paid in exchange for vehicles should be cal-
        culated 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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