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                       THE     A-ITORNEY                   GENERAL
                                      OF     TEXAS
                                 AURTIN.     TNXAS         78711




                                           August    26.   1974
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    The Honorable Robert        S. Calvert                   Opinion No.   H-   380
    Comptroller    of Public    Accounts
    State of Texas                                           Re: Taxation of rented
    Austin,    Texas                                         automobiles   under
                                                             Article 6.01. Taxation-
                                                             General,   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 proposi-
    tion 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), Taxation-
General.    But it is plain that the Legislature  in providing for the registra-
tion 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:


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                                       Ass stant




         DAVID M. KENDALL,         Chairman
         Opinion Committee


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