May an accrual-basis Kansas dealership recover sales tax it remitted but never collected when it repossesses a vehicle from a defaulting buyer?

Plain-English summary

An accrual-basis dealership asked whether it could recover Kansas sales tax it paid when a buyer later defaulted and the dealer repossessed the vehicle. The Department said yes, but only for tax accrued and remitted on the dealer's own seller-financed sale that the dealer never actually collected.

The letter distinguishes three financing patterns:

• Accrual-basis dealer using its own credit: The dealer may remit tax on the full price at sale or on amounts accrued each reporting period. After default, it may seek a refund of tax accrued and remitted but never collected from the buyer.
• Cash-basis dealer using its own credit: Because tax was remitted only on actual collections, no tax refund is due after repossession.
• Bank, credit company, or later loan-paper purchaser: Neither the dealership nor the lender may deduct or recover the tax merely because the vehicle was repossessed. The dealership was paid by the lender and suffered no sales-price loss.

No dealer may deduct collection costs, repossession expenses, or vehicle damage. The repossession itself is not a retail sale and is not taxed when title returns to the dealer. A later resale is a new taxable sale reported in full, without credit for tax paid by the first buyer. If the dealer uses the repossessed vehicle for something beyond retention, demonstration, or display while holding it for resale, it must accrue tax on that use.

What this means for you

Buy-here-pay-here and seller-financing dealers

Match refund claims to tax you actually accrued and remitted but never collected under your own nonassignable financing agreement. Keep the customer-payment, tax-remittance, default, and repossession records tied together.

Cash-basis dealers

Do not claim a refund for tax that was remitted only as the buyer paid. The letter treats those remittances as tax on actual collections, leaving no uncollected tax to recover.

Dealers assigning installment contracts

Selling the loan paper or using third-party financing eliminates the dealer's repossession deduction under this opinion. The lender cannot claim the dealership's sales-tax refund either.

Common questions

Q: What tax may an accrual-basis dealer recover?
A: Only tax accrued and remitted to Kansas but not actually collected from the defaulting buyer.

Q: Can repossession costs or vehicle damage be deducted?
A: No. The letter allows no deduction for collection expenses, repossession costs, or damage.

Q: Is repossession itself taxable?
A: No. Returning title to the dealer is not a retail sale.

Q: Is the later resale taxable?
A: Yes. The dealership reports the new sale in gross receipts without regard to tax paid by the prior buyer.

Q: What if a bank financed the original customer?
A: No dealership deduction or lender refund is allowed because the dealer was paid by the lender.

Citations and references

• K.A.R. 92-19-3 — seller-financed credit, conditional, and installment sales
• EDU-31a — Sales Tax Guidelines: How Kansas Motor Vehicle Dealers Should Charge Sales Tax on Vehicle Sale, Example 10

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: O-2009-014

Original ruling text

Opinion Letter

Body:

Office of Policy & Research

November 12, 2009

XXXXX
XXXXX
XXXXX

RE: Your e-mail received November 10, 2009

Dear XXXXX:

Thank you for your recent e-mail. You ask if an accrual-basis dealership that finances the sale of a vehicle can claim a deduction for the sales tax that it paid to the department at the time of sale, if it later repossesses the vehicle because of a payment default. The answer is yes.

The type of repossession you are asking about is discussed in EDU-31a, Sales Tax Guidelines: How Kansas Motor Vehicle Dealers Should Charge Sales Tax on Vehicle Sale.

Example 10 - Seller financed sales: When a dealer that uses accrual-basis accounting agrees to make a credit, conditional, or installment sale of a vehicle by extending its own credit or to otherwise finance the sale under a non-assignable agreement that does not involve a financial institution, the dealer may either: (a) remit tax on the full selling price at the time of the sale; or (b) pay tax on the total amount accrued during each reporting period. See K.A.R. 92-19-3. When a dealer that uses cash-basis accounting agrees to make a credit, conditional, or installment sale of a vehicle using its own credit or to otherwise finance the sale under a non-assignable agreement that does not involve a financial institution, the dealer may pay tax on the total collections made during each reporting period.
If the buyer defaults on the loan, no refund shall be paid if a cash-basis dealer remitted the tax due on its actual collections from the buyer. Such a dealer may not deduct any expense incurred repossessing the vehicle, for vehicle damage, or for any other expense. If a buyer defaults on a loan made by an accrual-basis dealer, the dealer may seek a refund of any taxes accrued and remitted to the department but not actually collected from the buyer. As with cash-basis dealers, no deductions are allowed for dealer collection expenses.

Please note that if the sale is financed by another party, such as a bank or credit company, the dealership may not take a sales tax deduction if the vehicle is later repossessed. Similarly, no deduction or refund claim may be made by the bank or credit company for any part of the sales tax that the dealership paid to the department. When a vehicle sale is financed by a third-party lender, the dealership is paid by the lender and suffers no loss if the buyer defaults on the loan. This same rule applies when a vehicle is repossessed after a dealership that originally financed the sales transaction later sells its loan paper to another lender.

The dealership's repossession of a vehicle is not a retail sale and is not taxed when the title is returned to the dealership. When a repossessed vehicle is resold by the dealership, the sale is required to be reported as part of the dealership's gross receipts without regard to any sales tax that was paid by the previous buyer who defaulted on the loan. When a retailer uses a repossessed vehicle other than for retention, demonstration, or display while holding the vehicle for resale in the regular course of its business, the dealership is required to accrue sales tax on the use of the vehicle.

Please call me at 785-296-3081 if you have any additional questions.

Sincerely,

Thomas E. Hatten
Attorney/Policy & Research

Date Composed: 11/16/2009 Date Modified: 11/16/2009

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