Does an insurance company owe Kansas sales tax when a vehicle is totaled and the owner keeps it minus a salvage deduction?

Plain-English summary

An insurance company asked about sales tax when a vehicle is declared a total loss but the owner keeps the car. In the arrangement described, the owner elects to subtract a reasonable salvage value from the settlement and retain the totaled automobile.

Kansas sales tax applies to "the gross receipts received from the sale of tangible personal property at retail" under K.S.A. 79-3603(a). The Department ruled that the situation described does not involve a sale of tangible personal property. Therefore, when a car is a total loss and the owner subtracts a salvage value and keeps the vehicle, the insurance company is not obligated to pay sales tax on that transaction. The Department added that it has no jurisdiction over what is or is not included in the compensation amount — that is strictly negotiated between the insurer and the owner.

What this means for you

If you settle a total-loss claim by letting the insured keep the wrecked vehicle and reducing the payout by the salvage value, that is not a taxable sale in Kansas.

• No sale, no sales tax. Because ownership of the vehicle isn't transferred to the insurer and resold, there is no sale of tangible personal property to tax.
• The salvage deduction is a settlement term. How the salvage value and the total compensation are figured is a matter negotiated between the insurer and the owner; the Department does not regulate that amount.
• Different facts can change the answer. This ruling addresses the specific scenario where the owner keeps the salvage. A settlement in which the insurer takes the salvage and later sells it, or replaces the vehicle, can raise separate sales/use tax questions.

Common questions

Does an insurer owe Kansas sales tax on a total-loss settlement where the owner keeps the car?
No. The Department ruled there is no sale of tangible personal property, so no sales tax is due on that transaction.

Why isn't it taxable?
Because the transaction, as described, does not involve a sale of tangible personal property under K.S.A. 79-3603(a).

Does the Department control how the salvage value is set?
No. It stated it has no jurisdiction over what is included in the compensation amount, which the insurer and owner negotiate.

What if the insurer keeps and resells the salvage instead?
That is a different fact pattern than the one addressed here and could have its own tax consequences; seek a determination for that situation.

Citations and references

• K.S.A. 79-3603(a) — imposes Kansas sales tax on the gross receipts from the retail sale of tangible personal property (the basis for finding no tax where there is no sale).

Source

• Original ruling (DOCX): https://www.ksrevenue.gov/pildocs/rulings/P-1998-24.docx
• Kansas Policy Information Library: https://www.ksrevenue.gov/prpil.html

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

February 27, 1998

TTTTTTTTTTT
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Dear Mr. TTTTTTTT:

We wish to acknowledge receipts of your letter dated December 15, 1997, regarding the application of Kansas Retailers’ Sales tax.

K.S.A. 79-3603(a) imposes a sales tax upon: “The gross receipts received from the sale of tangible personal property at retail within this state. . .”

Please be advised that the situation that you have described in your letter to this department does not indicate that a sale of tangible personal property has been made. Therefore, when an automobile has been determined a total loss and the owner elects to subtract out a reasonable salvage value and retain said automobile, the insurance company would not be obligated to pay sales tax on the respective transaction.

In closing, this department would not have any jurisdiction over what is and is not included in the compensation amount paid to the owner. This is strictly an amount negotiated between the insurance company and the owner.

If I may be of further assistance, please contact me at your earliest convenience at (785) 296-7776.

Sincerely yours,

Thomas P. Browne, Jr.
Tax Specialist

TPB

Date Composed: 03/04/1998 Date Modified: 10/10/2001

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