Does taking title to a vehicle and assuming or paying its debt create a taxable motor vehicle sale in Texas?

Plain-English summary

The Texas Comptroller treated a vehicle transfer as a second taxable sale when the new owner satisfied the outstanding loan by making payments or formally assuming the debt. Taking on that responsibility was consideration, even though the original purchaser had already paid tax and even though the car was wrecked before title transferred.

The answer differed for someone already jointly liable on the original loan. A co-maker or co-borrower gave no new consideration by assuming or refinancing the same debt, so no sales tax arose from that step. A co-signer, however, was only a guarantor and was not initially liable as a purchaser; tax was due when the co-signer took title or possession and assumed or paid the debt.

What this means for you

Families transferring financed vehicles

Paying off a relative's vehicle loan and taking the car is not necessarily a tax-free family handoff. The assumed or discharged debt can be the taxable purchase price.

Lenders and tax professionals

The distinction between a jointly liable co-borrower and a guarantor-only co-signer controlled the result. Review the original loan obligation, not just the later title paperwork.

Common questions

Q: Is assuming the outstanding loan consideration?

A: Yes, when a new owner who was not already jointly liable takes over or pays the debt.

Q: What if the transferee was an original co-borrower?

A: The letter said no tax was due merely from assuming or refinancing the original debt because liability did not change.

Q: Did the wreck eliminate the tax?

A: No. The Comptroller said the second transfer remained taxable despite the vehicle being wrecked before title transferred.

Citations and references

• The letter defines sale and consideration without citing a section number.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=MVT
• Opinion: https://star.comptroller.texas.gov/view/200202781L

Original ruling text

February 11, 2002

Dear **,

This is in reply to your E-mail inquiry concerning motor vehicle sales tax due
on a car previously titled to your daughter and for which you assumed the
liability.

The Motor vehicle sales tax is a transaction tax on the sale of a motor vehicle
in Texas based on the total amount of consideration received for the motor
vehicle. "Sale" means a transfer of title or possession of a motor vehicle for
a consideration. Consideration is defined as some right, interest, profit, or
benefit accruing to one party, or some forbearance, detriment, loss, or
responsibility, given, offered, or undertaken by the other Party in a
transaction.

When a vehicle encumbered by an outstanding debt is transferred to a new owner
who satisfies the outstanding debt by making payments on the debt or by
formally assuming the debt, a sale has occurred and motor vehicle sales tax is
due. The assumption of a debt is consideration paid and motor vehicle sales
tax is due on that consideration.

On the other hand if the new owner is a co-maker or co-borrower and jointly
liable for the original debt, no sales tax is due upon the assumption of the
total debt or upon the refinancing of the original debt. There is no change in
liability for the debt and thus no consideration. However, if the new owner is
merely a co-signer on the original debt, tax is due when the co-signer takes
title or possession to the vehicle and assumes or pays off the outstanding
debt. A co-signer is only a guarantor of the debt, and is not a purchaser or
initially liable for the debt.

The original purchaser was liable for the motor vehicle sales tax on the first
purchase. The second transfer (to the person who assumes the debt) is a second
taxable transaction and motor vehicle sales tax is due despite the fact that
the vehicle was wrecked before the title was transferred.

This opinion is based on the facts you submitted. Other facts, though similar,
may yield different results.

I hope this information helps. If you have further questions, please e-mail me
at , or you may reach me by phone at 1-800-531-5441,
ext. 3-4986.

Sincerely,

Ken Koch
Tax Policy Division

From: "**"
To:
Subject: 03032187-taxes
Date: Tue, 22 Jan 2002 19:17:54 -0600

I have a question no one else can answer.

My daughter bought a 1997 Honda car for 130000. She paid Texas state sales
taxes on that amount. She no longer could make payments so I took over the
payments: I did this by; using my credit union, the same place she had it
financed through, completely paying off her loan to keep my credit good, and
getting a loan in the same amount in my name only.

Here is the problem:

My wife totaled out the car. In the mean time, the title was not transferred
into my name. Now the insurance company says I have to pay taxes on the full
amount of the money they will pay me for the car.

I feel my daughter payed the taxes on the 13000 and should not have to pay
taxes again. The insurance says, no, you have to pay taxes again. So, who is
right, and what should I do?

Thanks,