How do Texas tax rules differ for street-legal motorcycles and off-road units when dealers charge fees, warranties, freight, and setup labor?

Plain-English summary

The Texas Comptroller compared six dealer charges for street-legal motorcycles and off-road units such as dirt bikes, ATVs, go-karts, golf carts, and race cars.

The basic divide was:

• A unit made street legal before sale was taxed as a motor vehicle under Chapter 152, without local sales tax.
• A unit not designed for highway use remained tangible personal property under Chapter 151, subject to state and applicable local sales tax.

That classification produced these results:

1. Government title, registration, and plate fees collected for a street-legal unit were not taxable.
2. Passed-through vehicle inventory tax was taxable on an off-road unit but excluded from street-legal motor vehicle consideration.
3. A government title-transfer fee collected for an off-road unit was not taxable, but a separately stated dealer documentary fee was part of its taxable sales price.
4. A motor vehicle repair warranty was not taxable, while an off-road-unit service contract was subject to Chapter 151 tax.
5. Freight before a street-legal sale was taxable and post-sale delivery was not; off-road delivery was taxable whether before or after sale.
6. Pre-sale labor to remove either type of unit from its shipping crate was taxable.

What this means for you

Dealers selling both vehicle types

Do not use one tax matrix for the entire showroom. Determine legal street status before applying tax to fees and add-ons.

Dealership accounting teams

Separate government pass-through fees from dealer charges and identify when delivery occurs. Those distinctions affected the tax base.

Warranty sellers

The same repair coverage had different treatment depending on whether the underlying item was a Chapter 152 motor vehicle or Chapter 151 off-road property.

Common questions

Q: Does making a motorcycle street legal change its tax chapter?

A: Yes, if completed before sale under the facts in this letter.

Q: Is an off-road documentary fee taxable?

A: Yes, when it is the dealer's title-work documentary charge rather than a government fee collected for the agency.

Q: Is delivery on an off-road unit taxable?

A: The letter said yes whether delivery occurred before or after the sale.

Q: Is uncrating labor taxable?

A: Yes when performed before sale for either vehicle class.

Citations and references

• Tex. Tax Code chs. 151, 152

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=MVT
• Opinion: https://star.comptroller.texas.gov/view/200304850L

Original ruling text

April 11, 2003

VIA FACSIMILE

Dear **:

This is a modification of my letter of March 12, 2003, concerning six issues
regarding the taxability of motorcycles and units that are not street legal,
such as dirt bikes, ATVs and Go Karts. The change to my original response is
in Item 3 regarding the taxability of the Title Work Documentary Fee on the
sale of tangible personal property. Thank you for your patience.

Item 1

In this scenario, a unit becomes street legal prior to its sale. You collect
the fees to title and register the unit, and you charge the 6.25 percent motor
vehicle sales tax. You asked if the unit is exempt from the limited sales tax
once it is considered street legal. You also asked if you should charge
limited sales tax on your charge for the title registration and license plate
fees.

Units not designed for highway use, such as dirt bikes, ATVs, and Go Karts are
taxed under Tax Code Chapter 151, Limited Sales, Excise, and Use Tax. This is
where most tangible personal property is taxed. The state sales tax rate is
6.25 percent with up to an additional 2 percent, depending on the local
jurisdictions. However, motor vehicles, including units that have become
street legal prior to their sale, are taxed under Tax Code Chapter 152, Taxes
on Sales, Rental, and Use of Motor Vehicles. The state rate is 6.25 percent
with no additional local tax.

The fees you charge and collect to have the motor vehicle (street-legal unit)
titled and registered are not taxable. Therefore, you should not charge
limited sales tax on these fees.

Item 2

Concerning off-road vehicles (units that are not motor vehicles), you asked if
your separately stated charge to your customer for the motor vehicle inventory
tax is subject to limited sales tax. The answer is yes.

In regard to motor vehicles (street-legal units), the charge for the motor
vehicle inventory tax is not part of the total consideration paid for the
vehicle and is not subject to the motor vehicle sales tax.

Item 3

You asked if you should charge your customer limited sales tax when you bill
your customer for the Texas Certificate of Title Transfer Fee or the Title Work
Documentary Fee. For a motor vehicle (street-legal unit), these fees are not
taxable, and you should not charge motor vehicle sales tax. However, on a unit
that is tangible personal property (off-road units such as ATVs, Go Karts, dirt
bikes), you will not charge sales tax on fees that you collect for the Texas
Department of Transportation, such as the Texas Certificate of Title Transfer
Fee. The separately stated charge for the Title Work Documentary Fee is part
of the sales price of the off-road unit and is subject to limited sales tax.

Item 4

You asked about the taxability of insurance policies offered by manufacturers
that pay for repairs.

The sale of an extended warranty or service contract that provides for the
repair of a motor vehicle (a street-legal unit) is not taxable. However, the
sale of an extended warranty or service contract that provides for the repair
of off-road units, such as ATVs, Go Karts, dirt bikes, is subject to the
limited sales tax.

Item 5

You also asked about the taxability of the freight charge when the manufacturer
and/or distributor ships a motor vehicle to the dealer. You pass this charge
on to the customer and you asked if you should charge limited sales tax on the
freight charge.

On the sale of a motor vehicle (street-legal unit), a charge for delivery prior
to the sale of the street-legal unit is part of the total consideration for the
unit and is subject to the 6.25 percent motor vehicle sales tax. If the charge
is for delivery after the sale, it is not taxable.

Concerning off-road units that are not motor vehicles, the delivery charge
whether prior to or after the sale is subject to limited sales tax.

Item 6

You also asked about the taxability of the labor charge to remove a
street-legal unit from the crate used by the manufacturer and/or distributor to
ship the street-legal unit to the dealer.

On the sale of a motor vehicle (street-legal motorcycle) subject to motor
vehicle tax and/or an off-road unit subject to limited sales tax, a charge to
remove the motor vehicle from the crate prior to the sale of the unit is part
of the total consideration for the unit and is subject to the respective tax.

The entire text of the Tax Code, a complete set of rules, and a wealth of other
information are available through our website at .

This opinion is based on the information presented. If there are additional or
different facts, the opinion could change.

If you have any questions or need more information, I will be glad to help you.
You may e-mail me at , or you may call me toll-free
at 1-800-531-5441, extension 3-4622.

Sincerely,

Stefanie B. Medack
Tax Policy Division

cc: Francisco Contreras
David Grijalva
Sandra Chiquito