How must a Texas seller-finance vehicle dealer allocate and remit motor vehicle sales tax across the down payment and installments?

Plain-English summary

The Texas Comptroller said § 152.047(c) allowed only one method for collecting motor vehicle sales tax on a seller-financed sale.

The dealer had to:

1. Calculate total tax on the sale.
2. Calculate and collect tax on the down payment, excluding properly itemized nontaxable charges.
3. Subtract that down-payment tax from total tax.
4. Divide the remaining tax equally by the number of regularly scheduled payments.
5. Collect that fixed tax amount with each installment and remit collected tax on each scheduled report.

Because the statute conclusively presumed straight-line accrual and payment of interest, the Comptroller said principal and tax allocation also had to follow the straight-line approach. It rejected the dealer's proposed method of multiplying each principal payment by the tax rate.

What this means for you

Seller-finance dealers

Build the fixed tax amount into the payment schedule when the contract is created. Do not recalculate tax as a percentage of changing principal receipts.

Dealership accountants

Itemize nontaxable charges in the down payment. Otherwise the letter treated the entire down-payment charge as taxable for the allocation.

Common questions

Q: Were two calculation methods allowed?

A: No. The Comptroller said the straight-line method was the only acceptable method.

Q: Is all remaining tax due immediately?

A: Not under the seller-finance payment method described here; the allocated tax is collected and remitted with scheduled payments.

Q: How is the down payment handled?

A: Tax attributable to the down payment is collected first, then the balance of tax is divided across later payments.

Citations and references

• Tex. Tax Code § 152.047(c)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=MVT
• Opinion: https://star.comptroller.texas.gov/view/200502734L

Original ruling text

February 9, 2005

Dear **:

Thank you for your inquiry concerning the calculation of tax on the
seller-financed sale of a motor vehicle in Texas.

The prevailing language in this situation is in Texas Tax Code Section
152.047(c). That language follows:

“If a note, mortgage, account receivable, or other document evidencing the
purchaser's indebtedness to the seller of a vehicle sold subject to a
seller-financed sale bears interest, it is conclusively presumed that interest
accrues and is paid by the purchaser on a straight line basis.”

Since, for tax purposes, the calculation of interest on a straight-line basis
forces the calculation of principle on the same basis, the only proper method
for collection of sales tax on a seller-financed transaction involves the
following steps:

1. Calculate the total tax imposed on the sale transaction.

2. Calculate the tax due on the down payment (the entire charge is taxable
   unless nontaxable charges are itemized in the down payment).

3. Subtract the tax on the down payment from the total tax due.

4. Divide the resultant figure in item 3) by the number of regularly scheduled
   payments and collect that amount for each payment.

5. Remit the collected taxes with each scheduled report.

While Section 152.047 was amended in 2001, the language in Subsection (c) has
been in force since the inception of the full section in 1993. In response to
your request to provide you with “literature on when the method was disallowed”
or “corresponding grandfathering literature on the disapproved method” I can
provide neither because there has only been one acceptable method for
calculating the tax.

This opinion is based on the information presented. Other information, though
similar, may provide a different result.

The motor vehicle sales tax statute is available on our website at
http://window.state.tx.us/taxinfo/sales/. Click on ‘Statutes,’ and then scroll
to the appropriate section.

If you have any questions or need additional information, you can reply to this
email, call me at 1-800-531-5441 ext. 50647, or write to Tax Policy Division,
P. O. Box 13528, Austin, Texas 78711-3528.

Our goal is to provide you with prompt, professional service. Please take a
moment to complete our on-line survey at
http://aixtcp.cpa.state.tx.us/surveys/tpsurv/.

Regards,

Tim Pingree
Tax Policy

I need to know what the approved methods are for the remittance of sales tax on
a seller financed used vehicle dealership. It is my impression that there are
two accepted methods:

Principal method: As principal is received from customers note receivables,
the principal amount is multiplied by 6.25% and the amount of sales tax is
remitted to the state

Straight Line Method: Sales tax is paid in immediately on customer down
payments then a factor is calculated by dividing the remaining sales tax
liability by the remaining payments (principal, interest and sales tax) to be
received over the life of the contract. This factor is then applied to each
payment received by the dealership until the note is paid off.

If one or more of these methods are no longer accepted, please provide me with
a calculation or explanation of the approved method. If one of these methods
is no longer accepted, please provide me with literature on when the method was
disallowed and the corresponding grand fathering literature on the disapproved
method.

Please call me if you need further clarification on my questions a the number
listed below.

Thank you in advance,