Must Texas dealers collect sales tax on documentary and inventory-tax charges for off-road vehicles, and how can they document farm exemptions?

Plain-English summary

The Texas Comptroller explained that off-road and street-legal vehicles use different tax bases, producing different answers for dealer charges.

Off-road vehicles were taxed under Chapter 151 at state sales tax plus applicable local sales tax. Because § 151.007 did not exclude passed-through vehicle inventory tax, a dealer had to collect sales tax on that charge. Documentary fees associated with selling an off-road vehicle were also part of taxable sales price.

For street-legal vehicles under Chapter 152, the letter said vehicle inventory tax was excluded from total consideration and repeated the agency's historical treatment of title-and-registration documentary fees as outside motor vehicle taxable consideration.

STAR partially superseded the letter's implementation date. Dealers were initially told to begin prospectively taxing off-road vehicle documentary fees on September 1, 2006; the corrected date was November 1, 2006.

The letter also addressed agricultural use. Transportation-only off-road motorcycles did not qualify, while three- or four-wheel vehicles actually used to spray crops or feed cattle could. The Comptroller agreed that a completed exemption certificate plus the buyer's Schedule F would relieve the dealer if the customer later used the vehicle nonexemptly; the customer would then owe tax, penalty, and interest.

What this means for you

Off-road vehicle dealers

Separate Chapter 151 treatment from Chapter 152 motor vehicle rules. A charge excluded for a street-legal vehicle can still be taxable when attached to an off-road vehicle sale.

Farm and ranch customers

The agricultural exemption depends on actual use in producing agricultural products for sale, not simply farmer status. Transportation use alone was insufficient under the letter.

Dealership accounting teams

This is 2006 historical guidance. The corrected documentary-fee start date matters for old audit periods, but current rates, exemption certificates, and substantiation rules should be checked before applying the discussion now.

Common questions

Q: Was vehicle inventory tax taxable when passed through on an off-road vehicle?

A: Yes. The letter said Chapter 151's sales-price definition did not exclude it.

Q: Were off-road vehicle documentary fees taxable?

A: Yes, as services associated with the sale. STAR corrected the prospective collection date to November 1, 2006.

Q: Did an off-road motorcycle used for transportation qualify for the farm exemption?

A: No. The letter distinguished transportation from actual agricultural production uses such as spraying crops or feeding cattle.

Q: Could Schedule F protect the dealer?

A: The Comptroller agreed that Schedule F accompanying a completed exemption certificate would relieve the dealer, while leaving the customer liable if the claimed use proved nonexempt.

Citations and references

• Tex. Tax Code §§ 151.007, 152.002
• Tex. Tax Code chs. 151, 152
• STAR 200610772L (corrected documentary-fee collection date named by the supersession notice; no unverified internal link)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=MVT
• Opinion: https://star.comptroller.texas.gov/view/200605566L

Original ruling text

STAR SUPERSEDED INFORMATION
Accession No.: 200605561L and 200605566L
Supersede type: Partial
Document superseded on: 10/27/2006

Issue that caused the document to be superseded:
Notice to dealers instructing them collect to collect tax on
documentary fees paid for off-road vehicles on a prospective
basis effective September 1, 2006

Reason: Error-inaccurate statement of policy. The date dealers are
to collect tax on the documentary fees is November 1, 2006.
For additional information, please refer to 200610772L.

May 9, 2006

Dear **:

Thank for your letter and for taking the time to meet with us concerning the
** Association.

The Association members are concerned about the assessment of sales tax during
an audit on documentary fees and vehicle inventory tax on sales of off-road
vehicles. As you pointed out the tax base for off-road vehicles is calculated
differently from the tax base for street-legal vehicles.

Based on past correspondence with the Association, it appears that the
Association and its members are aware of the important distinction between
off-road vehicles and street-legal vehicles. Off-road vehicles are taxed under
Chapter 151 at 6.25 percent state tax plus local sales taxes up to 2 percent
all of which are remitted directly to the state by the dealers. Street-legal
vehicles are taxed under Chapter 152 at 6.25 percent (state tax only) and not
remitted to the state but collected by local County Tax Assessor Collectors.
Tax Code section 152.002 defines “total consideration” (the amount subject to
motor vehicle sales or use tax) to exclude vehicle inventory tax. On the other
hand, Tax Code section 151.007 defines “sales price” (the amount subject to
limited sales or use tax) and does not list vehicle inventory tax as an
exclusion. When the statute is clear, we cannot waive the responsibility for
the collection of tax, and dealers are responsible for the collection of sales
tax on vehicle inventory tax charged in connection with the sale of an off-road
vehicle.

On the other hand, documentary fees are not specifically taxed or excluded from
taxation in either statute. Since 1971, the agency has instructed taxpayers
that a documentary fee paid for the preparation and processing of documents to
title and/or register a motor vehicle at the county tax office is not part of
“total consideration” paid for the vehicle and not subject to motor sales tax.
You pointed out that in 2003, Stefanie Medack of the Tax Policy Division
explained in STAR document 200304850L that a documentary fee charged in
connection with the sale of an off-road vehicle was taxable as part of the
sales price of the vehicle. You asked that we work with the Association to
clarify its members’ responsibilities with regard to the collection of tax on
the documentary fees.

Under the sales tax law, the taxable sales price of goods or taxable services
includes fees for services associated with the sale, and documentary fees are
part of the price of an off-road vehicle. However, recognizing this distinction
is not as clear as vehicle inventory tax, the Agency will be happy to work with
the Association to provide a notice to dealers instructing dealers to collect
tax on documentary fees paid for off-road vehicles on a prospective basis
effective September 1, 2006. Of course, any tax correctly collected cannot be
refunded. But if a dealer did not collect tax on documentary fees paid for
off-road vehicles, we will not hold the dealer liable for this error.

In 1994, Glen Hunt, Director of Tax Administration, wrote to the Association
concerning the exemption in the sales tax statute for equipment used in the
production of commercial farm and ranch products. In that letter, he addressed
the question of whether off-road motorcycles purchased by farmers and ranchers
could qualify for exemption. Mr. Hunt stated that the agency was hesitant to
allow the exemption and asked for more information. The farm and ranch
exemption is limited to equipment actually used in the production of
agricultural products for sale. Motorcycles used for transportation do not fit
within the parameters set out in this exemption. Conversely, three-wheel or
four-wheel off-road vehicles used to spray crops or to feed cattle will qualify
for the exemption. Since this issue was addressed with the Association in 1994,
we cannot assume that exemption certificates were accepted in good faith.

Because it is difficult to persuade customers of the consequences of claiming
an exemption from sales tax in error, I understand that the Association would
like to require that an exemption certificate claiming that an off-road
three-wheel or four-wheel vehicle used in agricultural production activities be
accompanied by a copy of the Schedule F from the purchaser’s federal tax
return.

We understand the difficulty the Association’s members have encountered and
agree that if a customer provides a copy of his or her Schedule F along with a
completed exemption certificate, the dealer will be relieved from the
responsibility of collecting tax on the sale even if it is later found that the
customer did not use the vehicle in an exempt manner. Of course, the customer
will be held liable for the tax, penalty and interest on that purchase.

As always, it’s been a pleasure working with you. Please let me know if you
have further questions. My direct line is 512.463.4614.

Sincerely,

Adina Harrell Christian
Area Manager for Tax Policy
Tax Policy Division