After a seller-finance dealer transfers a note to a qualifying related finance company, who reports tax and how is tax allocated to payments?

Plain-English summary

The Texas Comptroller explained how Senate Bill 1617's related-finance-company safe harbor affected seller-financed motor vehicle tax reporting.

Transferring a purchaser's note to a registered qualifying RFC prevented immediate acceleration of all remaining tax, but it did not move the collection and reporting obligation to the finance company. The selling dealer left the full sales tax in the customer's installment contract and continued collecting and remitting tax as each scheduled payment arrived.

The down-payment calculation also stayed the same. The dealer calculated total tax, determined the tax attributable to the down payment after separately itemized nontaxable title, registration, and documentary fees, subtracted that amount, then spread the remaining tax evenly across scheduled payments under § 152.047(c).

What this means for you

Seller-finance dealers

The safe harbor defers acceleration; it does not let you remove tax from the contract or contract away your reporting duty. Continue filing the collected tax with seller-finance reports.

Related finance companies

The RFC did not separately report tax on the principal portion of payments under this letter. The dealer retained that responsibility.

Dealership accountants

Itemize nontaxable title, registration, and documentary charges in the down payment. Otherwise the letter says the entire down-payment charge is subject to tax for allocation purposes.

Common questions

Q: Does the dealer delete sales tax from the customer contract?

A: No.

Q: Does the RFC report tax as it receives principal?

A: No. The selling dealer remains responsible.

Q: What did the safe harbor prevent?

A: Immediate acceleration of all remaining motor vehicle tax when a qualifying note was transferred to a registered qualifying RFC.

Citations and references

• Tex. Tax Code § 152.047(c), (g-1)
• Texas Senate Bill 1617, 80th Legislature (2007)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=MVT
• Opinion: https://star.comptroller.texas.gov/view/200708956L

Original ruling text

August 14, 2007

Subject: Safe Harbor Protection Registration

Dear **:

This is in response to your e-mail questions concerning Senate Bill 1617
regarding the safe harbor protection for seller-finance dealers against the
acceleration of sales tax when the dealer sells/transfers its notes to a
qualifying related finance company. Your questions and my responses are set out
below.

Question 1: Would the sales company delete the sales tax from the contract that
the customer signs? Would the finance company then record sales tax on the
principal of each payment received?

Response: No. The selling dealer does not delete the sales tax from the
installment contract that the customer signs; nor does the finance company
report the sales tax on the principal of each payment received.

Senate Bill 1617 amended Section 152.047 of the Tax Code by adding Subsection
(g-1) to provide that when a seller-finance dealer sells a purchaser's account
(note) to a registered qualified related finance company (RFC), the remaining
tax due does not accelerate (i.e. that all remaining tax due on seller-finance
contracts be remitted on the next motor vehicle seller-finance tax return.) The
amendment does not relieve the selling dealer of the liability for collecting
and remitting the remaining motor vehicle sales tax due on outstanding
purchaser’s accounts as each payment is received after the notes have been
transferred to a RFC.

Question 2: How do we handle the down payments and the other items that may be
added to the purchase price of the car such as title and license fees?

Response: Exactly the same as prior to the passage of the new law.

1. Calculate the total motor vehicle sales tax imposed on the sale transaction.
   For motor vehicle sales tax purposes, the calculation of interest and principal
   must be on a straight-line basis pursuant to Section 152.047(c) of the Tax
   Code.

2. Calculate the tax due on the down payment (the entire charge is subject to
   tax unless nontaxable charges, such as title, registration and documentary
   fees, 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 of tax for each payment.

5. Remit all collected sales taxes with each scheduled selling dealer’s report.

I hope this information helps. If you have further questions, please e-mail
them to [email protected], or you may reach me by phone at (800)
531-5441, ext. 3-4986.

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/tpsurv2/index.html.

Sincerely,

Ken Koch
Tax Policy Division
Comptroller of Public Accounts

From: **
Sent: Wednesday, July 18, 2007 4:24 PM
To: Tax Help
Subject: Safe Harbor Protection Registration

COMPANY and our related finance company are planning to register. However, we
have a question about how to record the tax. We currently include the full
sales tax in the total purchase price of a car, which is then included in the
transfer of the related note to our finance entity.

Would the sales company delete the sales tax from the contract that the
customer signs? Would the finance company then record sales tax on the
principal of each payment received?

How do we handle the down payments and the other items that may be added to the
purchase price of the car such as title and license fees?

If there is a publication that will provide this information?