How did Texas treat seller-financed vehicle accounts transferred to related finance companies before and after the 2007 law change?

Plain-English summary

This October 2007 Texas letter explained the transition created by Senate Bill 1617 for seller-finance dealers using a related finance company (RFC), and it offered special audit treatment for earlier periods.

For qualifying transfers after the RFC registered, the new law allowed a seller-finance dealer to transfer the vehicle or account to the related finance company without accelerating and immediately paying all remaining motor vehicle tax. The dealer nevertheless remained responsible for collecting and remitting the tax. Payments a buyer could prove were made to either the registered dealer or registered RFC would reduce the buyer's tax responsibility.

The legislation was prospective. For pre-law audit periods, the Comptroller described penalty waivers, allowed continued seller-finance reporting for accounts still being reported at the end of the audit, provided special repossession timing, and generally declined transfer-based assessments before October 1, 2007 when the recipient met the RFC definition. Those accommodations depended on complete records and cooperation.

The letter's registration discussion is no longer current. STAR's supersession notice says that, effective January 1, 2016, an RFC registers only once and has no renewal or fee requirement. The old $600 annual registration description should not be used.

What this means for you

Seller-finance motor vehicle dealers

The core responsibility stayed with the seller: using a related company did not shift the dealer's duty to collect and pay the motor vehicle tax. Maintain per-vehicle records of transfers and tax reported.

Related finance companies

Do not follow the letter's old annual registration and fee process. STAR points to 201603742L for the later one-time, no-fee registration policy.

Auditors and historical-period reviewers

The detailed waivers and timing concessions were expressly framed for the transition around the July 1, 2007 effective date. They are useful for understanding old periods, not as a promise for modern audits.

Common questions

Q: Did transfer to an RFC shift tax reporting to the RFC?

A: No. The letter said the dealer remained responsible for collection and payment and separate RFC motor vehicle tax reporting was unnecessary.

Q: Did buyer payments made to the RFC count?

A: Yes, if the buyer could prove payment to either the registered dealer or registered RFC.

Q: What happened if the RFC was not properly registered after July 1, 2007?

A: The letter said acceleration occurred at transfer, with credit for tax later reported on seller-finance returns and ordinary penalty or interest waiver procedures.

Q: Is the old $600 registration fee still required?

A: No. STAR's partial-supersession notice says that from January 1, 2016 registration is one-time, with no renewals and no fees.

Citations and references

• Texas Senate Bill 1617, 80th Legislature (effective July 1, 2007)
• STAR 201603742L (later RFC registration guidance 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/200710991L

Original ruling text

STAR Superseded Information

Supersede type: Partial

Document superseded on: 9/12/2019

Issue(s) that caused the document to be superseded: registration and renewal requirements

for Related Finance Companies (RFC)

Reason(s): Policy Change- Effective 01/01/2016 RFC are only required to register one time only, with no renewals and no fees. See STAR 201603742L.

October 31, 2007

Dear **:

Thank you for meeting with us concerning related finance companies (RFC) and
Senate Bill 1617, passed by the 80th Legislature. I appreciate your
willingness to work with this office to get clarification on the tax treatment
of RFC notes both before and after the change in statute.

If you would like, please forward the information in this letter to your
members.

Senate Bill 1617 was passed effective July 1, 2007. The legislation allows a
seller-finance dealer to transfer a vehicle to a qualifying related finance
company without accelerating and paying the tax. However, it only applies to
qualifying transfers after a related finance company has registered with the
Comptroller’s office and paid a $600 registration fee.

When a related finance company becomes permitted, the Comptroller’s office will
state that the taxpayer was registered beginning the first of the month in
which payment and application were filed. This date is the most advantageous
date that could be used. The applications are taken for whole years, so a
taxpayer pays upfront for the year and receives notice a month or so prior to
the renewal date. The new law only applies to transfers when the taxpayer is
registered.

As of Oct. 23, 2007 only 51 related finance companies have registered. The
Comptroller’s office is urging industry to comply with these new guidelines and
to register as soon as possible. We do not want to deter registration efforts
in any way. To that end, no registration data will be used by audit division
to select accounts for audit.

Responsibility for Taxes Collected after Transfer to RFC

Senate Bill 1617 only addressed the issue of acceleration of tax, without
speaking to tax collection responsibilities. Under the change, the dealer, as
the seller, retains the responsibility for the collection and payment of the
tax. There is no reason to require separate reporting of motor vehicle taxes
by the related finance company. Since these RFCs are normally 100 percent
owned by the same entity (statutory requirement of at least 80 percent), this
has not been seen as a problem.

If a buyer can show payments either to registered dealer or registered RFC, we
will include either in extinguishing their tax responsibility.

Audits for Periods Before and After Legislation

The legislation is prospective only.

Our office is making the following special accommodations when auditing dealers
for periods prior to the legislation.

1. Penalty will be waived on all taxes due regarding related finance companies
   (prior audit history, late returns, and other factors will not void the penalty
   waiver for these assessments)

2. No accelerations will be made on vehicles that continue to be reported on
   the dealer’s seller-finance returns as of the end of the audit period. If
   scheduled, these transactions would result in serious timing differences and
   large amounts of penalties and interest.

3. Repossessions. A dealer may continue to report the sales on the
   seller-finance return unless the vehicle is repossessed during the audit
   period. In these cases, the difference between the sales tax due at transfer
   and the sales taxes reported will be scheduled in the filing period of
   repossession. Once again, although the correct date for the taxpayer to report
   under the statute was the date of transfer to the RFC, using the later date
   saves the taxpayer penalties and interest.

4. The statute period is normally 4 years from the due date of a tax and can be
   longer due to other considerations. However, audit assessments will not be
   made due to a transfer or assignment of title to a firm meeting the definition
   of a related finance company prior to Oct. 1, 2007.

The taxpayer must provide the auditor with all information necessary to make
the allowances in points two and three. Failure to provide adequate
documentation will result in an auditor scheduling total figures as of the date
of transfer to the RFC. The taxpayer must provide full cooperation and make
the records available to show all transfers to RFCs and all taxes reported per
vehicle on the seller-finance reports.

For audit periods after July 1, 2007 where the RFC was not properly registered;
acceleration will occur strictly upon transfer to the RFC, credit will still be
allowed for taxes reported on subsequent seller-finance returns for the
accelerated vehicles, and any penalty or interest waivers will be made strictly
in accordance with our general procedures.

I hope this information is helpful to you and your members and once again I
would like to thank you for your help and patience in dealing with this
difficult issue. Please know that we stand ready to assist you in any way
possible. Should you have additional questions, please ask them to call me at
512/463-4260 or our Assistant Director of Tax Administration, Kevin Koller at
512/475-0613.

Sincerely,

Mike Reissig
Associate Deputy Comptroller