How is Texas motor vehicle sales tax calculated when a mechanic or storage facility takes or auctions a vehicle under a possessory lien?

Plain-English summary

The Texas Comptroller ruled that a mechanic or storage facility's unpaid charges are taxable consideration when the facility takes title to a vehicle under its possessory lien after an unsuccessful public auction.

The facility exchanges the debt for the vehicle. Because consideration can include debt forgiveness rather than cash, motor vehicle sales tax was due on the charges shown in the statutory notice and payment request.

The letter then separated three ownership patterns:

• If the facility took title in its own name, tax used the lien charges.
• If the facility caused title to go into its owner's personal name without additional payment, tax still applied to the lien charges under the purchased-through-another-name rule; any extra consideration was added.
• If a legally separate person bought at the public sale—including a shareholder, partner, or LLC member distinct from the entity lienholder—tax used the auction price.

A sole proprietor and DBA were not separate. When the sole proprietor purported to buy at the sale, tax used the greater of the lien charges or actual sales price.

What this means for you

Repair shops and storage facilities

Taking a vehicle to satisfy your bill is not a tax-free repossession. Document the statutory notice amount, auction effort, title recipient, and any additional payment.

Business owners

Entity form changes the analysis. A corporation, partnership, or LLC is separate from its owners, while a sole proprietor and DBA are the same person for this purpose.

County tax offices

Identify the actual lienholder and buyer. Tax can follow the debt amount, auction price, or greater-of rule depending on who takes title and what they pay.

Common questions

Q: Why is taking the vehicle taxable if no cash is paid?

A: The lienholder forgives the debt in exchange for title, and debt forgiveness is consideration.

Q: What if a corporation's shareholder buys the vehicle at auction?

A: The shareholder is legally separate from the corporation, so tax is based on the auction purchase price.

Q: What if the lienholder is a sole proprietor?

A: The owner and DBA are the same person; tax uses the greater of the lien charges or stated auction price.

Citations and references

• 34 Tex. Admin. Code Rule 3.65

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=MVT
• Opinion: https://star.comptroller.texas.gov/view/200807157L

Original ruling text

July 24, 2008

Subject: 07080289-Storage and Mechanic’s Lien

Dear **:

This is a clarification of the letter I forwarded to you on May 22, 2007, in
response to your e-mail questions concerning whether motor vehicle sales tax is
due on the transfer of title to a vehicle via a storage or mechanic’s lien in
several scenarios. The following text contains material clarifications in the
second and third situations you posed. The remainder of the previous response
is wholly accurate.

Situation 1: “You have a mechanic or storage facility. They hold a public sale
and no one buys the vehicle. The mechanic or storage facility decides to title
in their name. For this answer let's say they apply for title in the name of
the garage or the name of the storage facility. Do we collect sales tax on the
amount they requested from the person that left the vehicle?”

Response: Yes, motor vehicle sales tax is due on the amount of the charges
shown on the statutory notice and request for payment that is required to be
sent by the mechanic or storage facility to the last known registered owner of
the vehicle. The mechanic or storage facility has a statutory possessory lien
on the vehicle that allows them to retain and sell the vehicle at public
auction for payment of a debt. If the vehicle does not sell at auction, the
mechanic or storage facility can then take the vehicle in payment of the debt.
Therefore, a mechanic or storage facility in possession of a vehicle pursuant
to a possessory lien that takes title to a vehicle is taking the vehicle in
payment for the debt, which is a sale of the vehicle.

"Sale" means a transfer of title or possession of a motor vehicle for a
consideration. The forgiveness of the debt in exchange for title to the vehicle
is the sale of the vehicle for consideration. Consideration can be something
other than cash. It can include assumption or forgiveness of debt, a book
entry, etc. Therefore, motor vehicle sales tax is due when a mechanic or
storage facility takes title to a vehicle on which they have a possessory
mechanic’s or storage lien when the vehicle fails to sell at a public sale.

Situation 2: “You have a mechanic or storage facility. They hold a public sale
and no one buys the vehicle. The mechanic or owner of the storage facility
applies for title in their personal name. We are aware they are the owner of
the garage or storage facility. Do we collect sales tax on the amount they
requested from the person that left the vehicle?”

Response: Yes, when a vehicle is titled in the name of someone other than the
buyer of the vehicle, the motor vehicle sales and use tax is due. See Rule
3.65, Motor Vehicles Purchased Through Another Name. It is the mechanic or
storage facility that has a statutory possessory lien on the vehicle that
allows them to retain, sell and ultimately take title and possession of the
vehicle in payment of a debt (the sale of the vehicle for consideration). Motor
vehicle sales tax is due on the amount of the charges shown on the statutory
notice and request for payment that the mechanic or storage facility is
required to send to the last known registered owner of the vehicle, assuming
the person taking title to the vehicle has paid no additional consideration. If
additional consideration is paid, then the tax is due on the total
consideration.

Situation 3: Same scenario as above, but the mechanic or owner of the storage
facility shows they purchased the vehicle from their public sale. Do we
collect sales tax on the purchase price or the price they requested from the
person that left the vehicle?

Response: If the vehicle is purchased at the public sale by a person other than
the mechanic or storage facility that has a statutory possessory lien on the
vehicle, motor vehicle sales tax is due on the purchase price paid at the
public sale. For example, if the mechanic or storage facility that has a
statutory possessory lien on the vehicle is a corporation, partnership, or
limited liability company (LLC), and the purchaser is a stockholder in the
corporation, or a partner in the partnership, or a member of the limited
liability company, then the motor vehicle sales tax is due on the sales price
paid for the vehicle by the stockholder, partner or LLC member. A stockholder,
partner or member of an LLC is a separate legal entity from the corporation,
partnership or LLC. However, if the mechanic or storage facility that has a
statutory possessory lien on the vehicle is a sole proprietor with a DBA (doing
business name), then motor vehicle sales tax is due on either the amount of the
charges shown on the statutory notice and request for payment or the actual
sales price, which ever is greater.

This opinion is based on the facts you submitted. Other facts, though similar,
may yield different results. 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 1-800-531-5441, 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

From: **
Sent: Wednesday, March 21, 2007 12:38 PM
To: Tax Help
Subject: storage lien

I have gotten an answer to this question before but not necessarily the same
answer.
You have a mechanic or storage facility.
They hold a public sale and no one buys the vehicle.
The mechanic or storage facility decides to title in their name. For this
answer let's say they apply for title in the name of the garage or the name of
the storage facility.
Do we collect sales tax on the amount they requested from the person that left
the vehicle?

You have a mechanic or storage facility.
They hold a public sale and no one buys the vehicle.
The mechanic or owner of the storage facility applies for title in their
personal name. We are aware they are the owner of the garage or storage
facility.
Do we collect sales tax on the amount they requested from the person that left
the vehicle?

Same scenario as above, but the mechanic or owner of the storage facility shows
they purchased the vehicle from their public sale. Do we collect sales tax on
the purchase price or the price they requested from the person that left the
vehicle?

I decided to get the answer in writing this time, maybe for the last time.

Thank you,