When does a vehicle qualify as a Texas trade-in, how must a dealer document it, and what must a blanket resale certificate show?

Plain-English summary

The Texas Comptroller ruled that a vehicle's value reduces the taxable price of another vehicle only when the dealer accepts it as all or part of the consideration in the same purchase transaction.

A customer may surrender a trade-in before the replacement vehicle is manufactured or delivered. The credit still works if the parties complete the buyer's order for that replacement vehicle when the dealer accepts the trade-in and carry the trade-in through the retail installment contract and Form 130-U. The delay in delivery did not create a second transaction in the Comptroller's example.

By contrast, simply selling a used car to the dealer for a check and later using that check toward another vehicle is not a trade-in. Discussions about a future purchase are also insufficient without purchase documentation; a later contract is a separate transaction.

The ruling separately approved blanket motor vehicle resale certificates without a purchase date, but required the certificate to identify the vehicle identification number of every vehicle bought for resale.

What this means for you

Motor vehicle dealers

Document the trade-in and replacement purchase together. Put the trade-in on the buyer's order, the retail installment contract when applicable, and Form 130-U. A later effort to connect an earlier outright purchase from the customer will not reduce motor vehicle sales tax.

Customers ordering vehicles not yet built

You can deliver the trade-in before the new vehicle arrives if the buyer's order already commits the trade-in as consideration for that identified purchase. The ruling's favorable example depended on a single transaction, not merely an informal promise to return later.

Dealers buying inventory for resale

A blanket resale certificate may cover multiple purchases and need not list purchase dates, but each vehicle's VIN must appear on it.

Common questions

Q: What rate did the ruling identify for Texas retail motor vehicle tax?

A: Section 152.021 imposed 6.25% on total consideration paid for a retail motor vehicle sale unless an exemption applied.

Q: Can a dealer pay cash for a customer's car and call it a trade-in later?

A: No. If the customer sells the vehicle, leaves with a check, and later buys another vehicle under a new contract, the transactions remain separate.

Q: Must the replacement vehicle be delivered the same day?

A: No. The ruling approved a scenario where the new vehicle had not yet been manufactured, because the buyer's order documented the new purchase and trade-in when the dealer accepted the old vehicle.

Q: Who received reliance protection in this unusual ruling?

A: The letter expressly extended detrimental-reliance relief to the requesting taxpayer and member dealers with identical facts. It did not extend that protection to unrelated dealers.

Citations and references

• Tex. Tax Code §§ 152.021, 152.002(b)(5)
• Tex. Fin. Code §§ 348.404, 353.402
• 34 Tex. Admin. Code Rule 3.95(c)
• 34 Tex. Admin. Code Rules 3.1 and 3.10

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=MVT
• Opinion: https://star.comptroller.texas.gov/view/201807013L

Original ruling text

July 13, 2018

RE: Private Letter Ruling No. 170640343

Dear ***:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters. [ENDNOTE: 1] We are responding to your request dated June 15, 2017, and the addendum sent on March 4, 2018. In accordance with Rule 3.10, Taxpayer Bill of Rights, the Comptroller will give detrimental reliance relief to *** (Taxpayer) and those member dealers with identical facts.

You requested guidance for motor vehicle dealers, for purposes of motor vehicle tax, regarding when a motor vehicle qualifies as a trade-in and reduces the taxable value of a related purchase; how to document a trade-in; and when to accept a blanket resale certificate.

Questions, Rulings, and Analysis

Our restatement of your questions is shown below, followed by our responses and analysis.

Question One: When does a motor vehicle qualify as a trade-in so that there is a reduction in the motor vehicle sales tax due on a related purchase?

Ruling One: A motor vehicle qualifies as a trade-in, and reduces the motor vehicle sales tax due on the purchase of another motor vehicle, when the seller accepts the motor vehicle as all or part of the total consideration for the purchase. The trade-in and purchase must occur in a single transaction.

Question Two: How should a motor vehicle dealer document a motor vehicle trade-in?

Ruling Two: A motor vehicle dealer accepting a motor vehicle trade-in as all or part of the consideration for the purchase of another motor vehicle should document the trade-in on the motor vehicle buyer's orders, the retail installment contract, if applicable, and Form 130-U, Application for Texas Title and/or Registration.

Analysis:

Section 152.021 (Retail Sales Tax) imposes a 6.25 percent motor vehicle tax on the total consideration paid for a motor vehicle sold at retail in the state, unless specifically exempted.

Section 152.002 (Total Consideration) explains how to calculate the total consideration paid for a motor vehicle. Section 152.002(b)(5) states:

“Total consideration” does not include… the value of a motor vehicle taken by a seller as all or a part of the consideration for sale of another motor vehicle, including any cash payment to the buyer under Section 348.404 or 353.402 of the Finance Code…”

Based on this section, the agency’s longstanding practice is that the trade-in of a motor vehicle must occur during the same transaction as the purchase of the new motor vehicle in order to reduce the taxable value of the new motor vehicle. See Comptroller's Decision Nos. 111,960 (2016), 35,636 (1996), and 12,393 (1983).

If a motor vehicle dealer accepts a used motor vehicle from a customer on one day, and then sells another motor vehicle to the customer under another contract on a different day, the motor vehicle dealer cannot reduce the taxable value of the vehicle being sold by the value of the used vehicle. The presence of another contract creates a new transaction. See Comptroller's Decision Nos. 111,960, 35,636, and 12,393.

A trade-in should be documented on the buyer's order or retail installment contract, and the Form 130-U (Application for Texas Title and/or Registration). See STAR Accession No. 9001L0994C13 (Jan. 3, 1990).

For further clarification, the following scenarios qualify as a valid trade-in:

Scenario 1: Customer “X” trades a motor vehicle to Dealer “Y” and buys a new motor vehicle from “Y.” “X” and “Y” complete a buyer’s order for the new motor vehicle. The buyer’s order shows “X's” motor vehicle as a trade-in. “Y” accepts the motor vehicle from “X” towards the purchase of the new motor vehicle. The trade-in is also documented on the retail installment contract and the Form 130-U. The trade-in occurred in the same transaction as the sale, and the taxable value of the new motor vehicle does not include the value of the trade-in.

Scenario 2: Customer “X” trades a motor vehicle to Dealer “Y” and discusses buying another motor vehicle from “Y.” The motor vehicle “X” wants to purchase has not been manufactured. “X” and “Y” complete a buyer’s order for the soon-to-be manufactured motor vehicle. The buyer’s order shows “X's” motor vehicle as a trade-in. “Y” accepts the motor vehicle from “X” towards the purchase of the to be manufactured motor vehicle. Once the new motor vehicle is manufactured, the trade-in is also documented on the retail installment contract and the Form 130-U. A trade-in occurred in the same transaction as the sale, and the taxable value of the new motor vehicle does not include the value of the trade-in.

The following scenarios do not qualify as a valid trade-in:

Scenario 3: Customer “X” sells a motor vehicle to Dealer “Y” and leaves with a check from “Y” for the motor vehicle sale. No trade-in has occurred.

Scenario 4: Customer “X” sells a motor vehicle to Dealer “Y” and discusses buying another motor vehicle from “Y” in the future, but does not complete any documentation regarding a purchase. “X” leaves with a check from “Y” for the motor vehicle. “X” returns later with the check from “Y,” buys another motor vehicle, and puts the check towards the purchase price. No trade-in has occurred. The sale of a motor vehicle and later purchase of another motor vehicle occurred in two separate transactions.

Scenario 5: Customer “X” sells a motor vehicle to Dealer “Y” and discusses buying another motor vehicle from “Y.” “Y” says the dealership is only purchasing motor vehicles that day, but to come by another day and “Y” will sell “X” a motor vehicle. “Y” issues “X” a check for “X's” motor vehicle. “X” returns to the dealership the next day and purchases a motor vehicle. No trade-in has occurred. The sale of a motor vehicle and later purchase of another motor vehicle occurred in two separate transactions.

Question Three: Can a motor vehicle dealer accept a blanket resale certificate for the purchase of motor vehicles, or does the resale certificate have to contain the date and specific motor vehicle being purchased for resale?

Ruling Three: A valid motor vehicle blanket resale certificate must identify the vehicle identification number of each motor vehicle being purchased for resale. A blanket resale certificate does not have to include the date of purchase.

Analysis:

The good faith acceptance of a blanket resale certificate is addressed in Rule 3.95(c) (Motor Vehicle Sales Tax Resale Certificate; Sales for Resale). A blanket resale certificate is not required to contain the date of purchase. However, the vehicle identification numbers of the motor vehicle being purchased for resale must appear on the resale certificate.

Comptroller’s Decisions and STAR documents cited can be found on the Comptroller’s State Tax Automated Research (STAR) system. The Texas Tax Code, Texas Administrative Code, and the STAR system are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling No. 2017010146.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Accounts

ENDNOTE:

1. Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.