Was an insurer's settlement for a stolen rental tractor a taxable sale?

Plain-English summary

A construction-equipment dealer had rented out a tractor when it was stolen. The insurer's settlement was indemnity for the dealer's loss, not a sale between the dealer and insurer. The dealer therefore did not report the payment as a taxable sale or collect tax from the insurance company.

If the dealer purchased a replacement tractor to rent or sell, it could give the supplier a resale certificate instead of paying tax. The letter contrasted that result with an end user's recovery: because sales tax forms part of an end user's purchase price, recovering the item's entire cost would also require recovering that sales tax.

Common questions

Was the insurance settlement a taxable sale? No. Could replacement rental or resale inventory be bought with a resale certificate? Yes. Why might an end user's claim include sales tax? Because tax was part of the end user's original purchase price.

Citations and references

The reproduced letter cites no numbered statute or rule.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8505L0647A13

Original ruling text

May 20, 1985

Dear ***:

Thank you for your recent letter which is restated with response below.

"ABC, INC. was a construction equipment dealer that had a tractor on rent
to a customer when it was stolen. The insurance company refuses to pay the
sales tax on the settlement of the loss on the grounds that ABC, INC. would
purchase a replacement from another dealer in a tax exempt transaction. It
is my understanding from calling your taxpayer information service that this
transaction is a sale between ABC, INC. and the insurance company and is
therefore subject to state sales tax. Please confirm my understanding in writing
and send a carbon copy to the claims manager at XYZ Insurance:

RESPONSE: We do not consider the transaction between ABC, INC. and XYZ Insurance
Company to be a sale. Rather, it is indemnity for a loss you suffered.

Therefore you are not required to report the transaction as a taxable sale or
collect tax from the company. When purchasing a replacement tractor to
rent or sell you may issue your supplier a resale certificate in-lieu-of tax.

Sales tax is considered to be a part of the sales price on transactions
between a retailer and an end user. Therefore if an end user were going to
recover the entire cost of an item, he would also need to recover the sales tax.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

If you have any questions or need more information, please call us at
1-800-252-5555 toll free from anywhere in Texas. You may write us at the
Tax Administration Division.

Sincerely,

Tax Administration Division