What Texas sales-tax credit could a gallery claim after a financed painting was repossessed under a recourse arrangement?

Plain-English summary

A gallery reported a painting sale when the buyer obtained bank financing, and the gallery signed as a secured party. After default, the bank repossessed the painting, collected the note's remaining amount from the gallery under the recourse arrangement, and returned the painting.

Tax Policy said the gallery could claim a sales-tax credit, but only for the principal purchase-price balance still unpaid at repossession.

What this means for you

The historical memorandum limited the credit to unpaid principal. It did not grant credit for the entire original note or turn on when the gallery later paid the bank.

Common questions

Could the gallery claim a sales-tax credit? Yes.

How much? Only the principal purchase-price balance unpaid at repossession.

Was the credit based on the original sale date? The answer instead tied it to the unpaid purchase price at repossession.

Citations and references

• Fiche 294D03 and 294D04 — administrative references cited by the memorandum.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8709L0837D10

Original ruling text

INTEROFFICE BOB BULLOCK
MEMORANDUM COMPTROLLER OF
PUBLIC ACCOUNTS

DATE: September 1, 1987

TO: Bob Frederick, Legal Services Division

FROM: Wayne McDonald, Tax Policy

SUBJECT: Credit to seller for repossession of tangible
personal property secured with recourse

The auditor's inquiry and applicable research are attached.

Questions and proposed answers are below.

1. Is the gallery to take credit on their sales tax returns for the
   remaining amount of the note?

Answer: Yes. But only the remaining principal balance at the time of
repossession.

2. If so, would credit be allowed based on the original sale's date or
   when the gallery pays the remaining balance due on the note?

Answer: The credit would be allowed based on the purchase price
remaining
unpaid at the time of repossession.

Please see Fiche 294D03 and 294D04

Approved: Disapproved:

FIELD INQUIRY FOR TAXABILITY INFORMATION

1. x__Sales Tax
   __Business Tax
   __Fuels Tax
   __Inheritance Tax
   __Minerals Tax
   __Motor Vehicle Sales Tax
   __Ad Valorem Tax
   __Tobacco Tax

2. Field Representative: ***

3. Field Office 2I80 Austin Audit

4. Taxpayer Name & Mailing Address

5. Taxability of secured transaction with recourse

6. Ruling Reference (if applicable)_____

7. X Urgent
   Reason ___Thursday report audit

8. Business Type: Painting Gallery

9. Status: Pre-Audit
   X Audit in progress
   Audit Number (if any)
   T.P. Service
   Field Investigation

10. Describe all conditions and circumstances leading to inquiry:

A customer goes to the gallery and finds a painting he wishes to buy.
The
customer is informed by the gallery to go to BANK A to finance the paint-
ing. The customer enters into a loan agreement with the bank and the
gallery signs the loan agreement as a secured party. The customer
receives
the money and forwards it to the gallery in return for the painting. At
this time the gallery reports this transaction as a sale because they
report on the cash basis. In some instances the customer defaults on his
loan with the bank. The bank repossesses the painting. Since the gallery
is a secured party, the bank collects the remaining portion of the note
from the gallery and returns the painting to the gallery.

11. Specify Inquiry:

Is the gallery entitled to take credit on their sales tax returns for the
remaining amount of the note? If so, would credit be allowed based on
the
original sale's date or when the gallery pays the remaining balance due
on the note?