Did repossessing improved equipment create a taxable sale, and how would Texas measure use tax on the improvements?

Plain-English summary

Repossession by the original seller was not itself a sale for sales-and-use-tax purposes. The seller had paid tax when it originally bought the equipment and had used it before selling it to the Oklahoma purchaser.

The purchaser then made improvements before defaulting. The Comptroller said the seller would owe use tax on those improvements based on the consideration it gave for them, but the documents supplied were insufficient to determine the amount. Consideration could be noncash value such as assumed or forgiven debt or tax advantages.

The earlier October 8 letter requested the sales, note, security, lien, appraisal, location, repossession, and accounting documents needed to analyze the transaction.

What this means for you

The historical letter separated the nontaxable act of repossession from the taxable acquisition of value added by the buyer. Book value or appraised value did not automatically establish the use-tax base.

Common questions

Was repossession a taxable sale? No.

Was any tax still due? The letter said use tax was due on the improvements.

How was the tax base measured? By the consideration the seller gave for the improvements.

Could consideration be noncash? Yes. The letter listed debt assumption, debt forgiveness, and tax advantages as examples.

Did the letter determine the exact amount? No, because the requested facts and documents had not been supplied.

Citations and references

• No statute or rule number is cited in the ruling text.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8710L0844E07

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

October 28, 1987

Dear ***:

I requested additional information from you in order to have a better
understanding of the facts surrounding CORP A's repossession of an item
of equipment which A plans to list as a capital asset.

Repossession of equipment by a seller from a purchaser is not a sale for
sales and use tax purposes. You told me in our telephone conversation
that
A paid tax on the original purchase of the equipment and used it prior to
selling the equipment to the Oklahoma purchaser. A "repossessed" consi-
derably more than it originally sold to the purchaser. A will owe use
tax on the improvements made to the equipment based on the consideration
TXI
gave for the improvements.

You have not supplied sufficient information in order for a determination
to
be made as to exactly what consideration was given. Consideration can be
something other than cash. It can include assumption or forgiveness of
debt,
tax advantages, etc.

If you would like to submit additional information, we will be glad to
review
it and provide a more specific response.

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 me at
1-800-252-5555 toll free from anywhere in Texas. The regular number is
512/463-4600. You may write me at the Tax Policy Division.

Sincerely,
Julie Pesl
Tax Policy Division

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

October 8, 1987

Dear ***:

Thank you for your letter concerning used equipment which was sold and
then
repossessed by CORP A.

According to information supplied in your letter, in January, 1987, A
sold
a surplus capital asset for $122,000.00. Delivery occurred in Oklahoma.
The
net book value of this asset was $60,000.00. The purchaser made capital
improvements and the machinery now has an appraised value of $200,000.00.
The purchaser has defaulted on the note and A is now in the process of
repossessing the equipment.

In our telephone conversation you indicated that A paid tax on the
original
purchase and used the equipment prior to the sale.

IN order to answer your questions about the Texas sales tax implications
if
A books the asset at the appraised value of $200,000.00 or the net book
value of $60,000.00, I will need additional information from you.

Please provide the following:

1. Copies of the original sales agreement, note receivable and
   security agreement (UCC 1) between A and the customer.

2. Copies of the legal documents executed by both parties that
   show what consideration A gave for the improvements - how much
   and in what form?

3. Where in Oklahoma was the property located? Where is the
   equipment to be located after repossession?

4. What kind of asset will the equipment be listed as?

5. Was an appraisal of the equipment and improvements performed by
   an independent appraiser? If so, please provide a copy of the
   appraisal.

6. If liens were filed on the improvements by the supplier of the
   improvements, please send copies of the lien releases.

7. Was the repossession done as a forgiveness of debt (send evidence
   that the sales agreement was cancelled) or a foreclosure pursuant to
   a security agreement and filing of liens? Provide copies of documents
   filed with appropriate governmental entities which reflect A's intention
   to enforce its security interest through repossession of equipment.

8. Documentation as to why A would record an asset at a value less than
   the consideration given by A for the asset.

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 me at
1-800-252-5555 toll free from anywhere in Texas. The regular number
is 512/463-4600. You may write me at the Tax Policy Division.

Sincerely,
Julie Pesl
Tax Policy Division