If a Texas trucking company's driver buys a replacement tire in another state and pays that state's sales tax, can the Texas tire dealer credit that tax against the Texas use tax owed when the truck returns to Texas?

Subject

Tires Purchased And Installed On Trucks Traveling Nationwide — Credit Allowed Against Texas Use Tax Due On Tires Used In Texas Within One Year

Plain-English summary

A tax advisor asked the Comptroller about a Texas tire dealer whose Texas-based customer runs trucks all over the country. When one of the customer's trucks needs a replacement tire while it's out of state, the driver goes to a local dealer of the same brand. That out-of-state dealer installs the tire and bills a national distributor for the tire plus that state's sales tax; the distributor bills the Texas dealer, who pays it; the Texas dealer then bills the customer for the tire and Texas sales tax, and remits that Texas tax to the Comptroller — all without ever taking credit for the sales tax already paid to the other state.

Using an Alabama example (a $274.78 tire with $16.49 of Alabama sales tax, then billed to the customer with $21.25 of Texas tax at 7.25%), the advisor asked whether Texas tax even applies, and if so, how to claim credit for the tax already paid elsewhere.

The Comptroller's answer has two parts:

1. Whether Texas tax applies at all depends on the truck's return. Texas use tax is due on tires bought outside Texas and brought into the state for use — but only if the truck carrying the tire comes back into Texas within one year of the purchase date. If the truck never returns to Texas within that year, no Texas use tax is due at all.
2. If Texas use tax is due, the out-of-state tax already paid is creditable. Because Texas participates in the Multistate Tax Compact, it allows a credit against Texas use tax for any combined sales or use taxes legally paid on the same property to another state (or a subdivision of another state) — even if that other state isn't itself a compact member. The credit is applied in a set order: first to any transit-authority (MTA or city transit) use tax, then to county use tax, then to city use tax, and finally to state use tax. In the Alabama example, since Alabama's 6% tax was lower than the Texas rate of 7.25%, the customer still owed the 1.25% difference (about $3.43) in Texas use tax even after the credit.

What this means for you

Trucking companies and their tire/parts vendors

If your Texas-based fleet buys replacement parts (like tires) while traveling in other states, track two things: (1) whether the vehicle returns to Texas within a year of the purchase, and (2) how much sales or use tax you already paid to the other state. If the truck stays out of state past a year, no Texas use tax is owed on that item. If it does return within the year, you owe Texas use tax but get a credit for the other state's tax already paid — you don't pay tax twice on the same tire.

Dealers billing customers for out-of-state repairs

If you've been charging a customer full Texas sales tax on items bought and taxed in another state without applying a credit, this ruling shows you may have over-collected. The letter notes the customer could get a refund of the un-credited amount, and the dealer can then claim the credit by amending the relevant return or taking it on a later return, within the four-year statute of limitations from the date the tax was originally due.

Accountants and tax professionals

The credit-ordering rule matters for multi-jurisdiction Texas returns: apply the out-of-state tax credit first against MTA/transit use tax, then county, then city, and only last against state use tax. Rules 3.325 and 3.340 govern this mechanism.

Common questions

Q: Does Texas use tax always apply when an out-of-state dealer installs a tire on a Texas truck?
A: No. Texas use tax only applies if the truck carrying the tire comes back into Texas within one year of the purchase date. If it doesn't return within that year, no Texas use tax is due on that tire.

Q: Can a Texas dealer take credit for sales tax already paid to another state?
A: Yes. Under the Multistate Tax Compact, Texas allows a credit against Texas use tax for legally imposed sales or use tax paid to another state (or its subdivisions) on the same property, even if that state isn't a compact member itself.

Q: In what order is the out-of-state tax credit applied?
A: First against any Metropolitan Transit Authority or city transit use tax, then against county use tax, then against city use tax, and finally against state use tax.

Q: What if the other state's tax rate was lower than Texas's rate?
A: You still owe the difference. In the ruling's example, Alabama's 6% tax was credited against the 7.25% Texas rate, leaving 1.25% (about $3.43) still due as Texas use tax.

Q: What if a customer was overcharged because no credit was applied?
A: The dealer can refund the excess to the customer and then claim the credit itself by amending the original return or taking it on a subsequent return, within the four-year statute of limitations from the date the tax was due.

Citations and references

• 34 Tex. Admin. Code Rule 3.325 (credit for tax paid to another state) — enclosed with the ruling for the requester's reference
• 34 Tex. Admin. Code Rule 3.340 (Multistate Tax Compact) — enclosed with the ruling for the requester's reference

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9207L1190E01

Original ruling text

July 30, 1992

Dear ***:

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

We have a Texas based client that is a tire dealer ("client") that has a Texas
based customer ("customer") with trucks traveling throughout the United states.
If customer has a truck traveling in another state and the driver has to
purchase a tire, the driver goes to a dealer of the same brand of tires in that
state, that dealer installs the tire, that dealer bills the national
distributor for the tire and applicable sales tax, the national distributor in
turn bills our client for the same amount, our client pays the billing from the
national distributor, our client bills customer for the tire and applicable
Texas sales tax, and our client pays the Texas sales tax to the Texas
comptroller of Public Accounts. our client has not taken any credit against
Texas sales tax for the sales tax paid to the other state. The customer's
truck may return to Texas, or it may be a truck stationed in another state and
would not return to Texas. An Example is as follows:

1) Customer's driver has a tire installed by a tire dealer in Alabama.

2) The Alabama dealer bills the national distributor $274.78 for the tire and
$16.49 for Alabama sales Tax.

3) The national distributor bills our client $274.78 for the tire and $16.49
for Alabama sales tax.

4) Our client pays the national distributor for the tire and Alabama sales
tax.

5) Our client bills customer $301.38 for the tire and $21.25 for Texas sales
tax (7.25%).

6) Our client remits $21.25 to the .

7) Our client has not taken credit against Texas sales tax for the $16.49 of
Alabama sales tax paid.

Based on the above facts and example, I would like your opinion as to whether
the above transaction is subject to Texas sales tax, and if so, how do we take
credit for sales tax paid to other states.

Response: Texas use tax is due on tires purchased outside Texas and brought
into state for use. If the trucks on which the tires are mounted do not
reenter Texas within a year of the date the tires are purchased, no Texas use
tax is due.

As a member of the multistate compact, Texas will allow as a credit against
Texas use tax due any combined amounts of legally imposed sales or use taxes
paid on the same property to another state or any subdivision of another state.
allowed even though the other state may not be a member of the multistate
compact.

The credit shall be applied first against the amount of any use tax due the
Metropolitan Transit Authority or city Transit Department. credit shall then
be applied against county use tax due, if any, and then against the amount of
any city use tax due. Finally, any remaining credit shall be applied against
use tax due the state.

In the example you provided, your client's customer paid 6% Alabama sales tax.
Presumably the Texas tax rate in effect at the customer's Texas truck terminal
is 7.25%, which means your client should collect 1.25% additional Texas state
use tax from the customer (or $3.43). Your client may refund the additional
$17.82 to the customer and then claim credit by amending the appropriate return
or taking credit on a subsequent return. The statute of limitations period is
four years from the date the tax was due. I am enclosing Rules 3.325 and 3.340
for your file.

This opinion is based on the facts you presented. Other facts, though similar,
may yield different results.

If you have questions or need more information, please call or write. You may
reach me by calling toll free, (800) 531-5441. My direct line number is (512)
463-4680. The number for FAX transmissions is (512) 475-0900. You may write
to me in care of Tax Administration Division.

Sincerely,

Al Van Allen
Tax Administration Division