When a financed vehicle is repossessed, which lender is entitled to a sales tax refund on the unpaid purchase price -- and does it matter whether the loan came directly from a bank or was assigned to the bank by the selling dealer?

Plain-English summary

Someone asked the Tax Commission to clarify Tax Bulletin 11-91: what is a "direct loan" and what must a financial institution do to qualify for a sales tax refund when a financed purchase (like a vehicle) is repossessed?

The Commission's Auditing Division explained the framework:

• The refund itself is created by Utah Code § 59-12-107(8), which allows a credit/refund of the sales tax already paid on the portion of the purchase price that's still unpaid at the time of repossession.
• Rule R865-19-20S limits that credit to the selling dealer in the first instance, but the dealer's right to the refund can be assigned to a financial institution -- specifically through the assignment of a non-recourse loan.
• A non-recourse loan is one the dealer originally makes to the customer and then sells or assigns to a financial institution; once assigned, the dealer has no further responsibility, and all of the dealer's rights -- including the refund right -- transfer to the institution.
• A direct loan is one the borrower arranges directly with a financial institution (not assigned from a dealer). If a repossession happens on a purchase financed this way, the financial institution is not eligible for a refund.
• Bottom line: a financial institution can get a refund (channeled through the dealer) only where it received the loan by assignment from the dealer. If the customer instead went straight to their own bank or credit union for financing, that lender cannot claim a refund on repossession.

The record also includes a follow-up letter from a reader questioning apparent inconsistencies in Tax Bulletin 11-91's wording -- pointing out language suggesting financial institutions could "arrange with the selling vendor" for credit on non-recourse repossessions, and asking whether a dealer's arrangement to route customer financing through a particular bank could qualify as something other than a "direct loan." No Commission response to that follow-up letter appears in the available record for this ruling -- readers with a similar dealer-arranged-financing fact pattern should seek their own current guidance rather than assume an answer either way.

What this means for you

Auto and equipment dealers who assign customer financing

If you originate a loan and then sell or assign it to a bank or finance company (a non-recourse arrangement), your right to a sales tax refund on a later repossession transfers with the loan -- but the refund still runs through you as the dealer, not directly to the financial institution.

Banks and credit unions

A loan you make directly to a borrower to buy from a dealer (not one you bought or received by assignment from the dealer) does not carry a repossession sales tax refund right under this ruling, even if you have a broader working relationship or referral arrangement with that dealer.

Accountants and tax professionals

Watch for dealer-arranged financing structures that sit between a clean "direct loan" and a clean "assigned non-recourse loan" -- this ruling flags that exact gray area (a dealer referring approved customers to a partner bank) as an open question the Commission had not resolved in the available record. Confirm current guidance before relying on either outcome for such a structure.

Common questions

Q: Who can claim a sales tax refund when a financed item is repossessed?
A: The selling dealer, by default. A financial institution can claim it only if the dealer assigned it a non-recourse loan -- and even then, the refund is requested through the dealer.

Q: My bank made the loan directly to the customer with no dealer assignment -- can we get a refund on repossession?
A: Not under this ruling's "direct loan" analysis -- direct loans made straight from an institution to a borrower don't carry the refund right.

Q: What if the dealer arranges for its customers to be financed by a particular bank, but the bank still makes the loan directly?
A: This ruling flags that exact question as raised but not answered in the available record -- don't assume either outcome without current confirmation.

Q: Can I rely on this ruling for my own financing arrangement?
A: Not automatically -- it binds the Commission only for the taxpayer and facts presented, and even the Commission's own bulletin was flagged as potentially inconsistent on close variations of the fact pattern.

Citations and references

Statutes and rules:

• Utah Code § 59-12-107(8) (refund of tax paid on the unpaid purchase price at repossession)
• Utah Tax Commission Rule R865-19-20S (repossession credit limited to the selling dealer, assignable via a non-recourse loan)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/92-016.pdf

Original ruling text

Response
July 10, 1992

July
10, 1992

XXXXX

Re: Tax Bulletin 11-91

Dear
XXXXX:

This
letter is in response to your recent request for a Tax Commission ruling on
what constitutes a direct loan and what a financial institution must do to
qualify for a refund when a repossession occurs.

The
Tax Commission policy is to refer such requests to the division most qualified
to analyze the request and make recommendations concerning it. As such, your
request was referred to the Tax Commission's Auditing Division for their
analysis and recommendations. The division's recommendations are as follows:

1. Utah Code section 59-12-107(8) allows a
   refund (credit) of taxes paid on the portion of the purchase price remaining
   unpaid at the time of a repossession. Tax Commission Rule R865-19-20S specifies
   that this credit is allowed only to the selling dealer, but that this right to
   a refund be may passed on to a financial institution through the assignment of
   a non-recourse loan.

2.
A direct loan on a vehicle purchased from a dealer is a loan arranged for by
the borrower directly with the financial institution. If a repossession occurs
involving a product purchased using a direct loan, the financial institution is
not eligible to apply for a refund.

3.
A non-recourse loan is a loan from the dealer to the customer that is
subsequently assigned or sold to a financial institution. The dealer has no
further responsibility to the financial institution after the loan is assigned
or sold. The dealer's rights under this loan are transferred to the financial
institution including the right to a refund upon repossession.

4.
In summary, where a dealer makes a loan and assigns it to a financial
institution, that financial institution may request a refund through the dealer
upon making a repossession. If a buyer
goes to his own bank or credit union the obtains a loan, the bank or credit
union may not request a refund when a repossession occurs.

For
The Commission,

Joe
B. Pacheco

Commissioner

Joe
B. Pacheco, Commissioner

Utah
State Tax Commission

160
East Third South

Salt
Lake City, Utah 84134

Dear
Mr. Pacheco:

I
have reviewed Tax Bulletin 11-91, and notice some apparent inconsistencies. For
example, the second paragraph states:

"On
non-recourse financed repossessions, financial institutions may arrange with
the selling vendor for the selling vendor to take credit and forward the funds
to the financial institution."

However
the fourth paragraph states:

"If
a repossession occurs involving a product purchased using a direct loan, the
financial institution is not eligible to apply for a refund."

The
statement in the fourth paragraph seems to conflict with the statement in the
second paragraph. It also seems to be in conflict with Rule R865-19-20S(16)
which states:

16.
"Credit for tax on repossessions is allowed only to the selling dealer or
vendor."

paragraph
1a of this rule goes on to say;

"This
does not preclude arrangements being made between the dealer or vendor and
third party financial institutions wherein sales tax credits for repossessions
by financial institutions may be taken by the dealer or vendor who will in turn
reimburse the financial institution."

Are
not all loans direct loans? If you go to XXXXX store and purchase a living room
set and finance it through XXXXX, isn't that a direct loan? If you purchase a
car from a XXXXXX dealer and finance it through XXXXX, isn't that a direct
loan? If a financial institution makes arrangements with a car dealer that when
a customer of the dealer doesn't have other financing, the dealer will call the
institution and, upon credit approval, it will finance the purchase. Under the
current rules, can the financial institution get a refund of sales tax on
repossessed cars by following the procedure as stated in R865-19-20S(16)(la).
If not, what must a financial institution do in order to qualify.

Thank
you for your help in this matter.

Respectfully,

XXXXX