Does Texas motor vehicle sales tax apply when a borrower buys a replacement vehicle but keeps the old loan through a substitution of collateral?

Plain-English summary

The Texas Comptroller ruled that a replacement vehicle purchase remained subject to motor vehicle sales tax even when the borrower kept the original loan and simply substituted the new vehicle as collateral.

Each retail vehicle sale is tested on its own. The terms of the loan agreement did not determine whether the new vehicle purchase was taxable, and the fact that the replacement cost the same or less than the original vehicle created no exemption.

What this means for you

Vehicle finance companies

Do not tell dealers or borrowers that a collateral swap eliminates motor vehicle tax. Loan continuity is separate from the taxable retail acquisition.

Vehicle buyers and dealers

The replacement purchase needs ordinary tax and title treatment even when no new financing agreement is created.

Common questions

Q: Does keeping the old loan avoid tax?

A: No.

Q: Does it matter that the new vehicle costs less?

A: No exemption arose from equal or lower cost under this letter.

Citations and references

• The letter cites no specific statute or administrative rule.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=MVT
• Opinion: https://star.comptroller.texas.gov/view/200407807L

Original ruling text

July 14, 2004

Dear **:

Thank you for your e-mail about motor vehicle tax. I am pleased to be of
assistance.

You believe that when performing a substitution of collateral, that no tax is
due if the new vehicle costs the same as or less than the original vehicle.
You have been asked by a dealer for a form that documents this.

Your understanding that no tax is due is incorrect.

Each retail sale of a motor vehicle in Texas is taxable. The terms or
conditions of a loan agreement do not determine the taxability of a motor
vehicle. In a situation where a motor vehicle is purchased and an "old" loan
is retained (collateral is simply substituted), motor vehicle tax is due on the
purchase.

The entire text of the Tax Code, a complete set of rules, and other tax
information are available through our website at .

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

Our goal is to provide you with prompt, professional service. Please take a
moment to complete our on-line survey at
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If you have any questions or need more information, I will be glad to help you.
You may e-mail me at , or you may call me toll-free
at 1-800-531-5441, extension 3-4622.

Sincerely,

Stefanie B. Medack
Tax Policy Division

-----Original Message-----
From: ** [mail to: ]
Sent: Monday, July 12, 2004 1:19 PM
To: [email protected]
Subject: Collateral Exchange taxes
To Whom It May Concern:

I work for ** Motor Corporation and was informed that if you were
performing a substitution of collateral no taxes are due if the new vehicle
costs the same or less as the original vehicle. I have been having a difficult
time informing a dealer of this and they are requesting a form. Do you have
anything that I can print or receive in a fax that would show no taxes being
due if we are performing a substation of collateral.

Let me know when you get a chance.

Thanks