Can proceeds from selling an old vehicle to a relative reduce Texas motor vehicle sales tax on a new vehicle bought from a dealer?

Plain-English summary

The Texas Comptroller ruled that selling an old car to a relative did not reduce the taxable price of a new car purchased from a dealer.

The trade-in exclusion applies only when the purchaser transfers the old motor vehicle directly to the seller of the new vehicle and the seller accepts it as part of the new vehicle's consideration. A separate third-party sale produces cash, not a statutory trade-in, regardless of how soon the new purchase follows.

What this means for you

Vehicle buyers

Compare the tax cost before selling privately. A higher private-sale price may still leave the full dealer purchase price taxable, while a direct dealer trade-in reduces the Chapter 152 tax base.

Motor vehicle dealers

Do not subtract a customer's outside sale proceeds from taxable consideration. The dealership must actually take the vehicle in the purchase transaction.

Common questions

Q: Does selling to a relative change the answer?

A: No. The buyer in this letter planned a family sale, but it remained a third-party transaction.

Q: Is there a time window that turns a private sale into a trade-in?

A: No such window was provided. Direct transfer to the new-vehicle seller as consideration is the statutory requirement.

Citations and references

• Tex. Tax Code § 152.002(b)(5)
• Tex. Fin. Code § 348.404

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=MVT
• Opinion: https://star.comptroller.texas.gov/view/200706497L

Original ruling text

June 1, 2007

Subject: 07149403-Motor Vehicle Sales Tax Trade-in

Dear ***:

This is in response to your e-mail question concerning whether you can
calculate the sales tax due on the purchase of a new car from a dealer based on
the difference between the sales price of your old car that you are going to
sell to a relative and the purchase price of the new car when the dealer titles
the new car in Texas.

The Texas motor vehicle sales tax is based on the total consideration paid for
the vehicle less any amount allowed for a vehicle traded in to the seller by
the purchaser. In order to reduce the taxable value of the new vehicle, the
vehicle being traded-in must be transferred directly to the seller of the new
vehicle and used as partial consideration in payment for the new vehicle. The
amount subject to motor vehicle tax cannot be reduced by the proceeds of a
third-party sale in which a vehicle that could have been used as a trade-in is
sold to a third party rather than being traded to the seller of the new
vehicle.

Section 152.002(b) of the Texas Tax Code states that Total consideration does
not include:

(1) a cash discount;

(2) a full cash or credit refund to a customer of the sales price of a motor
vehicle returned to the seller;

(3) the amount charged for labor or service rendered in installing, applying,
remodeling, or repairing the motor vehicle sold;

(4) a financing, carrying, or service charge or interest on credit extended on
a motor vehicle sold under a conditional sale or other deferred payment
contract;

(5) the value of a motor vehicle taken by a seller as all or a part of the
consideration for sale of another motor vehicle, including any cash payment to
the buyer under Section 348.404, Finance Code;

(6) a charge for transportation of the motor vehicle after a sale; or

(7) motor vehicle inventory tax.

The language of Section 152.002(b)(5) is explicit in that the value of a motor
vehicle taken by a seller as all or a part of the consideration for sale of
another motor vehicle is the only way the buyer can reduce the taxable value of
the new vehicle. There is no provision in the Tax Code that allows the amount
subject to motor vehicle tax to be adjusted by the proceeds of a third-party
transaction in which an intended trade vehicle is sold to a person other than
the seller of the new vehicle.

For online access to the section of the tax code noted above go to:
www.window.state.tx.us/taxinfo/mtr_veh/mv_su.html Scroll down to "Statutes" and
click to open.

I hope this information helps. If you have further questions, please e-mail
them to [email protected], or you may reach me by phone at (800)
531-5441, ext. 3-4986.

Our goal is to provide you with prompt, professional service. Please take a
moment to complete our on-line survey at
http://aixtcp.cpa.state.tx.us/surveys/tpsurv2/index.html

Sincerely,

Ken Koch
Tax Policy Division

To: Tax Help
Subject: Motor Vehicle Sales Tax

Hello, I am inquiring about the following scenario, similar to a trade-in, but
with a third party:

I am a Texas resident. I have a car that I am going to sell to a relative in
Iowa. I will have a notorized bill of sale from a Texas Notary Public. I am
going to buy a new car from a Texas dealer. The car sold and the car purchased
are my primary car.

Can I claim an exemption of Sales Tax as such:

New Car Price MINUS Old Car Sales Price EQUALS Taxable amount?

Is there a certain length of time to buy the new car in order to claim the
exemption?

Any clarification is appreciated,