What happens to Texas seller-finance vehicle tax when notes are sold to a partnership that fails the related-finance-company ownership test?

Plain-English summary

The Texas Comptroller ruled that a used-car dealer's proposed note sale to a partnership owned by the dealer owner's three adult children would accelerate all remaining motor vehicle sales tax on those seller-financed accounts.

The partnership failed the qualifying related finance company test. Section 152.0475(a) required at least 80% of the RFC's ownership to be identical to the licensed dealer's ownership. The dealer was wholly owned by the parent, while the proposed partnership was owned by the children and the parent held no partnership interest.

The letter distinguished a true note sale from collateral. If the dealer merely granted a security interest while retaining custody, control, and the right to collect payments absent default, tax did not accelerate. But the dealer still could not contract away its duty to collect and remit the tax.

What this means for you

Seller-finance dealers

Test ownership before transferring accounts. Family relationship is not identical legal ownership. A buyer that misses the 80% test can trigger immediate tax on the unpaid contracts.

Finance partners and lenders

A collateral assignment can have different treatment from a sale. The agreement and actual control of the notes and payments must match the security-interest facts described in the letter.

Dealership accountants

Reporting checks from the finance entity does not shift statutory liability. The selling dealer remains responsible when it retains the notes and collection activity.

Common questions

Q: Why did the children's partnership fail?

A: None of its partners owned the dealer, so the required 80% identical ownership was absent.

Q: What did acceleration mean?

A: The remaining tax on the seller-finance contracts became due on the next applicable return rather than being collected over future installments.

Q: Did pledging notes as collateral cause acceleration?

A: Not when the dealer retained custody, control, and payment rights absent default, but the dealer remained liable for collection and remittance.

Citations and references

• Tex. Tax Code §§ 152.047(g-1), 152.0475(a)
• Texas Senate Bill 1617, 80th Legislature (2007)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=MVT
• Opinion: https://star.comptroller.texas.gov/view/200707957L

Original ruling text

July 26, 2007

Dear **:

This is in response to your fax letter concerning Senate Bill 1617 (Chapter
191) enacted during the 80th Legislative Session that will permit
seller-finance dealers to sell its notes to a qualifying related finance
company without causing the acceleration of the remainder of the motor vehicle
sales tax due. Your question and my response are set out below.

Facts: TAXPAYER (**) is in the business of selling used automobiles
in CITY, Texas, and it has been in business for a number of years.

It finances most of its sales and it is presently reporting its sales taxes to
the Comptroller on an installment basis or as they are collected.

The outstanding capital stock of taxpayer is owned 100 percent by COMPANY.

Taxpayer proposes to sell the notes that it received after July 1, 2007, at a
discount to a newly formed partnership. The partners of the partnership will be
the three adult children of COMPANY. COMPANY will not be a partner in that
partnership. The partnership will be a regular partnership. It will not be a
limited partnership.

The written contract between the taxpayer and the partnership will provide that
all of the auto purchaser's notes and security agreements will remain with the
taxpayer and the taxpayer will continue collecting the notes and depositing the
funds in the taxpayer's bank account. Also the taxpayer will repossess any
delinquencies just like it has in the past. The taxpayer will prepare the sales
tax reports and report the sales taxes that have been collected. These reports
will be reported in the name of the partnership. The partnership will issue its
check to the Comptroller for the taxes due.

Question: You ask if the partnership can report the motor vehicle sales tax due
on the purchaser’s accounts (installment contracts) for the sale of motor
vehicles by TAXPAYER, a seller-finance dealer, as the sales taxes are
collected, if TAXPAYER either sells the notes attached to the purchaser’s
accounts to the partnership or uses the notes as security with the partnership
when the security agreements and notes remain with the dealer and the dealer
continues to collect on the notes and deposits the funds in the dealer’s bank
account.

Response: No. First, Senate Bill 1617 amended Section 152.047 of the Tax Code
by adding Subsection (g-1) to provide that when a seller-finance dealer sells a
purchaser's account (note) to a registered qualified related finance company
(RFC), the remaining tax due does not accelerate (i.e., that all remaining tax
due on seller-finance contracts be remitted on the next motor vehicle
seller-finance tax return.) The amendment does not relieve the selling dealer
(TAXPAYER) of the liability for collecting and remitting the remaining motor
vehicle sales tax due on outstanding purchaser’s accounts as each payment is
received after the notes have been transferred to a RFC.

Second, Senate Bill 1617 further amended Chapter 152 by adding Section
152.0475(a) defining a qualifying RFC as one in which at least 80 percent of
the ownership of the RFC is identical to the ownership of the licensed dealer
who sold the purchaser’s account (note.) In your fax letter you stated that
“Taxpayer [TAXPAYER] proposes to sell the notes that it received after July 1,
2007, at a discount to a newly formed partnership. The partners of the
partnership will be the three adult children of COMPANY. COMPANY will not be a
partner in the partnership.” Therefore, the partnership that is to receive the
notes from TAXPAYER is not a qualifying RFC, since none of the partners (the
children of COMPANY) in the partnership are owners in TAXPAYER which is owned
100 percent by COMPANY. And, since the partnership is not a qualified RFC, the
sale of the purchaser’s accounts (notes) from the dealership to the partnership
will cause the remaining motor vehicle sales tax due on those purchaser’s
accounts (seller-finance contracts) to be accelerated.

Third, if, as set-out in your fax letter, “The written contract between the
** [TAXPAYER] and the partnership will provide that all of the auto
purchaser's notes and security agreements will remain with the taxpayer and the
taxpayer will continue collecting the notes and depositing the funds in the
taxpayer's bank account”, TAXPAYER remains liable for collecting and remitting
the sales tax on those purchaser's contracts, since the notes were not sold to
the partnership. A seller-finance dealer cannot contract away its liability to
collect and remit the sales tax on its seller-finance contracts.

The addition of Subsection (g-1)(2) to Section 152.047 of the Tax Code by
Senate Bill 1617 is the codification of long standing policy that when a
seller-finance dealer grants a security interest in a purchaser's account but
retains, custody and control of the account and the right to receive payments
in the absence of a default under the security agreement, the remaining motor
vehicle sales tax is not accelerated. Furthermore, granting such a security
interest in a dealer’s purchaser’s accounts (using the purchaser’s notes as
collateral for loans to the dealer) does not relieve the dealer of its
liability to collect and remit the motor vehicle sales tax due on those
accounts.

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

Sincerely,

Ken Koch
Tax Policy Division