Is a dealership membership program that pays a car buyer's depreciation loss (beyond their insurance settlement) after a total loss or theft taxed as insurance, and does the benefit affect motor vehicle sales tax on the replacement car?

Plain-English summary

A membership program lets motor vehicle purchasers pay a fee, at the time of purchase, to enroll in a "depreciation protection" benefit: if their vehicle is later totaled or stolen, the program pays them the gap between what they originally paid for the vehicle and their own primary insurance settlement — compensating for depreciation the insurance payout doesn't cover — toward the purchase of a replacement vehicle from a participating dealer. A program administrator runs the plan and holds a contractual-liability insurance policy that backs participating dealers' payment obligations (members aren't parties to that backing policy). The administrator asked three questions: is the membership itself a taxable insurance service; is the membership fee part of the taxable price of the original vehicle; and is the program's eventual benefit payment part of the taxable price of the replacement vehicle.

The Comptroller answered all three, for purposes of the ruling assuming (subject to the Texas Department of Insurance's own separate determination) that the program is NOT itself an insurance policy:

1. Not a taxable insurance service. Texas taxes specific insurance services (loss/damage appraisal, inspection, investigation, actuarial work, claims adjustment, loss prevention) performed in connection with an actual insurance policy. Because the membership program itself isn't a policy of insurance, selling membership in it doesn't fall within the taxable insurance-services category — or any other enumerated taxable service.
2. Membership fee is NOT part of the original vehicle's taxable price. Motor vehicle sales tax is based on "total consideration," which covers amounts paid for the vehicle and pre-sale accessories. A separate membership fee for this depreciation-protection benefit isn't a payment for the vehicle or an accessory, so it doesn't get folded into the taxable sales price.
3. The benefit payment IS part of the replacement vehicle's taxable price. When the program later pays money toward a replacement vehicle, that payment is treated the same as an insurance company's payment toward a replacement vehicle — both count as third-party contributions to the total consideration for that purchase, and both are taxable, per longstanding Comptroller guidance that insurance-type proceeds toward a vehicle purchase can't be excluded from the taxable amount.

What this means for you

Dealerships offering depreciation-protection or similar add-on membership programs

Structuring the offering as a membership (rather than an insurance product) and keeping the fee genuinely separate from the vehicle's purchase price supports non-taxable treatment of the fee itself — but be ready for the eventual benefit payout, when used toward a replacement vehicle, to be taxed as part of that new purchase's price, just like an insurance settlement would be.

Consumers using a depreciation-protection benefit toward a new vehicle

Don't assume the benefit payment arrives tax-free just because your original membership fee wasn't taxed — the payout itself becomes part of what you're taxed on when you use it toward the replacement vehicle's purchase price.

Insurance regulators and program administrators

This ruling's tax conclusion is explicitly conditioned on the program NOT being a policy of insurance under Texas Department of Insurance rules — if that regulatory characterization changes, the Comptroller flagged that its tax analysis could change too.

Common questions

Q: Is a fee paid to join a vehicle depreciation-protection membership program taxed as insurance?
A: No — per this ruling, because the program isn't itself an insurance policy, the membership fee doesn't fall within Texas's taxable insurance-services category.

Q: Does the depreciation-protection membership fee get added to the taxable price of the vehicle being purchased?
A: No — per this ruling, the membership fee isn't an amount paid for the vehicle or a pre-sale accessory, so it's excluded from the vehicle's taxable total consideration.

Q: Is a depreciation-protection benefit payment toward a replacement vehicle taxed the same as an insurance payout would be?
A: Yes — per this ruling, the benefit is treated as third-party consideration toward the replacement vehicle's purchase price, taxable the same way an insurance company's payment toward a replacement vehicle is.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.0101(a)(9) (Taxable Services — insurance services)
• Tex. Tax Code § 151.0101(b) (Comptroller's exclusive jurisdiction over taxable insurance services)
• 34 Tex. Admin. Code Rule 3.355(b) (Insurance Services — must pertain to a policy of insurance)
• Tex. Tax Code § 152.021(a) (Motor Vehicle Sales Tax Imposed)
• Tex. Tax Code § 152.002(a) (Total consideration — amount paid for vehicle and pre-sale accessories)
• 34 Tex. Admin. Code Rule 3.290(a)(1) (Motor Vehicle Sales Tax — accessories defined)
• 34 Tex. Admin. Code Rule 3.62 (Insurance Settlements — replacement-vehicle purchases by an insurer are taxable)

Cited prior guidance:

• Comptroller's Decision No. 9,676 (1979) — insurance proceeds toward a replacement vehicle may not be excluded from the taxable amount
• STAR Accession No. 200103256P (2000) — same principle reaffirmed

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201702005L

Original ruling text

This document has also been indexed as a motor vehicle sales tax letter, STAR 201702007L.

February 9, 2017

Re: Private Letter Ruling #162520217

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters.[1] We are responding to your request for guidance dated August 4, 2016, on the taxability of the PowerBuy Membership Program. Detrimental reliance relief applies under Rule 3.10, the Taxpayer Bill of Rights.

Facts Presented

We derived the facts below from documentation you submitted to our office. You submitted five documents: (1) a letter dated July 29, 2016 from the Texas Office of Consumer Credit Commissioner to COMPANY A; (2) a ruling from the Texas Department of Insurance; (3) promotional material for the PowerBuy Membership Program; (4) a copy of the PowerBuy Membership Program Membership Registration Form; and (5) a one-page description of the Depreciation Membership Program prepared by COMPANY B, the underwriter.

The PowerBuy Membership Program (Program) offers motor vehicle purchasers a benefit toward the purchase of a new replacement motor vehicle from a participating dealer when the purchaser’s vehicle is deemed a total loss or is stolen. The benefit compensates the purchaser for any depreciation to the vehicle.

Participating motor vehicle dealers offer motor vehicle purchasers the option to participate in the Program for a fee. Purchasers who participate in the Program are “members.” The benefit amount provided by the Program generally equals the amount the member paid for the destroyed or stolen vehicle, minus the member’s own insurance settlement from a separate primary insurance carrier. The membership registration form describes the specific benefits provided under the Program. The Program is an agreement between the member and the selling motor vehicle dealer.

COMPANY A is the Program’s Administrator. Under a separate agreement between COMPANY A and participating motor vehicle dealers – the PowerBuy Optional Membership Program Sales Agreement – COMPANY A administers the Program and maintains a Universal Contractual Liability Insurance Policy (UCLIP). The UCLIP insures participating dealers for the benefits when a replacement vehicle is purchased. Members are not parties to the UCLIP.

For purposes of this private letter ruling, the Comptroller assumes that the Program is not an insurance policy. If the Texas Department of Insurance determines that the Program is a policy of insurance this response may change.

Requested Rulings, Response and Analysis

Our restatement of the three rulings you requested is shown below, followed by our response and analysis for each request.

Requested Ruling 1: The PowerBuy Membership Program (Program) is not an insurance service or other taxable service subject to sales and use tax under Tax Code, Chapter 151 (Limited Sales, Excise, and Use Tax).

Ruling: The Program is not an insurance service or other taxable service subject to sales and use tax under Tax Code, Chapter 151.

Analysis:

Taxable services are listed in Section 151.0101. Insurance services are specifically enumerated as taxable services. See Section 151.0101(a)(9). The Comptroller has exclusive jurisdiction to interpret the scope of taxable insurance services. See Section 151.0101(b).

Rule 3.355, concerning Insurance Services, defines taxable insurance services. The rule provides that a taxable insurance service is one that is performed “on behalf of an insurance carrier, its insured, its policyholders, or others pertaining to a policy or policies of insurance.” Rule 3.355(b). The Program is not a policy of insurance, and the sale of membership in the Program does not pertain to a policy of insurance. Consequently, the Program is not a taxable insurance service.

In addition, the Program does not fall within the scope of any of the other enumerated services in Section 151.0101(a). Therefore, the Program is not taxable under Chapter 151.

Requested Ruling 2: The motor vehicle purchaser’s payment to a participating motor vehicle dealer to join the Program is not part of the total consideration paid for the purchase of the motor vehicle and is not subject to tax under Tax Code, Chapter 152 (Taxes on Sale, Rental, and Use of Motor Vehicles).

Ruling: The motor vehicle purchaser’s payment to a participating dealer for membership in the Program is not part of the taxable total consideration paid for the purchase of the motor vehicle and is not subject to tax under Tax Code, Chapter 152.

Analysis:

Motor vehicle sales tax is imposed on every retail sale of a motor vehicle in this state. See Section 152.021(a). The tax is calculated on the total consideration paid as defined in Section 152.002. The term includes “the amount paid or to be paid for a motor vehicle and its accessories attached on or before the sale.” See Section 152.002(a).

The Program’s membership fee is not an amount paid for the motor vehicle, an accessory defined in Rule 3.290(a)(1), or other cost occurring prior to the sale.

Requested Ruling 3: The Program’s benefit paid for the purchase of a replacement vehicle is part of the total consideration paid for the replacement motor vehicle and is subject to tax under Tax Code, Chapter 152.

Ruling: The Program’s benefit paid to the dealer on the purchase of a replacement vehicle is part of the taxable total consideration paid for the replacement vehicle and is subject to motor vehicle tax under Tax Code, Chapter 152.

Analysis:

Motor vehicle sales tax is imposed on every retail sale of a motor vehicle in this state. See Section 152.021(a). The tax is calculated on the total consideration paid as defined in Section 152.002. The term includes “the amount paid or to be paid for a motor vehicle and its accessories attached on or before the sale.” See Section 152.002(a).

The definition of total consideration includes an amount paid by a third party towards the cost of a replacement vehicle. For example, Rule 3.62, Insurance Settlements, provides that the purchase of a replacement vehicle by an insurance company for an insured is taxable. Prior Comptroller guidance has stated that insurance proceeds may not be excluded from the taxable amount. See Comptroller’s Decision No. 9,676 (1979) and STAR Accession No. 200103256P (Dec. 22, 2000).

Comptroller’s Decisions and STAR Documents cited can be found on the Comptroller’s State Tax Automated Research (STAR) system. The Texas Tax Code, Texas Administrative Code, and the STAR system are accessible at www.comptroller.texas.gov/taxes/.

If you have any questions about this private letter ruling, please email us through our website at https://www.comptroller.texas.gov/taxhelp/ and reference Private Letter Ruling #162520217.

Regards,

Tax Policy Division – Indirect Taxes

Comptroller of Public Accounts

ENDNOTES:

[1] Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.