Is a dealer's vehicle depreciation-protection membership taxable, and is its payment toward a replacement vehicle included in taxable consideration?

Plain-English summary

The Texas Comptroller gave different tax treatment to the two sides of a dealer-offered vehicle depreciation protection program.

The customer's membership fee was not taxable. Assuming the program was not insurance, membership did not pertain to an insurance policy and did not fit another taxable service under Chapter 151. It also was not part of the consideration for the original vehicle under Chapter 152 because it was not payment for the vehicle, an attached accessory, or another pre-sale cost.

The later program benefit was taxable when used to buy a replacement vehicle after theft or total loss. The benefit generally filled the gap between the original purchase price and the member's primary insurance settlement. Because a third party paid that amount toward the replacement vehicle's price, it became part of the replacement vehicle's taxable total consideration.

What this means for you

Dealers offering depreciation protection

Keep the membership fee distinct from the vehicle price. The favorable fee result depended on the program not being an insurance policy and not purchasing a taxable service or vehicle accessory.

Program administrators

The ruling assumed the program was not insurance based on the submitted facts and agency materials. It expressly warned that the answer could change if the Texas Department of Insurance classified the program as an insurance policy.

Customers replacing a totaled or stolen vehicle

Even though the membership fee was exempt, the benefit did not reduce the replacement vehicle's tax base. Like insurance proceeds paid toward a replacement, the program payment counted as consideration.

Common questions

Q: Was the membership an insurance service?

A: Not under the ruling's assumption. The program was an agreement between the dealer and member, while the administrator's contractual liability policy insured participating dealers and did not make members parties to that policy.

Q: Was the membership fee part of the first vehicle's taxable price?

A: No. It was not payment for the vehicle, an attached accessory, or another cost incurred before the sale.

Q: Why was the replacement benefit taxable?

A: The benefit was a third-party payment toward the replacement vehicle's purchase price, so it fell within taxable total consideration.

Q: Would an insurance classification change the analysis?

A: It could. The Comptroller expressly conditioned the answer on the program not being an insurance policy.

Citations and references

• Tex. Tax Code §§ 151.0101(a)(9), (b), 152.002(a), 152.021(a)
• 34 Tex. Admin. Code Rules 3.62, 3.290(a)(1), 3.355(b)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=MVT
• Opinion: https://star.comptroller.texas.gov/view/201702007L

Original ruling text

This document has also been indexed as a sales tax letter, STAR 201702005L.

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.