Did a secured lender owe Texas sales or use tax after repossessing equipment and buying it back at an unsuccessful auction?

Plain-English summary

The Texas Comptroller addressed equipment financed by a corporation that held a first lien. After the borrower went bankrupt, the lender repossessed the equipment, offered it at auction, received no outside bids, and bought it back so legal title would be placed in the lender's name.

The Comptroller said sales tax did not apply when an owner delivered property to an auctioneer and bought back its own property at the auction.

The lender's later use of the equipment in its own operations also did not create use tax, assuming the original purchaser had paid sales tax on the original equipment purchase.

What this means for you

Secured lenders

On these facts, taking title through an auction buyback of the lender's repossessed property was not treated as a taxable sale.

Auctioneers

The letter distinguished an owner's repurchase of its own property from a sale to a third-party buyer.

Accountants and tax professionals

The no-use-tax conclusion depended on the original purchaser having paid tax. Preserve records of that original tax payment.

Common questions

Q: Was sales tax due when the lender bought the equipment back at auction?
A: No.

Q: Did using the equipment in the lender's own business create use tax?
A: No, assuming the original purchaser had paid tax.

Q: Did the letter address a successful sale to an outside bidder?
A: No. Its conclusion concerned an owner buying back its own property when there were no willing buyers.

Citations and references

• The letter cites no statute or administrative rule.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8411L0621D02

Original ruling text

November 20, 1984

Dear ***:

Thank you for your recent letter in which you state:

Please determine the applicability of sales use tax in the following.

CORPORATION ABC finances equipment, in which title is put in the
name of the borrower. The borrower pays sales tax to the vendor
on his purchase, which is also financed by CORPORATION ABC. The
lender (in reality secondary owner) is considered a lienholder in
the property. During a period in his loan repayment, the borrower
goes bankrupt. As first lienholder (secured owner) CORPORATION ABC
repossesses the equipment.

ABC attempts to sell the equipment at auction, but there are no
willing buyers. As such we must repurchase the equipment at the
auction. This in essence transfers legal title to our name. With
no market for the equipment we decide to put it to use in our own
operations.

1. Is tax due on our purchase at auction, or has there been no true
   sale of merchandise since we have in actually sold the equipment
   to ourselves and there has been no taxable occurrence no taxable
   event has occurred?

Response: Sales Tax does not apply when an owner of property
delivers it to an auctioneer for auction and buys back his own
property at the auction.

2. Does our use of the equipment subject the merchandise to tax or
   has this responsibility been satisfied through our financing of
   the tax on the original equipment purchase?

Response: Assuming tax was paid by the purchaser, no use tax is due.

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

If I can be of further help, please call 1-800-252-5555 toll free from
anywhere in Texas. You may write the Tax Administration Division.

Sincerely,

Tax Policy Section
Tax Administration Division