How did Texas tax pipe trade-ins, additional cash, prior tax, barter credits, and direct-payment-permit adjustments?

Plain-English summary

A pipe seller could accept an oil company's pipe as a trade-in and reduce the new pipe's sales price by the trade-in value. Tax had already been due on the oil company's original pipe. If the company paid additional cash or “boot,” that extra amount was taxable.

Using the old pipe as a trade-in was itself a taxable use, so the company could not recover the sales tax paid on that pipe. If it sold or bartered the pipe before making any use of it, however, it had to collect tax on the selling price and could claim a credit for tax previously paid.

If a direct-payment permit holder had reported use tax and then sold or bartered the pipe before use, it could amend the direct-payment return to claim a credit and had to report use tax on any property received in the barter. No credit was allowed when the pipe was used as a trade-in.

Common questions

Did trade-in value reduce the taxable price of the new pipe? Yes.

Was additional cash paid in the exchange taxable? Yes.

Could tax on the original pipe be recovered after using it as a trade-in? No.

What if the pipe was sold or bartered before any use? The seller collected tax on the sale and could claim a credit for tax previously paid.

Citations and references

• Texas Comptroller Rule 3.302(g) — trade-ins.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8512L0810F08

Original ruling text

December 18, 1985

Dear *****:

Thank you for your letter dated December 10, 1985 concerning state, local
and MTA sales taxes, as they apply in the specific situation that you described.

Your questions and our responses are listed below:

Question 1) Assuming the trade is even (i.e. there is no "boot" or
excess value received versus value given up) should sales or MTA tax
be charged to Company B on this like kind exchange?

Answer: Company A (a seller of pipe) may take pipe belonging to Company B
(an oil company) as a trade-in, and reduce all or part of the sales price
by the value of the pipe taken in trade. Tax was due on the original pipes
purchased by Company B.

Question 2) If the trade involves "boot" (i.e. if the value given up is
greater or less than the value received) does this change the answer to
Question 1?

Answer: Please refer to Question 1. If Company B must pay an additional
amount, the additional amount will be subject to sales tax.

Question 3) How can Company B get back the sales tax on the inventory
they bought but later resold or traded?

Answer: If Company B is using the pipe as a trade-in on new pipe, it can
not get back the sales tax on the original pipe purchased. Applying the
pipe as a trade-in is a taxable use.

If Company B actually sells or barters the pipe prior to making any use
of it, they must collect sales tax based on the selling price. They may claim
a credit for tax previously paid.

Question 4) How can Company B get back the sales tax if they have a
direct payment permit?

Answer: If Company B has reported use tax on a direct payment return and
then sold or bartered the pipe prior to making any use of the pipe, it
may amend the direct payment return to claim a credit for use tax paid. They
will, of course, report use tax on any item received as a result of the barter
transaction.

If Company B uses the pipe as a trade-in, the tax is due. No credit will
be allowed.

I have enclosed our rule 3.302 on trade-ins for your review. Please
refer to Section (g).

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

If you have any questions or need more information, please call me at
1-800-252-5555 toll free from anywhere in Texas. The regular number is
512/463-4600. You may write me at the Tax Administration Division.

Sincerely,

Julie Pesl
Tax Policy
Tax Administration