Does a creditor owe Texas sales tax when it takes furniture from an insolvent customer in exchange for reducing the customer's debt?

Plain-English summary

The Comptroller said the engineering firm's receipt of an insolvent customer's furniture was a taxable sale. The firm received title and possession of tangible personal property, and its forgiveness of part of the customer's debt was consideration for that transfer.

The taxable amount was the amount by which the outstanding debt was reduced in exchange for the furniture. If that amount could not be determined, the tax base would be the value the firm assigned to the furniture when recording it as an asset on its books.

What this means for you

Taking property instead of cash can still create a taxable purchase. Here, reducing a receivable supplied the consideration, so the creditor owed tax even though no money changed hands for the furniture.

Common questions

Was taking the furniture a sale? Yes. It transferred title and possession of tangible personal property for consideration.

What was the consideration? The creditor's forgiveness of part of the debtor's outstanding balance.

How was the tax base measured? By the debt reduction. If that could not be determined, the letter used the value assigned when the furniture was entered on the creditor's books.

Citations and references

• Tex. Tax Code Section 151.005(1) — definition of a sale

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9109L1131D04

Original ruling text

September 19, 1991

Dear *****:

Thank you for your recent letter. According to the given facts,
your client (*****) is an engineering firm that performs
mostly nontaxable services. Your client received from one of
its customers notice of insolvency and inability to pay its outstanding
balances. Along with several other creditors of the insolvent
company, your client seized some of the debtor's furniture in partial
satisfaction of the debt. You ask whether your client owes tax on the
furniture it seized.

This transaction constitutes a transfer of both title to and possession
of tangible personal property (furniture) for consideration
(forgiveness of debt). This is a "sale" within the meaning of Tax Code
Sec. 151.005 (1).

Since a "sale" has occurred, tax is due on the furniture. The
consideration given (in other words, the tax base) is equal to
the amount by which the debtor's outstanding balance was reduced
in exchange for the furniture. If this amount were not determinable,
the tax base would be equal to the value that your client assigned to
the furniture when it entered the furniture as an asset on its books.

This opinion is based on the facts presented. Different facts,
though similar, might lead to different answers. if you have further
questions, feel free to write or call me at 1-800-252-5555,
ext. 3-3889.

Sincerely,

John Christian
Attorney
Tax Administration