A pawnbroker was previously told (in a March 13, 1992 letter) that it should not charge sales tax when a customer redeems their own pawned property. Is that always true, or does it depend on whether the pawnbroker already declared the goods forfeited?

Plain-English summary

This letter is a correction and clarification of an earlier letter the Comptroller's office sent the same pawnbroker on March 13, 1992. In that earlier letter, the Comptroller had advised the pawnbroker that it should not charge sales tax when the original owner redeems pawned property. This July 13, 1992 letter narrows that answer: it's correct only up to a point.

The key distinction turns on forfeiture timing:

• Before forfeiture: If the original owner redeems the pledged property before the pawnbroker has exercised its option to treat the pledged goods as forfeited, the transfer back to the original owner is not a taxable sale.
• After forfeiture: If the pawnbroker has already exercised that option and recorded the pledgor's goods as forfeited in its own records, then any subsequent transfer of those goods for consideration is a taxable sale — even if the buyer is the very same person who originally pawned the item. The pawnbroker must collect sales tax on that subsequent sale regardless of who buys it.

What this means for you

Pawnbrokers

Whether you owe sales tax on a "redemption" depends on your own records, not just on who is picking up the property. If a customer pays off their loan and reclaims their item before you've recorded it as forfeited, no sales tax applies to that transaction. But once you've exercised your forfeiture option and logged the goods as forfeited in your books, any later transfer of that same property for payment — including a sale back to the original pledgor — is taxable, and you must collect sales tax just as you would on a sale to any other customer.

Pawnbrokers who received the March 13, 1992 letter (or similar advice)

This letter shows the Comptroller's office revisiting and narrowing an earlier answer on the same question within a few months. If you rely on an older STAR letter about pawnshop redemptions, check whether it addresses the forfeiture-timing distinction described here — an unqualified "no tax on redemption" answer may only be accurate for pre-forfeiture redemptions.

Accountants and tax professionals

When advising pawnshop clients, ask whether the specific transaction in question happened before or after the shop's internal records show the goods as forfeited. That single fact — not merely who receives the property back — determines whether sales tax is due.

Common questions

Q: Does a pawnbroker owe sales tax when the original owner redeems their pawned item?
A: Not if the redemption happens before the pawnbroker has exercised its option to treat the pledged goods as forfeited. In that case, the transfer back to the original owner is not a taxable sale.

Q: What if the pawnbroker already recorded the goods as forfeited before the original owner tries to get them back?
A: Then the transfer is a taxable sale. Once the pawnbroker has exercised its forfeiture option and recorded the pledgor's goods as forfeited, any subsequent transfer of those goods for consideration — including to the original owner — is taxable, and the pawnbroker must collect sales tax.

Q: Does it matter who the buyer is once the goods have been forfeited?
A: No. The letter states the pawnbroker must collect sales tax on any subsequent sale of forfeited property "regardless of who the buyer is."

Q: Why was this letter sent?
A: It clarifies and narrows an answer the Comptroller's office had given the same pawnbroker in a letter dated March 13, 1992, which had advised (without the forfeiture-timing qualification) that pawnbrokers should not charge sales tax on redemptions by the original owner.

Q: Can other pawnbrokers rely on this letter for their own transactions?
A: No. This letter was addressed to a specific taxpayer and redacted for publication on STAR. Under 34 Tex. Admin. Code Rules 3.1 and 3.10, a STAR letter can support a detrimental-reliance claim only for the taxpayer to whom it was directly issued.

Citations and references

No specific statutes or rule numbers were cited in the body of this letter.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9207L1182B01

Original ruling text

July 13, 1992

Dear **:

On March 13, 1992, we wrote you regarding pawnbrokers charging sales tax on the
redemption of property by the original owner. The purpose of this letter is to
clarify the answer we gave on that date.

We advised you that a pawnbroker should not charge sales tax on the redemption
of property by the original owner. That answer is correct only to the following
extent.

The transfer of the property to the original owner will not be considered a
taxable sales when the property is redeemed by the original owner before the
pawnbroker has exercised his option to consider the pledged goods forfeited.

If the pawnbroker has exercised his option and recorded the pledgor's goods as
forfeited in the pawnbroker's records, we consider the subsequent transfer of
those goods for a consideration to be a taxable sale. The pawnbroker must
collect sales tax on any subsequent sale of that property after it has been
forfeited regardless of who the buyer is.

If you have any questions or need more information, you may call me toll free
at l-800-252-5555, extension 3-4633. The regular number is 512/463-4633. You
may also write to the Tax Administration Division.

Sincerely,

Wanda Hutcheson
Tax Administration Division