Can a creditor or client who hires an automobile repossession company issue a resale certificate instead of paying sales tax on the repossession service?

Plain-English summary

A repossession company asked the Comptroller whether a client -- such as a lender that hires the company to repossess an automobile after a default -- can give the repossession company a resale certificate instead of paying sales tax on the repossession service. The Comptroller said no.

The Department reasoned that repossession services are not "incorporated" into the automobile that is later sold. Instead, they are simply an expense the client incurs while securing (recovering) the vehicle. The letter draws an analogy to a manufacturer that buys special tooling to make a product for a customer: the manufacturer is the consumer of that tooling and must pay tax on it, but can recover the cost by folding it into the sales price of the finished product. Repossession services work the same way -- the client is the consumer of the service and owes tax on it, even though the client may later recoup that cost when the repossessed vehicle is resold.

The letter also draws a contrast with a taxable service that genuinely can be resold: repairing tangible personal property. A repair enhances the value of the item being resold, so a resale certificate can apply to a repair. Repossessing a car does not enhance the car's value, so the same resale logic does not apply to repossession.

What this means for you

Lenders and other repossession clients

If you hire a company to repossess a vehicle (or similar collateral) after a default, you cannot use a resale certificate to avoid paying sales tax on that repossession service, even if you plan to resell the repossessed vehicle later. The Comptroller treats you as the end consumer of the repossession service.

Repossession companies

You should collect sales tax from your clients on repossession services rather than accepting a resale certificate in place of tax, unless a client's situation differs from the facts described here.

Accountants and tax professionals

The key legal point is that the resale exemption in Rule 3.354(c)(3) applies only where a taxable service is "incorporated" into (i.e., enhances the value of) tangible personal property that is itself resold -- the example given is a repair service. Debt collection and repossession services do not meet that test because they don't enhance the value of the repossessed item; they're simply a cost of recovering it.

Common questions

Q: Why can't a resale certificate be used for repossession services?
A: Because the repossession service is not incorporated into (and does not enhance the value of) the vehicle that is later sold. The resale provision in Rule 3.354(c)(3) applies to taxable services that are incorporated into resold property, such as a repair service, not to debt collection or repossession services.

Q: Who owes the sales tax -- the repossession company or the client?
A: The client (the party that hires the repossession company) is treated as the consumer of the service and owes the tax, similar to how a manufacturer that buys tooling for a job must pay tax on the tooling itself, even though the manufacturer later recovers that cost through the price of what it sells.

Q: Can the client still recover the cost of the repossession service later?
A: The letter notes this is possible in the same way a manufacturer recovers tooling costs through its sales price -- but that possibility doesn't change who owes the sales tax on the repossession service itself.

Q: Does this ruling apply to any repossession-related fee dispute?
A: This particular 1993 letter addresses only whether a resale certificate may be used for the repossession service itself. It does not address other charges a repossession company might separately bill, such as storage or duplicate-key fees.

Citations and references

Rules:

• 34 Tex. Admin. Code Rule 3.354(c)(3) (resale certificate provision; does not apply to debt collection services)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9301748L

Original ruling text

January 13, 1993

Dear *****:

Thank you for your letter of December 18, 1992, concerning the taxability of
the repossession services that you sell.

A resale certificate may not be issued by a client in lieu of paying sales tax
on automobile repossession services. The repossession services are not
"incorporated" into the automobile that is sold.

The repossession services are merely expenses that the client incurs in
securing the automobile; this service is not resold but is recouped in a manner
similar to a manufacturer who has to purchase special tooling to manufacture a
product for a customer. The manufacturer is the consumer of the tooling. As the
consumer, the manufacturer is required to pay tax on the tooling. However, the
manufacturer may recover this expense by including it in the sales price of the
manufactured product.

The resale provision in Rule 3.354(c)(3) simply does not apply to debt
collection services. This resale provision appears in all of the service rules.
An example of a taxable service that may be incorporated into an item that is
resold is a repair of tangible personal property. Services to repair broken
equipment enhances the value of the equipment. Repossessing an item does not
enhance the item's value.

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

You may call toll free 1-800-531-5441, extension 3-4683 if you have any
questions or need more information. You may write to Tax Administration
Division, Comptroller of Public Accounts.

Sincerely,

Eddie C. Washington
Tax Administration Division