How did Texas handle vehicle tax when a lemon-law vehicle was refunded, upgraded, downgraded, replaced, or leased?

Plain-English summary

The Texas Tax Administration Division addressed several tax consequences of returning a vehicle under the lemon law.

It did not decide whether the manufacturer had to include sales tax in the customer refund; that question was forwarded to the transportation agency.

If the returned vehicle was actually traded to the dealer for a more expensive replacement, tax applied to the price difference. If not, the full replacement price was taxed and the customer separately requested a refund of tax paid on the first vehicle.

A lower-priced replacement produced no refund based solely on the value difference. Instead, the customer filed a refund request for the returned vehicle and paid tax on the new purchase.

For a lease, the lease payments were not taxed. A Texas sale to the lessor was subject to sales tax, while an out-of-state vehicle brought into Texas was subject to use tax based on purchase price.

What this means for you

Vehicle buyers, dealers, and manufacturers

Whether the returned vehicle was a true trade-in changed the replacement's tax base.

Refund claimants

The historical claim required Form 14-202, the tax receipt, purchase documents, cancellation, and a copy of the refund check.

Common questions

Q: Was an upgrade taxed only on the difference?

A: Yes, if the returned vehicle was actually traded to the seller.

Q: Did a trade-down create a value-difference refund?

A: No.

Q: Were lease payments taxed?

A: No.

Citations and references

• Form 14-202, Texas Claim for Refund of Motor Vehicle Tax — identified as the historical refund form.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=MVT
• Opinion: https://star.comptroller.texas.gov/view/9304098L

Original ruling text

April 12, 1993

Dear ***:

Thank you for your letter regarding the handling of any refund/credit for tax
paid on a motor vehicle returned under the "Lemon Law".

Question 1: You first asked if (when a vehicle has been returned under the
lemon law) the manufacturer is obligated to include the motor vehicle sales tax
in the refund to the customer.

Response: This office does not require the manufacturer to refund the tax to
the customer; however, questions regarding the requirements under the lemon
law should be directed to the Texas Department of Transportation, Division of
Motor
Vehicles. I am forwarding a copy of your letter to that office for reply.

Question 2: You state that often the customer will opt for a replacement
vehicle rather than a full refund. Seldom is the new vehicle an exact even
trade. The customer may elect to upgrade or downgrade. You asked if the
customer upgrades, is the amount (cost) representing the upgrade taxed?

Response: If the vehicle being returned is actually traded in to the seller
(dealer), then the vehicle can be treated as a trade-in and tax will be due on
the price difference. Otherwise, tax is due on the full purchase price of the
new vehicle and a refund requested for the tax paid on the first vehicle.

Question 3: Conversely, if the customer elects a downgrade, is the amount
(cost) representing the downgrade eligible to be refunded by the state?

Response : When a "trade-down" occurs, there is no provision to refund tax
(based on the value difference) to the receiver of the lesser-valued vehicle.
Therefore, a request for refund should be submitted for the returned vehicle
and tax paid on the new purchase.

Question 4: You then asked if tax assessed on a leased vehicle is classified as
sales or use tax.

Response: There is no tax assessed on the lease payments of a lease vehicle.
Sales tax is assessed on a Texas sale of a vehicle to a lessor (tax due from
the
purchaser/lessor). For lease vehicles purchased outside of Texas and brought
into Texas, use tax is due based on the purchase price.

Question 5: Lastly, you asked if there are any special forms required by Texas
which need to be included in the application for refund?

Response: Enclosed is a copy of Form 14-202, Texas Claim for Refund of Motor

Vehicle Tax. The general instructions on the back of the form lists all
documents required for each type of refund request. In addition to the tax
collector's receipt and buyer's order or purchase invoice (required on all
refund requests), a request due to lemon law cancellation must include a copy
of the cancellation and copy of the refund check received.

If you have any questions, please don't hesitate to write the Tax
Administration Division or call me toll free at 1-800-531-5441, Ext. 34663.

Sincerely,

Joan Hale
Tax Administration Division