Is a finance/interest charge excluded from Texas sales tax if it isn't broken out separately on the contract or invoice?

Subject

Finance/Interest Charge — Must Be Separately Stated In Contract, Invoice, Billing, Sales Slip, Ticket

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9403680L

Plain-English Summary

This letter is the Comptroller's response to a state legislator who had inquired, on behalf of a constituent ("PERSON A"), about why sales tax was charged on the finance/interest portion of a purchase. The Comptroller explained that the tax was correctly assessed.

Tex. Tax Code § 151.007(c)(4) excludes finance, carrying, and service charges — and interest from credit extended under a conditional sales contract or other deferred-payment contract — from the taxable "sales price," but only if those charges are separately identified to the customer by means such as an invoice, billing, sales slip, ticket, or contract.

In PERSON A's case, he purchased a four-wheel alignment machine (identified in the letter as sold by Textron). The contract set out the machine's price along with the sales tax and a documentation fee, and then listed a monthly payment amount for 60 months. While the interest amount could technically be calculated as the difference between the total of the 60 payments and the machine's stated price, the interest was never specifically and separately set out on the documents as the statute requires. Because the finance/interest charge was not separately identified, it did not qualify for the exclusion, and tax was properly charged on the total amount.

The letter also notes that this separate-statement requirement was added to the sales tax law in 1981 by the Legislature specifically to address auditing problems: companies were arguing that excluded charges (like finance charges) should be excluded from the sales price even when those charges were never actually identified to the customer. The amendment was projected to increase state revenue, together with two related amendments that improved the Comptroller's ability to audit these transactions.

Finally, the Comptroller left the door open: if PERSON A could produce something in writing that had, in fact, separately set out the total financing charges at the time of the purchase, he was invited to send it in for reconsideration.

What This Means For You

If you are a seller financing a sale (e.g., under a conditional sales contract or installment contract): To exclude your finance, carrying, service, or interest charges from the taxable sales price, you must separately state that charge — as its own line item — on the invoice, billing, sales slip, ticket, or contract given to the customer. Simply setting a monthly payment amount that implicitly includes interest is not enough, even if a customer (or auditor) could back into the interest amount by doing the math.

If you are a buyer who financed a taxable purchase: If your interest/finance charge was not separately broken out on your paperwork, tax was likely properly assessed on the full amount, including the built-in finance charge. If you have documentation showing the finance charge actually was disclosed separately at the time of sale, that may support a different result — the Comptroller in this letter invited exactly that kind of follow-up evidence.

If you are an auditor or accountant reviewing contracts: Look for an explicit, separately identified finance/interest/carrying/service charge line. A charge that is only mathematically derivable from the total payments versus the stated price does not meet the § 151.007(c)(4) separate-statement requirement.

Q&A

Q: Is interest or a finance charge on a deferred-payment purchase always excluded from Texas sales tax?
A: No. Under Tex. Tax Code § 151.007(c)(4), such charges are excluded from the taxable sales price only if they are separately identified to the customer on the invoice, billing, sales slip, ticket, or contract.

Q: The buyer could calculate the interest by subtracting the machine's price from the total of the payments — isn't that "separately identified" enough?
A: No. In this letter, the Comptroller held that even though the interest could be derived mathematically as the difference between the payment totals and the stated price, that is not the same as specifically and separately setting out the finance/interest charge as the statute requires. Tax was assessed on the full amount.

Q: Why does Texas require finance charges to be separately stated at all?
A: The letter explains that this requirement was added by the Legislature in 1981 to fix an auditing problem — sellers were claiming charges were excluded from the sales price under this section even though those charges were never actually identified to the customer at the time of sale, making the exclusion impossible to verify.

Citations

• Tex. Tax Code § 151.007(c)(4) (excluding separately-identified finance, carrying, and service charges, and interest on deferred-payment contracts, from the taxable sales price)

Original ruling text

March 21, 1994

Dear **:

Recently, you inquired about a problem one of your constituents, PERSON A, was
having concerning the tax on finance charges on a purchase he made. While I
sympathize with PERSON A, the tax was correctly assessed.

Sec. 151.007 (c)(4) of the sales tax act excludes finance charges on contracts.
However, the section states:

(c) "Sales price" or "receipts" does not include any of the following if
separately identified to the customer by such means as an invoice, billing,
sales slip or ticket, or contract:

(4) finance, carrying and service charges, or interest from credit extended on
sales of taxable items under a conditional sales contract or other contract
providing for the deferred payment of the purchase price;

According to PERSON A's letter, when he purchased the four-wheel alignment
machine, the price of the machine was set out together with the sales tax and
documentation fee. A monthly payment was then set out for 60 months. While the
interest could be assumed as the difference between the amounts set out and the
sums of the payments, the interest was not specifically set out as required by
the above section of the sales tax act.

This requirement was added to the sales tax in 1981 by the Legislature because
of auditing problems being encountered where excluded portions of the sale
price were not set out. The companies were arguing that the items excluded by
the section should be excluded from the sales price even though they were never
identified to the customer. At that time, the revenue estimate was increased by
$** per annum based on this amendment coupled with two other
amendments which facilitated our ability to audit.

I hope this satisfactorily explains why tax was set up on the total charges by
Textron to PERSON Al.

It may be that PERSON A was, in fact, advised as to the total financing
charges. If he was given something in writing setting out what they were,
please send it to Wade Anderson, Assistant Director of Tax Administration, 111
East 17th Street, Austin, Texas 78774, or call him at 1-800-531-5441, extension
3-4004.

Sincerely,

JOHN SHARP
Comptroller of Public Accounts

cc: Wade Anderson, Assistant Director, Tax Administration
Charles Johnstone, Manager, Tax Administration