Does Texas sales tax apply to finance/interest charges if they aren't broken out separately from the item's price?

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/9403882L

Plain-English Summary

This letter is Comptroller John Sharp's reply to State Representative Ray Allen, who had raised a constituent complaint on behalf of "PERSON A." PERSON A had purchased a four-wheel alignment machine from "COMPANY A" and was upset that sales tax had been assessed on the full contract amount, including what he considered the financing/interest portion of the deal.

The Comptroller explained that Tex. Tax Code § 151.007(c)(4) does let sellers exclude 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 separately identified to the customer by such means as an invoice, billing, sales slip or ticket, or contract." In PERSON A's case, the contract listed the machine's price along with sales tax and a documentation fee, and then set out a flat monthly payment amount for 60 months. Although the interest amount could technically be calculated by subtracting the stated price from the total of all the payments, it was never separately stated as its own line item. Because the statute requires separate identification — not just mathematical derivability — the finance/interest charge did not qualify for the exclusion, and the tax was correctly assessed on the full amount.

The letter also gives the historical reason for the separate-statement requirement: the Legislature added it in 1981 after auditing problems arose where sellers argued that certain charges should be excluded from the sales price even though those charges were never actually identified to the customer at the time of sale. The change (along with two related amendments that improved the Comptroller's audit ability) was projected to increase state revenue.

Finally, the Comptroller left the door open: if PERSON A actually had something in writing that separately set out the financing charges, he was invited to send it to Wade Anderson, Assistant Director of Tax Administration, for further review.

What This Means For You

If you sell taxable items on credit or under installment contracts in Texas: To exclude finance, carrying, service, or interest charges from the taxable sales price, you must separately state that charge on the invoice, billing, sales slip, ticket, or contract. Simply setting a total monthly payment that implicitly includes interest is not enough — the exclusion is lost if the customer (or an auditor) has to back into the interest amount by doing math.

If you are a consumer who financed a purchase: If your contract only shows the item price and a monthly payment amount, expect sales tax to be assessed on the full contract price, even if part of what you're paying is really interest. Ask for the finance charge to be broken out in writing if you want it excluded from tax.

If you received a similar assessment: This letter shows the Comptroller will treat an assessment as correct where the financing/interest amount was not separately disclosed, even if it can be inferred by subtracting the sticker price from total payments.

Q&A

Q: Can a business avoid sales tax on interest charges just by making sure the interest amount could be calculated by the customer?
A: No. Tex. Tax Code § 151.007(c)(4) requires that finance, carrying, service, and interest charges be separately identified to the customer on the invoice, billing, sales slip, ticket, or contract. Being mathematically derivable (e.g., total payments minus stated price) is not the same as being separately stated, and the Comptroller treated tax on the full amount as correctly assessed where that separate statement was missing.

Q: Why does Texas require finance charges to be separately stated instead of just automatically excluding them?
A: According to this letter, the Legislature added the separate-statement requirement in 1981 in response to auditing problems: sellers were arguing that certain amounts should be excluded from the taxable sales price even though those amounts had never been identified to the customer at the time of the sale. Requiring separate statement made these exclusions easier to verify in an audit.

Q: What could the constituent in this letter have done differently?
A: The Comptroller noted that if PERSON A had actually been given something in writing that separately set out the total financing charges, he could submit it to the Assistant Director of Tax Administration for review — suggesting the outcome might differ if separate written disclosure of the finance charge existed.

Citations

• Tex. Tax Code § 151.007(c)(4) (excluding separately identified finance, carrying, and service charges, and interest from credit extended under a conditional sales contract or other deferred-payment contract, from taxable "sales price" or "receipts")

Original ruling text

March 21, 1994

The Honorable Ray Allen
State Representative, District 106
Texas House of Representatives
2321 Southeast 8th Street, Suite 145
Grand Prairie, Texas 75051-4100

Dear Ray:

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
COMPANY A to PERSON A.

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