Could a seller-financing dealer apply a blended tax factor below the full rate to a vehicle down payment?

Plain-English summary

The Texas Tax Administration Division rejected a seller-financing dealer's proposal to spread tax proportionally across the down payment and all scheduled payments using a blended factor below the full historical rate.

The down payment carried no interest or other nontaxable charges, so the full tax rate applied to it. Using the lower blended factor would undertax that receipt, especially if the contract ended early.

A tax-computation factor was acceptable for later scheduled payments because they included interest and other nontaxable charges.

What this means for you

Seller-financing dealers and auto-finance companies

The historical letter treated the down payment differently from installment payments containing interest.

Dealership accountants

The Comptroller rejected a method that reached the right total only if every contract ran to full term.

Common questions

Q: Could the blended factor apply to the down payment?

A: No.

Q: Could it apply to scheduled payments?

A: Yes, because those payments included interest and other nontaxable charges.

Q: Is the stated 6.25% rate current?

A: No.

Citations and references

• The letter did not identify a statute or administrative rule by number.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=MVT
• Opinion: https://star.comptroller.texas.gov/view/9404L1310G10

Original ruling text

April 1, 1994

Dear **:

This is in follow-up to your visit with Joan Hale and me concerning
calculationof tax on motor vehicle seller-financed sales. This response
has been reviewed by our counsel and audit personnel.

Basically, your position is that the down payment should not be subject
to the full 6.25% tax rate but that a pro rata amount be applied. In your
example you've computed a sales tax computation factor by adding the down
payment, any deferred down payment, and the sum of the scheduled payments
(including interest). That figure is then divided into the total tax due
resulting in a factor that is less than 6.25%. That factor would then be
applied to all payments including the down payment(s).

I do not agree with your position. The total payment is subject to the
full 6.25% tax rate. Because a down payment is not subject to charges
and because nontaxable charges are not attributed to the down payment, to
apply a "tax computation factor" less than the full tax rate would under
tax that receipt.

It is acceptable to apply a "tax computation factor" to scheduled payments
since they include interest and other nontaxable charges.

If all contracts went full term, the state would eventually receive the
full amount of tax under your method. However, if a contract does not
go full term, less tax would be collected under your proposal.

You indicated that you would like to meet if we did not agree with your
proposal. If you still wish to meet, please give me a call and I'll set
up a meeting with Comptroller staff. You may call toll free
1-800-531-5441, extension 3-4684.

Sincerely,

Curt Swenson
Tax Administration Division

NOTE: Previous Accession Number 9404509L