A towing company asks whether towing/transfer charges billed in connection with vehicle repossessions — including a "second tow" from a storage facility to an auction — are taxable debt collection services or nontaxable towing/transportation.

Plain-English summary

A towing company asked the Comptroller about two repossession-related scenarios and whether certain towing/transfer charges were taxable debt collection services or nontaxable towing.

Scenario 1 — tow from dealership to auction. A lender needing to repossess a vehicle has the borrower voluntarily drop it off at the dealership; the lender then hires a towing company to move the vehicle from the dealership to an auction. The towing company believed it was providing only towing, not repossession, since the lender already had possession once the vehicle reached the dealership. The Comptroller's response: it depends on what the towing company was actually hired to do. A person paid for repossession services is selling a taxable debt collection service, and sales tax applies to the total charge — including any separately stated transportation-to-auction charge. But if the lender only called the towing company after the vehicle was already delivered to the dealership and the lender already had access to it, then only a nontaxable transportation service is being provided, because no repossession occurs in that case.

Scenario 2 — "second tow" from storage facility to auction. Here the towing company itself repossesses the vehicle and tows it to its own storage facility, holds it during the borrower's ten-day redemption period, and then tows it to the auction. The taxpayer agreed the repossession, first tow, and storage fee were taxable, but argued the second tow (storage facility to auction) was a separate, nontaxable towing charge since the lender had taken possession by directing storage and auction timing. The Comptroller disagreed: because the towing was billed by a provider of repossession services, Texas Tax Code Section 151.007(a)(7) and (b) does not allow that second tow to be excluded from the total taxable price of the debt collection service.

The letter also references an earlier Comptroller letter (from Larry Koenig, dated November 24, 1992) and two Administrative Hearings (No. 33,923 and No. 34,327) as examples addressing the taxability of towing charges billed by repossession-service providers.

What this means for you

Towing and repossession companies

Whether your charge is taxable turns on what you were actually hired to do, not on how you label the invoice line item. If you are hired to repossess a vehicle — including towing it away and later transporting it to auction — the whole charge, even separately stated "tow" or "transfer" fees, is treated as part of one taxable debt collection service and cannot be carved out as nontaxable transportation.

Lenders and finance companies

If you truly already have possession of a vehicle (for example, a borrower voluntarily drops it at a dealership) and you separately hire a hauler just to move it somewhere, that transportation-only charge is not taxable. But if the hauler is the one who actually retrieves the vehicle from the borrower, the transaction is a repossession, and sales tax applies to the full charge, including any later "second tow" to an auction.

Businesses billing multi-step repossession jobs (repossess, store, then re-tow to auction)

Don't assume that the final leg of the job — moving the car from your storage facility to auction — escapes tax just because it looks like a standalone tow. Under Section 151.007(a)(7) and (b), that second tow stays part of the taxable total if it's billed by the party that performed the repossession.

Common questions

Q: Is towing a repossessed vehicle always a taxable debt collection service?
A: Only if the towing company (or whoever bills the charge) actually performed the repossession. If someone else already had possession of the vehicle and only hired a hauler to move it, that's a nontaxable transportation service.

Q: Can a repossession company avoid tax on part of its charge by separately stating a "transfer" or "second tow" fee?
A: No. Under Texas Tax Code Section 151.007(a)(7) and (b), the total charge for a taxable debt collection service can't be reduced by carving out a separately stated towing/transfer charge when that towing was billed by the repossession-services provider.

Q: What made the difference between a taxable repossession and a nontaxable tow in Scenario 1?
A: Whether the towing company was hired to retrieve the vehicle from the borrower (repossession, taxable) or was merely asked to move a vehicle the lender already had access to (transportation only, nontaxable).

Q: Can I rely on this letter for my own towing/repossession business?
A: No. This opinion is based on the facts submitted, and other facts, though similar, may yield different results; STAR letters bind the Comptroller only as to the taxpayer to whom they were issued.

Citations and references

Statutes:

• Texas Tax Code Section 151.007(a)(7) and (b) (charges that cannot be excluded from the total taxable price of a service)

Other Comptroller materials referenced in the letter (not attached here):

• Letter from Larry Koenig, dated November 24, 1992 (total charge by a repossession company to a financial institution is taxable)
• Administrative Hearing No. 33,923
• Administrative Hearing No. 34,327

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9701949L

Original ruling text

January 31, 1997

Dear ***:

Thank you for your letter concerning two scenarios relating to towing and
repossession of vehicles.

Scenario 1: Lender needs to repossess a vehicle. Lender has the borrower
drop the vehicle off at the dealership. Lender prepares paperwork to have
the vehicle transported to an automobile auction. A towing company is
hired to transport the vehicle from the dealership to the auction site.

Your client, the towing company, does not believe that he is providing any
repossession services in this case. He is providing towing services only.
You believe that the lender has possession of the vehicle once it is at the
dealership.

Question: Do you agree that the repossession has taken place once the
automobile has been dropped at the dealership?

Response: No. A person paid for repossession services is selling a taxable
debt collection service. As such, sales tax must be collected on the total
charge to the lender including separately stated charges for transportation
to an auction site. See the last sentence of Larry Koenig's November 24,
1992, letter stating "However, the total charge made by the repossession
company to the financial institution is taxable." However, your next
question addresses whether repossession services even occur in the first
scenario.

Question: Do you agree that the tow from the dealership to the auction
is merely a tow and not a repossession?

Response: Perhaps. The most important question is whether the lender hired
the "towing company" to repossess the vehicle? For instance, did the lender
merely call the towing company after it was already delivered to the
dealership and the lender had access to their vehicle? In that circumstance,
only a nontaxable transportation service is provided because no repossession
service occurs.

Scenario 2: Lender needs to repossess a vehicle. Lender has the towing
company repossess the vehicle and tow it back to the towing company's
vehicle storage facility. The vehicle is stored at the towing company's
storage facility until the ten day period in which the borrower can pay
for the vehicle and retake possession has expired. The towing company
is then instructed to tow the vehicle to the automobile auction.

Your position under this scenario is that the repossession, towing to
the storage facility and fee for storing the vehicle are taxable to the
lender. However, you feel that the lender does in fact have possession
of the vehicle since they determined where to store the vehicle and
when to deliver it to auction. You do not feel that the tow from the
storage facility to the automobile auction is taxable.

Question: Do you agree that the tow from your storage facility to the
auction is a tow and not a repossession?

Response: No. If the towing is billed by a provider of repossession
services, Texas Tax Code Section 151.007(a)(7) and (b) does not allow
the subsequent towing (second tow) to be excluded from the total price
of the taxable service. I have enclosed Administrative Hearing
No. 33,923 and Hearing No. 34,327 that both address the taxability of
towing charges billed by a provider of repossession services.

This opinion is based on the facts you submitted. Other facts, though
similar, may yield different results.

You may call me toll free at 1-800-531-5441, ext. 5-0030. The direct
line is 512/475-0030. You may also write to Tax Policy, Comptroller
of Public Accounts.

Sincerely,

David Somerville
Tax Policy Division