Did a vehicle-loan co-signer owe Texas motor vehicle sales tax when the buyer defaulted and the co-signer paid the loan and took title?

Plain-English summary

The Texas Comptroller said a true loan co-signer owed motor vehicle sales tax when the original buyer defaulted, the bank repossessed the vehicle, and the co-signer paid off the loan and took title.

The result depended on the person being only a co-signer—not a co-borrower or co-purchaser. A co-signer guaranteed the financing but was not an original purchaser and was not initially liable on the note.

The original purchaser owed tax on the first vehicle purchase. The later transfer of title to the co-signer was a second taxable transaction.

What this means for you

Vehicle loan co-signers

Protecting your credit by paying the debt did not give you original-purchaser status under this letter.

Banks and auto finance companies

Distinguish guarantors from co-borrowers and co-purchasers in the loan and title documents.

Title services

The tax result followed the co-signer's new acquisition of title after repossession.

Common questions

Q: Was tax due when the co-signer took title?

A: Yes.

Q: What if the person was a co-borrower or co-purchaser?

A: The letter did not decide that different situation.

Q: Why was this a second transaction?

A: The co-signer was not an original purchaser and acquired title only after default.

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/9801448L

Original ruling text

January 15, 1998

Dear Ms. **:

Thank you for your request for motor vehicle tax information.

Facts: An individual co-signs a bank note for the financing of a motor
vehicle. Purchaser defaults on the loan and the bank repossesses the vehicle.
To protect his credit, the co-signer agrees to pay off the loan and take
possession of the vehicle.

Question: If sales tax was paid on the original purchase price, is tax due
again in the second transaction?

Response: Presuming the individual is a co-signer (not a co-borrower or
co-purchaser) on the loan, tax is due when the co-signer takes title to the
vehicle. A co-signer has only guaranteed the financing, and was not a
purchaser or initially liable for the note. The original purchaser was liable
for the motor vehicle sales tax on the first purchase. The second transfer (to
the co-signer) is a second taxable transaction.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion could change.

If you have any questions, please do not hesitate to call one of our tax
specialists toll free at 1-800-252-1382. The direct number is 512/463-4600.
You may also write to Tax Policy Division, Comptroller of Public Accounts.

Sincerely,

Joan Hale
Tax Policy Division