Motor vehicle dealerships often have some of the most complex Texas sales tax situations. This is true because auto sales often involve both a variety of products and unique rules that apply to these transactions. They also face a high audit risk because of their large transaction volume and the third-party reporting from DMV registrations. Avoiding these issues can lead to uncomfortable audits, large sales tax debts, and other distractions that take away from running your business. Our Texas sales tax guide for motor vehicle dealerships provides a clear and simple framework for understanding the many issues affecting your dealership’s sales tax obligations in Texas.
How Texas Sales Tax Applies to Your Auto Dealership’s Products and Services
Motor vehicle dealerships in Texas must register for a seller’s permit from the Comptroller’s Office, which enables them to report and remit the sales or use tax they owe on their transactions.
Motor Vehicles Sales
Texas distinguishes motor vehicle sales into two categories for the purpose of motor vehicle sales tax based on whether they are designed for on-highway or off-highway use.
On-Highway Vehicles
On-highway vehicles, such as cars, SUVs, trucks, and motorcycles are subject to the statewide 6.25 percent motor vehicle sales tax that applies to the total consideration a dealership receives from the customer. The motor vehicle tax is due within 30 days of the sale. However, Texas also allows dealerships to exclude certain charges from the total consideration they receive for sales tax purposes when separately stated, including the following:
- Motor vehicle inventory tax
- Transfer document preparation and processing fees
- Title registration fees
- Other fees required by law related to the sale or inspection of the vehicle
- County tax assessor-collector fees
The trade-in value of another on-highway vehicle can further reduce the total consideration paid for the purpose of calculating motor vehicle tax owed on a sale. For example, a customer trades in a $15,000 vehicle toward their purchase of a $30,000 vehicle. The dealership would collect and remit tax for the remaining $15,000.
Off-Highway Vehicles
In comparison, Texas applies its standard sales and use tax of 6.25 percent to the sale of off highway vehicles, which could include ATVs, dirt bikes, utility vehicles, sand rails, and other recreational vehicles. Local sales tax rates up to an additional two percent could also apply to the sale of an off-highway vehicle depending on the location. Unlike on-highway vehicles, the sales tax on an off-highway vehicle sale applies more broadly to include charges related to inventory tax, document processing fees, and title fees.
Motor Vehicle Rentals
Many dealerships also offer a variety of lease and vehicle rental options to customers. These dealerships will need to register for a Motor Vehicle Rental Tax Permit and collect tax on their gross receipts from these transactions. The amount of motor vehicle gross rental receipts tax owed will depend on the applicable tax rate, which varies based on the length of the rental. Short-term rentals (between 1-30 days) have a 10 percent rate while other rental contracts (between 31-180 days) have the standard 6.25 percent rate. Gross rental receipts do not include separately stated charges for insurance, vehicle damage, refueling, or other discounts. Additionally, local tax rates could increase the amount a dealership must collect from a customer for vehicle rentals.
Motor Vehicle Repair, Maintenance, or Remodeling Services
The third area where car dealerships are likely to encounter Texas sales and use tax concerns is the repair, maintenance, or remodeling services it provides to customers. Charges for the labor related to repair and maintenance services are not generally subject to sales tax in Texas and dealerships should not collect sales tax from customers. However, dealerships will need to pay sales tax to suppliers on the consumable supplies, materials, and parts they use to service their customer’s vehicles. In remodeling services, charges for both parts and labor are subject to Texas sales tax. These are services intended to modify the shape, style, or form of a vehicle (e.g., installing a body kit or converting a van into a camper).
Lump-Sum or Separated Invoices on Repair and Maintenance Charges
An exception may apply to dealerships that itemize the charges for parts and labor on their repair or maintenance service invoices. In these cases, the dealership must collect sales tax from customers on the charges for parts but can purchase them from suppliers using a resale certificate.
Sales Tax on Charges for Parts Under a Warranty or Maintenance Contract
The application of warranties or maintenance agreements can further complicate a dealership’s sales tax obligations related to servicing a vehicle. Sales tax will not typically apply to charges for parts related to servicing a vehicle when provided at no cost to the customer through the following arrangements:
- A vehicle’s extended warranty
- A free maintenance agreement provided through the purchase of a motor vehicle
- A goodwill or implied warranty repair made within seven days of purchasing the vehicle (unless the purchase was made “as-is”)
Dealerships that offer optional maintenance contracts to customers must collect sales tax on the parts they use to service a vehicle under these contracts. However, the charges for the contract itself is not typically taxable.
Paying Texas Sales Tax for a Motor Vehicle Dealership’s Business Expenses
In addition to collecting Texas sales tax from customers, car dealerships will also need to pay sales tax to suppliers for most items purchased to further their business operations. Common examples of these taxable business expenses will include the following:
- Marketing and advertising materials (e.g., signs, business cards, and banners)
- Give-away items (e.g., soft drinks, ready-to-eat foods, and electronics)
- Other promotional items (e.g., branded license plates, services logs, medallions, etc.)
- Tools and equipment
Dealerships may owe sales tax on a variety of services purchased in operating their business or maintaining their showrooms. Examples of these taxable services may include data processing, janitorial services, and landscaping work.
Texas Sales Tax Exemptions for Motor Vehicles
Some sales of motor vehicles through a Texas car dealership may be exempt from tax depending on the nature of the buyer or other context. For example, Texas exempts vehicles from sales tax if the buyer does not intend to use the vehicle in the state and instead plans to directly transport it to another state. A Texas motor vehicle tax exemption also applies for sales of vehicles used exclusively in timber or agriculture production, including to build or maintain roads or water facilities on a farm. Dealerships must collect a properly signed and completed exemption certificate from the customer and retain this record to support the non-collection of sales tax.
Contact Our Texas Sales Tax Professionals Today
Many different issues can affect your motor vehicle dealership’s sales tax obligations in the state of Texas. Understanding these rules is the first step toward maintaining compliance and identifying problems from past years. Auto dealerships with concerns about their Texas sales tax liability or practices can schedule a consultation with our team of professionals today. We provide efficient and specialized sales tax support to businesses in Texas facing challenges with an audit or assessment. Contact our office today to learn more.