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November 17, 2008
RE: 08133264 – STORAGE FEES ON ABANDONED VEHICLES
Dear Ms. Tredway:
This is in response to your inquiry dated May 8, 2008, as supplemented by further information on May 16th, 22nd, and 23rd. As I understand it, your membership is concerned with having to collect, report and remit sales tax assessed on storage charges relating to abandoned motor vehicles that have been towed to and stored by a vehicle storage facility (VSF). To date some member facilities have not collected, reported or assessed sales tax on the storage charges because when an abandoned vehicle is disposed of at public sale, the proceeds from the sale are remitted to the VSF by the exempt governmental agency that conducted the sale. It is the VSF’s understanding that by remitting the proceeds to the VSF, the agency is making a purchase. Such a purchase made by an exempt entity is not subject to Texas sales or use tax.
You state that a storage charge for an abandoned vehicle should be exempt from sales tax because the service is being purchased by a tax exempt governmental agency. In support of this, you cite that payment of the VSF’s storage charges are usually paid by check drawn on a law enforcement agency’s account. To support your membership’s failure to collect sales tax, your membership relies on a letter opinion dated January 17, 1997 (Letter Opinion No. 9701255L (1997)), which states as follows:
Even though you have stored the vehicles at the request of the city (a tax exempt entity), the storage charges are considered paid by the vehicle’s owner (a taxable entity) when you receive auction payouts. Any amounts received directly from the city or other political subdivision are exempt.
- If read in isolation, the second sentence does seem to give some support to your membership’s position. But when read in its entirety, that letter states very clearly that storage charges pertaining to abandoned vehicles sold at public auction or sale are taxable. Furthermore, the letter sets out examples on how to calculate the sales tax when the proceeds from the sale both exceeds and falls short of the VSF’s charges. Although the first sentence of that paragraph specifically states—and the letter generally states—that the storage charges are deemed to have been paid by the owner who abandoned the car even when the VSF receives the auction payout (and thus, is taxable), your membership has focused on the second sentence, which correctly states that any amounts received from a governmental agency are exempt.
The opinion issued in 1997 was based on the facts as understood by the Comptroller’s Office at the time, and it was assumed that some vehicles that incurred storage charges actually belonged to a political subdivision whose purchases of taxable items are exempt from sales tax under section 151.309 of the Texas Tax Code. The second sentence was directed to that possibility and did not negate the first sentence. It merely addressed the fact that when a governmental agency conducts a public sale and remits the proceeds from that sale to a VSF, it will invariably be in the form of a check drawn on that agency’s account. It should not be inferred by your memberships that those proceeds represent exempt purchases made by the agency on behalf of its constituency.
Under Comptroller Rule 3.322(g)(3), an exempt governmental agency can purchase a taxable service such as a vehicle storage service tax free without having to issue an exemption certificate as long as the agency issues a written purchase voucher for the purchase. The intent of that second sentence was to express the Comptroller’s opinion that charges for storage services purchased by a governmental agency to store its own vehicles are exempt from sales tax. The first sentenced expressed the Comptroller’s opinion that sales tax is due on the storage charges for abandoned vehicles and that it considers the owner of the vehicle at the time the vehicle is taken into storage to be the purchaser of the service. Even though the funds to pay the charges are drawn on the account of a governmental agency, the funds are derived from the proceeds of the public sale of the owner’s vehicle.
It is the longstanding policy of the Comptroller that storage fees on abandoned vehicles are subject to sales tax no matter how the storage fees are paid or on what account the funds are drawn.
You state that since the VSF has no contact with the owner, it really does not matter in those instances whether the receipts from the auction are by a check drawn on a buyer’s account or a law enforcement agency (LEA) account and the results should not be treated differently. As a point of fact, the proceeds are not treated differently. The proceeds drawn on an LEA account are taxable, as are those drawn on a buyer’s account.
Although the VSF believes that there is no contact between the owner and the facility and that it is dealing exclusively with an LEA, that is not correct. Under the Transportation Code and the Occupations Code, the VSF is in contact with the owner of an abandoned vehicle. Under the applicable code section, the VSF is required to give legal notice to the owner or lienholder that it is in possession of the vehicle. This notice has legal consequences. Failure of an owner or lienholder to claim an abandoned vehicle within the statutory time frame constitutes a waiver by the owner or lienholder to all right, title and interest in the vehicle and more than that, the owner or lienholder is deemed to having given consent to the sale of the vehicle at a public auction. Any sale at a public auction is done on behalf of the absent owner or lienholder and any funds are held in trust subject to any fees incurred (including taxable storage fees) by the owner prior to the sale of the vehicle. If the owner appears and pays all required charges, he may take possession of the vehicle, subject of course to the payment of all applicable charges and sales or use tax. But if he does not appear, he consents to the sale of his vehicle and the sale is still subject to those charges and the applicable sales tax.
Under section 2303.151 of the Occupations Code, the VSF must provide written notice to the registered owner and the primary lienholder when an abandoned vehicle has been towed to its facility for storage without the owner’s consent. This notice provides among other things the date that the vehicle was accepted for storage, the first day for which a storage fee was assessed, the daily storage rate and the type and amount of other charges to be paid when the vehicle is claimed. Under section 2303.154 the VSF is required to give a second notice if the owner does not claim the vehicle or if it is not taken into custody by a LEA under Chapter 683 of the Transportation Code. That notice, like the notice provided in section 683.014 of the Transportation Code, states that the failure of an owner to claim an abandoned vehicle within the statutory time frame constitutes a waiver by the owner or lienholder to all right, title and interest in the vehicle and more than that, the owner or lienholder is deemed to having given consent to the sale of the vehicle at a public auction. Even though you assert that there is no contact between the VSF and the owners of abandoned vehicles, by operation of statute there is sufficient contact to establish a basis for a taxable transaction. Although you are focused on the probability that an abandoned vehicle owner will never respond to the notice, there is always a possibility that an owner will show up to claim his property and pay his storage fees including sales tax. In either event, he has incurred a taxable storage service by abandoning his vehicle.
You also state that the VSF may dispose an abandoned vehicle under provisions of Chapter 70 of the Property Code relating to a garageman’s lien. You state once again that the VSF has no dealings with the vehicle owner and has not entered into any transactions with the owner for the performance of any taxable services.
But once again, the performance of the VSF’s motor vehicle storage services arises under operation of law. Under subsection 70.003(c), a garageman with whom a motor vehicle is left for care is allowed a lien on that motor vehicle for the care (that is, storage) of that vehicle, including reasonable charges for towing to the storage facility. As holder of the lien, the garageman is required to give notice of the lien to the last known registered owner and each lienholder of record. That notice among other things must include a request for payment, request that the vehicle be removed, give the vehicle’s location, and state the amount of accrued charges. If the vehicle is not claimed, the VSF may sell the vehicle under the provisions of section 70.006. If it is claimed, the owner must pay all charges including storage fees together with sales tax. It does not matter if the abandoned vehicle is not claimed and is ultimately sold at a public sale. The taxable transaction occurs when the vehicle is abandoned, towed to and stored at the storage facility. The garageman’s lien is the means by which the garageman secures his payment for storage fees in the event that the owner does not claim the vehicle and the garageman has to perfect his lien and ultimately sell the vehicle. The taxable transaction takes place prior to the perfection of the lien and the subsequent sale.
Your May 16th supplement illustrates the misunderstanding that you say is typical of the relationship between the VSF and the LEA. You state that at times the LEA will have custody of the vehicle that is being stored at the VSF. (I assume that you mean that the vehicle was towed in under the authority of the LEA). You also state that it is the LEA that establishes the guidelines and procedures for the auction and for the satisfaction of the garageman’s lien, and it is the LEA that actually handles the sale of the vehicle and then subsequently remits part of the proceeds it receives from the sale to the VSF. You state that both the VSF and LEA have operated under the misconception that sales or use tax was included in the amount of the perfected lien. In determining the amount that law enforcement pays the VSF, it deducts that sales tax amount from the payment it makes to the VSF since it is exempt from paying sales tax. You cited the following example:
VSF Invoice for Abandoned Vehicle:
Towing fee $200.00
Impoundment fee $ 20.00
Notification fee $ 10.00
Storage fee $500.00
Storage sales/use tax (8.25%) $ 41.25
$771.25
Abandoned Vehicle auctioned for $800.00
Law Enforcement retains $10 as allowed by statute
Law Enforcement reimburses VSF as follows:
Towing fee $200.00
Impoundment fee $ 20.00
Notification fee $ 10.00
Storage fee $500.00
$730.00
Law Enforcement holds $60 for 90-days in case original vehicle owner makes a claim.You state that the LEAwithholds $60 for 90 days in the event that the original vehicle owner claims the vehicle during the statutory period for making a claim. If the vehicle is unclaimed after the required period has lapsed, the $60 held by the LEA is credited to the LEA’s account. You state that it has been the understanding of the VSF and the LEA that the proceeds from the sale did not need to include sales tax because the LEA is a tax-exempt entity not required to pay sales tax on its purchases. As such, the LEA does not include that amount in its remittance to the VSF.
On the above transaction, the LEA should have remitted $772.90 to the VSF, which includes the $730.00 total charge plus sales tax on the storage charge ($41.25 sales tax) and the impoundment fee ($1.65 sales tax). The LEA should have retained only $27.10 of which $10 would cover the costs of the public sale. As discussed above, the LEA was not the purchaser of the vehicle storage services. Those services were purchased by the owner of the abandoned vehicle by operation of statute. When the vehicle is sold at a public sale, if the LEA collects an amount sufficient to cover all costs incurred by the VSF including sales tax, it must remit an amount to the VSF sufficient to cover its total charges plus the sales tax. In the above example, the Comptroller’s Office looks to the VSF to collect, report and remit the $42.90 sales tax on the $720 charges for impoundment and storage. No tax is due on the notification fee. If not remitted, an assessment will be made against the VSF in that amount. The VSF’s recourse is to seek the sales tax from the LEA that failed to forward the sales tax portion of the proceeds.
Your next concern arises from the methodology used to calculate the sales tax when the amount of the proceeds from the public sale falls short of all of the statutory charges and fees. Your membership believes that the sales tax should be calculated differently, particularly when an abandoned vehicle is towed to the VSF by an independent towing company.
You state that, in many cases, tow trucks delivering vehicles to a VSF are independent towers and that weekly the VSF settles up with and pays the towers a towing fee for each vehicle towed. If the vehicle is not claimed by the owner, the towing charge becomes a part of the garageman’s lien. When the car is sold at auction and the total amount of the proceeds exceeds the garageman’s lien, there is no problem. But when the amount is less, you state that a question arises on how to calculate the towing fee when considering the amount of the sales tax owed on the storage charge. You state that the Comptroller’s policy has been to report and pay the tax proportionately to the total unpaid bill. You state that you do not understand why this method should be used, especially in situations where the towing fee has already been paid out-of-pocket by the VSF.
Unfortunately, that is a question outside of my jurisdiction and I cannot give you an answer. I can point out that basically it is a question that involves the business practices of a VSF vis-à-vis the independent towing company. Either the VSF will have to change its business practices and settle up with a towing company after the sale of a vehicle, or it will have to accept a loss as a cost of business. If the sale proceeds fall short of the costs, the loss will either be shared or not depending on the business practices in place.
This opinion is based on the information presented. If there are additional or different facts, the opinion could change.
I hope this answers your question. A complete set of rules, our publications, forms and the entire text of the Tax Code are available through the Comptroller’s website at http://www.window.state.tx.us.
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If you have any questions or need more information, you may reply by email directly to:
tax.help@cpa.state.tx.us, or call me toll-free at 1-800-531-5441, extension 6-2065. I am always available to help you.
James P. Mathieson
Tax Policy Specialist
Tax Policy Division
Texas Comptroller of Public Accounts
P.O. Box 13528
Austin, Texas 78711
512.936-2065 (phone)
512.475.0900 (fax)
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