Motor Vehicle and Motor Fuel Taxes: When Sales Tax Issues Overlap

Businesses that manage vehicle fleets may have to pay both motor vehicle and motor fuel taxes under Texas law. This can amount to a substantial tax burden. Recognizing that this is the case, the Texas Comptroller’s Office strictly enforces compliance in this area, and companies that have overlapping vehicle-related state tax obligations must prioritize compliance.

They must also be prepared to respond to scrutiny from the Texas Comptroller’s Office when necessary.

Sales and use tax audits can expose businesses to liability for back taxes, interest and penalties. When the Texas Comptroller’s Office determines that additional liability is warranted, these audits can also lead to account freezes, asset seizures, liens, levies, and other enforcement measures. As a result, companies subject to Texas’ motor vehicle tax and the state’s motor fuel tax need to ensure not only that they maintain compliance but also that they are prepared to affirmatively demonstrate it.

Texas Motor Vehicle and Motor Fuel Tax Compliance: An Overview

Complying with Texas’s motor vehicle and motor fuel tax laws is complex. However, it is also extremely important, and the Texas Comptroller’s Office has made clear that this complexity is not an excuse for noncompliance. The Comptroller’s Office routinely conducts motor vehicle and motor fuel-related tax audits, and it pays particular attention to companies that are required to pay both types of tax.

So, what is required? Due to the complexity of Texas’ sales and use tax laws, all companies must assess their compliance obligations on a case-by-case basis. With this in mind, here is an overview of some of the basic requirements as outlined by the Texas Tax Code and other applicable laws:

• Motor Vehicle Sales and Use Tax – Motor vehicles purchased in Texas or purchased out-of-state for use in Texas are generally subject to the state’s sales and use tax. This tax is generally 6.25 percent of a vehicle’s “standard presumptive value,” minus any trade-in allowance.
• Motor Vehicle Fuel Tax – Gasoline and diesel fuel are subject to Texas’s motor vehicle fuel tax. This tax is generally $0.20 per gallon of fuel purchased.
• International Fuel Tax Agreement (IFTA) – Under the International Fuel Tax Agreement (IFTA), companies that maintain interstate operations must report and pay motor vehicle fuel tax to all appropriate state taxing authorities. These companies must obtain an IFTA license and file a consolidated report of motor fuel taxes owed.

The Texas Comptroller’s Office strictly enforces compliance with all motor vehicle and motor fuel-related tax obligations. It uses audits to assess compliance, and it imposes additional liability for interest and penalties when warranted. This underscores the importance of proactively managing state sales and use tax compliance on an ongoing basis; and, for companies that are not in compliance (or that have concerns about compliance), it highlights the need to assess their risk and make informed decisions going forward.

Taking a Proactive Approach to Compliance

With this in mind, what can (and should) fleet operators and other companies do to effectively manage their motor vehicle and motor fuel tax-related risk? Taking a proactive approach to compliance in this area involves:

1. Conducting a Comprehensive Assessment of the Company’s Tax Obligations

Companies that are required to pay Texas motor vehicle tax and motor fuel tax should conduct a comprehensive assessment of their compliance obligations. Overlooking any potential sources of state sales or use tax liability could lead to noncompliance and the imposition of interest and penalties.

2. Identifying Any and All Applicable Credits and Exemptions

In addition to assessing their compliance obligations, companies should ensure they identify all applicable credits and exemptions. Companies may be entitled to Texas state tax credits for fuel taxes paid to other states under IFTA (or vice versa), and motor vehicle and fuel purchases may be exempt from Texas state tax under certain circumstances.

3. Implementing an Informed and Good-Faith Approach to Texas State Tax Compliance

Implementing an informed, good-faith approach to Texas state tax compliance is essential to avoiding oversights and internal failures. It is also essential for defending against a Texas sales and use tax audit. Even if a company’s efforts do not result in full compliance, being able to demonstrate implementation and adherence to an acceptable compliance program can substantially mitigate the risks involved in facing scrutiny from the Texas Comptroller’s Office.

Taking a Proactive Approach to Audit Defense

Even when prioritizing compliance, fleet operators and other companies must also prepare for a possible Texas state tax audit. Maintaining compliance does not guarantee freedom from scrutiny, and in the event of an audit, an informed and strategic defense will be critical to avoiding unwarranted liability. Among other things, taking a proactive approach to audit defense involves:

1. Maintaining Robust Documentation of Texas State Tax Compliance

Fleet operators and other companies should maintain robust documentation of Texas state tax compliance. Doing so will both allow them to assess compliance internally on an ongoing basis and prepare them to face scrutiny from the Texas Comptroller’s Office.

2. Preparing a Texas State Tax Audit Response Plan

Due to the risk of scrutiny from the Texas Comptroller’s Office, companies subject to state sales and use tax compliance should prepare an audit response plan. Ensuring that all relevant personnel know what to do (and what not to do) in the event of an audit is essential.

3. Responding Promptly and Engaging Vigorously in the Audit Process

Once an audit is underway, playing an active role in the process is critical for avoiding unwarranted and unnecessary consequences. Targeted companies should take a proactive approach to their defense and focus on using the documentation they have to pursue a favorable resolution.

Request an Appointment with the Texas State Tax Lawyers at Brown PC

At Brown PC, we provide strategic legal representation for companies facing Texas sales and use tax audits. If you would like to know more about our practice, we invite you to get in touch. Please call 888-870-0025 or contact us online to request a confidential consultation.