IMAGINE A SCENARIO THAT OFTEN UNFOLDS in tax assessor-collectors offices across the state: Joe Citizen has just purchased a used vehicle for his son, who just graduated high school. It’s a good car, a 2000 Acura Integra with normal wear and tear that Joe purchased for $7,000 from a neighbor down the road. Joe thinks he got a good deal on the car, but spending $436 dollars more on sales tax just doesn’t seem appealing.
Joe has purchased quite a few cars in his day, and he knows he can get by paying less sales tax. The plan is to go into the county tax assessor-collectors office and maybe fudge the sales price, just a little bit. Maybe he’ll say it’s worth $3,500 or $2,000. Or, he could say it was a gift and just pay the $10 vehicle registration gift tax.
Joe walks into the county tax assessor-collectors office and fills out his registration forms, stating that his son’s new car was worth just $3,000 - $187.50 in sales taxes. Joe thinks it’s a good number; less than half what he paid for it, but not incredulous enough that it’d be totally unbelievable to the clerk behind the desk.
But then the clerk does something she hasn’t done before. She looks up the make and model and year of his car, then informs the man that, according to national blue book prices, the vehicle is worth more than $7,000, and that a new law states that he must pay sales taxes based on 80 percent of those values. For Joe, that means having to pay $350 in sales taxes.
Joe whines, he moans, he complains, but in the end, he pays the $350 and leaves. His plan to save money by low-balling his vehicle’s sales price was just foiled – this time.
Next time, he thinks to himself, he’ll just say the vehicle was a gift.
Fixing loopholes
Until now, Joe would have walked into the tax assessor-collectors office, signed a document known as the “Texas Title Application (I304)” stating the amount he paid for the car, paid his $187 and left. Because of the assumption that people routinely report lower sales prices than they actually paid, the I30U has often been referred to as the “liars affidavit.” But a new law, House Bill 4, passed during the last special legislative session, will change that process in order to fix loopholes in the system that were preventing the state from collecting as much motor vehicle sales tax as it should have been and were allowing residents to fudge their vehicles values without repercussion.
House Bill 4 changes the way in which motor vehicle sales tax is assessed for sales not involving professional car dealers, as of Oct. 1. Instead of going by a person’s word to get a vehicle’s value and having buyers fill out the I304U forms when paying their sales taxes, each vehicle will now have a “standard presumptive value,” based on the vehicle’s nationally-accepted blue book private party price.
As of Oct. 1, those working in the county’s Tax Assessor-Collector’s office will have to use the blue book price to determine sales tax if the vehicle was purchased from a private seller, unless the given sales price of the vehicle is at least 80 percent of the listed value.
The changes in the law could generate as much as an additional $30 million for the state’s general-revenue related funds in fiscal year 2007, and as much as $43 million a year by 2010, according to its fiscal note. To get that additional revenue, many people who either got good deals on their cars or who planned to beat the system could end up paying a higher sales tax than they expected. And any time that happens, those running the desk at the tax assessor-collectors office brace themselves to look like the bad guy.
“Anytime we have customers that pay one more dollar, they get upset,” said Alma Russell, the motor vehicle director in Williamson County. “We take the flack, people take out frustrations on the front line, and they word things personally. They accuse you of changing the law, you are responsible. They make scenes, they grab their papers, they storm out, they swear.”
But while bracing themselves for the inevitably upset patrons, for the most part, both Russell and her county’s tax assessor-collector, Deborah Hunt, are supportive of the bill, stating that it is the first step to correcting a broken tax.
“I think this will be difficult to implement in terms of customer reaction… but I think it was something that needed to be fixed,” Hunt said. Legislators, when drafting the bill, took care in making sure that those in Russell’s position had some leeway in dealing with customers. In its earliest forms, the law had been rigid – customers would have had to pay sales tax on the full standard presumptive value of the vehicle, even if it had been purchased from a dealer at a discount. Tax assessor-collectors and their employees around the state had worried that such rigidity would make them too much of a policeman and would create difficult situations with customers.
During the legislative process, the legislators added in the 80 percent clause in order to give buyers more leeway in case they got a good deal or in case the vehicle in question is worth less than the blue book value for whatever reason. They also allowed for buyers who believe their car is worth less than the 80 percent value to get a professional appraisal on the vehicle within 20 business days of purchasing the vehicle. If the buyer goes through the hassle of the appraisal, whatever value the car has been appraised at will be used to determine the sales tax, and not the standard presumptive value.
“What this bill originally said was a little bit hard, because it just said ‘standard presumptive value,’” Rep. David Swinford, the bill’s sponsor, told the House Ways and Means Committee as it was going through the drafts, describing why he and others had eventually decided to limit the new law to only private party sales and to give more leeway than was originally allowed. “You walk in, and it doesn’t matter what kind of deal you made on your car, if it wasn’t what the book said, you paid it. What we did was we said, okay, we trust our car dealers to bring in the deal, we’ve all dealt with car dealers and they give you a deal sheet, and whatever is on that deal sheet should be what goes all the way through. “We are going to have people wearing the doors out at the clerk’s office, going back and forth, trying to get an appraisal and all this stuff,” he went on. “We needed some latitude, and so what we did, is we said that they had 80 percent of the presumptive value. If it’s 80 percent or more of that value, then they could just settle it right there and not have to go anywhere else (to get an appraisal).”
According to a draft set of rules published by the Comptroller’s office on July 28, the appraisal fee can be anywhere from $100 to $300 dollars for vehicles not including motorcycles (the published appraisal fee for motorcycles in the draft rules was $40 to $300). However, those prices had not been finalized by the County deadline, and the rules left it up to the dealer doing the appraisal to determine where in the given range the appraisal fee would actually be. Some, like Sharon Hollingsworth, are worried that the range of acceptable appraisal fees could lead to more upset customers.
“You know these adjusters are probably going to charge the high end of the fee,” said Hollingsworth, the office manager in the Randall County tax assessor-collectors office. A $300 appraisal, which is roughly equal to the amount of taxes that would be collected on a $4,000 car may be a significant amount of money to a purchaser who obtained a cheaper vehicle. It could cause some buyers some frustration if the appraisal fee is higher than the amount of sales tax they are trying to protest. Debbie Wheeler, a tax policy expert who works in the Comptroller’s office, said the appraisal fees were meant to be as fair as possible. “The fees were not set to deter people from seeking appraisals,” she said. “They are intended to cover the reasonable costs for labor and expertise necessary to obtain a valid appraisal when the purchaser believes that a used motor vehicle is worth less than 80 percent of its standard presumptive value due to such things as mechanical problems or body damage.”
More loopholes to go
While the purpose of the new law is to close loopholes, legislators refused to address several others during the process, the biggest one of which could be the provision that vehicles given as gifts do not warrant an actual sales tax, only a flat $10 fee. Unless the vehicle is only worth $62.50, that’s a steal.
Most of the fraudulent motor vehicle sales tax transactions that take place currently have to do with purchasers claiming their new vehicles were actually gifts. Both Russell and Hollingsworth estimated that about one-third of their transactions were fraudulent, mostly in that way.
Both said they fear that attaching any sort of definitive value to a vehicle may actually raise the number of fraudulent transactions that take place, since it creates an additional financial incentive to claim the vehicle as a gift. “I don’t think it will solve the problem of fraud,” said Deborah Hunt, Williamson County’s tax assessor-collector, before the new law actually took effect.
“I think we see a lot of gifts right now, and I think we are going to see more,” added Russell, stating that she already believes that about a third of the motor vehicle sales tax collections are fraudulent. “You can just tell. A lot of times people will question, ‘Well, what should I put here? Is it cheaper to do a gift?’ Sometimes, they’ll discuss it with each other. We overhear things.” While Rep. Swinford admitted that those wanting to take advantage of the system can still do so, he also said fixing the gift loophole currently creates more bad than good, and would cause those collecting the taxes even more grief and policing work to implement.
“To tighten that up, it makes the county assessor-collector’s office an investigator, and that wasn’t the purpose of the bill,” Swinford said. “We tried to make it as easy as possible on our county tax folks, so that they would have an easy time with it. We tried to make it has good as we could, make it as fair as we could, and as easy to administer as we could.”
The issue of the gift fee did come up in committee hearings, but more in a wearen’t- getting-rid-of-it way than a this-issomething- we-should-look-at way.
Hollingsworth said that while she understood the dilemma in fixing the gift loophole – that people should be able to do what they want with their property, including giving it away – she still hopes the “gift situation” is addressed in the future. “There are always going to be holes, so we just have to keep patching, fixing those holes, to try to stay ahead of the unscrupulous,” she said.
Down to the wire
By law, House Bill 4 will be effective as of Oct. 1. As of County Magazine’s publishing deadline on Aug. 15, the Texas Department of Transportation was still working to determine the most appropriate electronic software available to generate the standard presumptive values of vehicles.
One obstacle faced during the process was that the standard presumptive value had to be based off of private party transaction figures, and not other values that blue book vendors normally provide, such as wholesale values, or trade in values or motor vehicle auction values. Private party transaction values are normally lower than other prices listed by bluebook vendors, said Mike Craig, the deputy director of TXDOT’s Vehicle, Titles and Registration division.
“If I were to sell my vehicle to you, I wouldn’t report that value to anybody,” Craig said. “Some of these vendors have to come up with some calculation that they can apply to (create) private party values.” Hopefully, the method of calculation the chosen vendor utilizes will also be fairly simple, Craig said. Instead of asking for specific details about a car’s history, accident record and modifications, Craig said in mid August that TXDOT would focus on software that generated values based off of just one or two figures, such as mileage, make and year. That way, it would be easily implemented throughout the state.
“If you have to put in five criteria, such as, ‘I’ve got custom seats,’ or ‘I’ve got custom wheels,’ then you are spending an inordinate amount of time going through the process,” Craig said. “We are heading toward a minimalist approach, for the counties, so they can process quickly and present a value that in most case should not be a problem for anyone, including the private party.”
At the time County went to press, TXDOT was considering software from about five different vendors, he added. Based on those vendors and their software, he said that no county tax assessor-collectors would have to manually look up the standard presumptive values, and that the amount of training necessary to use the software that is selected would be minimal. “We are basically going to want the vendors to provide the value electronically, because it is much more efficient,” Craig said. Hollingsworth said success of the bill would depend on customers’ understanding of why the rules have changed, and the state’s ability to inform them prior to actually walking into the tax-assessor collector’s office. “I think probably one of our concerns right now is compromising our working relationship with our customers,” she said. “I think these people are going to be terribly offended if we don’t take their word when they come in.”
The Comptroller’s office has promised to take the public relations and educational steps necessary to ensure that customers aren’t surprised by the changes. They are planning on passing on pamphlets and flyers to counties, as well as posters, said Wheeler.
But that means that for the most part, customers probably won’t be seeing the new information until they are waiting in line. “I feel like there are going to be a lot of people who don’t read the paper, they are not interested in what the radio is saying, they are not going to be familiar with the law before they walk in here, and we are going to be the messenger, and it’s going to be, let’s shoot the messenger,” Hollingsworth said.