State & Local Tax Blog

Cash for Clunkers and Sales Tax

The federal cash for clunkers program has been in the news nonstop lately. Everyone’s thinking about what they have in their driveway and if it would qualify for this program.
But not me. I’m thinking about the sales tax implications involved.There’s a few basic questions that come to mind. First, what is the tax treatment of the actual cash-for-clunker transaction in the various states. Will states tax just the net amount of the sale, or do they clunk the purchaser by making him/her pay tax on the entire purchase price? And, second, now that we’re thinking about trade-ins, how are non-motor vehicle trade-ins treated in the various states? And there’s one more question: How do the dealers themselves treat the cash they get from the federal government (assuming they actually get it, of course!)?

Taxability of Vehicle Trade-ins

When you mention trade-ins, most people think about motor vehicles. So let’s answer that question first. Most people would probably argue that if you bought a vehicle 3 years ago and paid tax on it when you got it, you should get “credit” for that when you go to trade the vehicle in—it’s only fair!

Of course that theory doesn’t really hold too much water in the transactional tax world of sales/use tax. Sales taxes are due when transactions occur. If you buy a piece of equipment for your use, then tax is due on that transaction. If you sell it 2 years later, then tax is due again on that transaction. A trade-in is essentially a sale of the item being traded in. But even so, most states still allow an exclusion from the taxable sales price for the amount of a vehicle trade-in. Sales tax purists may cringe, but most voters buy cars over and over. Politicians would be hearing from upset constituents nonstop if they didn’t allow a trade-in tax offset. As it turns out, when it comes to motor vehicles, most states tax only the net amount of the sale.

Clunker States—These States Tax Vehicle Trade-ins

Alabama, California, D.C., Maryland, Michigan, New Jersey, North Carolina and Oklahoma,

Other Trade-ins

Now what about the larger issue? How do the various states treat trade-ins in general. It’s not nearly so common as motor vehicle trade-ins but, we do see from time to time, companies will buy some item and get credit for some other item they traded in. Most states allow a tax reduction when a trade-in is made. We have a chart for that and we would be happy to share that with you.

Car Dealers

Finally, what about the dealers? The sell a car for $30,000 less a $4,500 clunker rebate. In these states that do not allow a trade-in tax reduction, do they collect tax on the $30,000 or on the lesser amount? At least one of those states has weighed in the matter and that’s California. The California SBE has issued Special Notice L-230, in which they say that these rebates will be considered as sales to the federal government and therefore not taxable in CA. So, good news for dealers in CA.

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