Paul L. Caron

Wednesday, August 26, 2009

Tax for Clunkers

Cars-cash-for-clunkers Following up on my previous post, Cash for Clunkers = Gross Income to Dealers (Not Customers), which explained that the statute expressly provides that the $3,500 and $4,500 rebates are not treated as income to car buyers for federal income tax purposes (as confirmed in the government's official clunker website's FAQ).  But several blogs state (without explanation) that the rebates constitute income to car buyers for state tax purposes:

  • Keloland:  "The Cash for Clunkers program is adding to the activity at treasurers' offices all around South Dakota. ...  [M]any of those cashing in on the clunkers program are surprised when they get to the treasurer's office windows. That's because the government's rebate of up to $4500 dollars for every clunker is taxable. 'They didn't realize that would be taxable. A lot of people don't realize that. So they're not happy and kind of surprised when they find that out,' [Minnehaha County Treasurer Pam] Nelson said."
  • Right Wing News:  "Yep, you read that right. In many states car buyers that turned in their "clunkers" for up to $4,500 off the cost of a new car are finding out that they have to pay state sales tax on the $4,500 too. And still others just might find out next year that they'll have to pay income tax on that "free" government money. Many South Dakotans, for instance, have been shocked to find that the wonderful gift from Obama was still added in with the cost of the automobile for the sales tax calculation, so their tax went up accordingly despite that they didn't pay the $4,500 themselves. Some states calculate sales tax by subtracting from the total cost of a new purchase the trade-in allowance of a buyer's old car. But in the case of cash for clunkers, there is no trade-in allowance and the $4,500 remains added to the car purchase. Even worse, many states will charge income tax on the $4,500 because the sum will be determined to be the same thing as income to the car buyer."
  • The Blog Prof
  • Fausta's Blog

(Hat Tip: Chris Kobus.)

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While many states are specifically excluding the cash for clunkers payments from sales tax, there is a fairly straighforward basis for including the payment. Sales tax is a transactional tax based on the gross retail income received by the vendor. For instance, if I purchase a pound of Starbucks coffee at Wal-Mart for $10 and use a $1 coupon from the manufacturer at the check out, I will generally pay sales tax on the full price since the vendor is receiving $10 for the purchase. However, if I purchase the same coffee using a Wal-Mart coupon for $1, I will generally only pay sales tax on $9 since the gross retail income received by the vendor is only $9. Obviously, this same analysis will not apply to state income taxes which generally begin their calculations of state adjusted gross income with federal taxable income. The key here is whether the cash for clunker payment is excluded from gross income or deducted below the line.

Posted by: Mike Ralston | Aug 27, 2009 8:15:23 AM

A neat site with links to various state sales tax rules on CARS credits:

Posted by: Vinny | Aug 26, 2009 3:01:08 PM