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How the Timing of a Motor Vehicle Trade-In Can Impact Sales Tax

How the Timing of a Motor Vehicle Trade-In Can Impact Sales Tax

Auto dealers, car rental companies, and others in the motor vehicle business have many challenges in reporting their sales tax. This is especially true when doing business across different jurisdictions with different rules. Two cases in New Jersey and Nebraska highlight a common, yet important, motor vehicle dealer practice that will always affect the application of sales tax – when the purchase involves a buyer’s trade-in that reduces the overall sale price. Specifically, these cases discuss a key element in the sales tax effect of a motor vehicle trade-in – the timing of the sale. Further down, we also explore some other key issues you or your client’s car dealership should consider when it comes to sales tax following a vehicle trade-in.

New Jersey: Botwin v. Director, Division of Taxation (2021)

New Jersey limits the sales tax benefit of a reduced purchase price on a motor vehicle after applying a trade-in’s value to a transaction that occurs at the same time. In Botwin v. Director, Division of Taxation, the taxpayer appealed the Division of Taxation’s denial of its claim for a sales tax refund for its purchase of a truck. The truck was bought using the cash proceeds from the return of a prior motor vehicle purchase that included a trade-in.

Initially, the taxpayer purchased a truck from an auto dealer for $51,978.27 less the $29,000 value of the trade-in. Due to a defect, the taxpayer received a full refund (including the $1,600.32 paid in sales tax) under New Jersey’s Lemon Law and later purchased another truck for $67,849.06. On appeal, the taxpayer argued the $29,000 trade-in value should apply to the calculation of sales tax on the $67,849.06 sale price because it was inseparable from the first transaction (i.e., the second truck purchase could not have happened without the trade-in).

New Jersey excludes from the sale price of taxable property, the credit from any trade-in of same-kind property. See N.J.S.A. 54:32B-2(oo)(2)(E). For a motor vehicle purchase, New Jersey’s administrative code further requires the following:

  • The purchase and trade-in must occur at the same time.
  • The trade-in must involve property of the same kind.
  • A dealer of motor vehicles registered with the Motor Vehicle Commission and New Jersey Division of Taxation must acquire the trade-in.
  • The dealer must obtain a certificate of title for the trade-in vehicle. See N.J.A.C. 18:24-7.4.

The Tax Court of New Jersey upheld the Division of Taxation’s denial of the taxpayer’s sales tax refund claim. It relied on the plain language of the administrative code requiring the purchase and trade-in to “occur at the same time”. Additionally, the court noted the taxpayer could have sought a replacement from the first auto dealer to capture the sales tax benefit of the trade-in but elected to receive a full refund instead.

Nebraska: Gelco Fleet Trust v. Department of Revenue (2022)

Like New Jersey, Nebraska lets you exclude the value of a trade-in from the sale price of a motor vehicle sale for the purpose of calculating sales tax. However, the Department of Revenue in Gelco Fleet Trust v. Nebraska Department of Revenue denied a taxpayer’s claim for a sales tax refund it claimed because the sale price should have been reduced from a trade-in.

The taxpayer was a vehicle rental company that transferred the title of a Chevy Equinox to another entity. A couple of months later, the taxpayer bought a GMC Terrain from the same entity for $27,514.34. The bill of sale reflected a trade-in value of $13,635.05 for the Equinox, but the sales and use tax Form 6 was blank regarding certain details about the trade-in and included a VIN different from the Equinox’s VIN. The taxpayer eventually appealed to the Nebraska Supreme Court arguing the lower courts and Department of Revenue wrongfully held the trade-in must happen at the same time as the new vehicle purchase. Nebraska’s statute allows exclusions from the sale price for credit from a trade-in that is “taken as all or a part of the consideration for the sale of another vehicle”. See N.R.S. 77-2701.35(3)(e).

The Nebraska Supreme Court noted the statute did not impose any time requirement for qualifying a vehicle transfer as a trade-in credit but still upheld the denial of a sales tax refund. Its reason for doing so? The taxpayer failed to properly complete Form 6, which serves as the certification of the consideration between the parties including a trade-in credit. Without it, the court had to assume the trade-in and sale were two separate transactions, which disqualified the taxpayer from the sales tax credit.

General Issues for Car Dealers That Accept Trade-Ins

Trade-in credits are valuable incentives for car dealerships to replenish their used-lot inventory while also selling new vehicles. How your business processes trade-ins, however, is critical for optimizing sales tax reporting, claiming available credits, and avoiding overcollection of tax. When handling a motor vehicle trade-in, think about the following for future sales tax compliance:

  • How sales tax applies to the trade-in. For example, states like New Jersey, Nebraska, and New York allow exclusions for trade-ins, but other states, like California, don’t.
  • The requirements to qualify the trade-in’s exclusion from sales tax (e.g., timing).
  • How you must document the trade-in to prove it qualifies for any sales tax benefits (e.g., itemizing the invoice or completing necessary sales tax forms).

Consult Our Sales Tax Professionals Today

Car dealerships can be prime targets for sales tax authorities because their transactions are high volume, carry significant value, and often involve a complex set of rules. Applying trade-ins is just one of those areas that can make your reporting difficult, which sometimes leads to an audit or notice of assessment. When that happens, our sales tax professionals are here to help. We serve as consultants and representatives for auto dealers and other businesses in all facets of their sales tax, including audit defense, processing refunds or credits, and pursuing available tax challenges.

Questions about vehicle trade-ins or other sales tax issues for your car dealership? Schedule a free consultation with our team today.