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Tax Anomalies On Car Sales/Trades July 24, 2007

Posted by federalist in Taxation.
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I just confirmed an interesting anomaly in the taxation of car sales:

[A]ccording to dealers and regional authorities contacted by MSN Autos, when your car is taken in trade you only pay sales tax on the difference in cost between its trade-in value and the price of the new car. For example, if a dealer gives you $10,000 on your trade-in and the purchase price of the car you are buying is $25,000, you’ll only be required to pay sales tax on the $15,000 difference between the two amounts. In states with a high sales tax, this benefit can help narrow the difference between trade-in value and private party price.

Amusingly, if in this example you instead chose to sell that old car to a third party then the state would collect sales tax on $35k instead of just $15k!  That can be quite an incentive to trade-in a car with significant residual value.  And it seems like an odd loophole for the states to have left open.

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