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.
TAX CHART: Click on this link to request the Trade-In Tax Chart.

Shipping Charges Taxable?

Freight charges always seem to be a thorn in the side of tax professionals. They're usually too small to worry about on an individual transaction basis, but they can loom large in sample audits where just a few errors in a sample can translate to huge assessments when extrapolated to a population.

Separately Stated

The sales/use tax treatment of shipping charges varies all over the board with lots of little conditions. Almost half of the states do not tax shipping charges depending on certain factors. One major factor is whether the shipping charge is separately stated. In fact, according to our research, in AZ, ID, MD, UT and VA, as long as the charge is separately stated, it is not included in the taxable sale amount and that's the only condition.

Other Conditions

There are additional states that do not tax shipping charges and require the charges to be separately stated, but also have other conditions. Included in that list are: AL, CA, DC, FL, IA, LA, ME, MA, MI, MO, NV, WI. BUT, keep in mind that even in those states, there are other (IMPORTANT, EVEN CRITICAL) conditions that apply. You'll want to see our chart for the details. For example, in Alabama, shipping charges are not taxable if (1) charges are separately stated and paid by the purchaser, and (2) delivery is by common carrier or the U.S. Postal Service. And in AL, transportation charges are not "separate and identifiable" if included with other charges and billed as "shipping and handling" or "postage and handling." In WI, the shipping charges are not taxed, if (1) charges are separately stated and (2) delivery occurs after the sale. Charges are excluded when billed by a third party transportation company, if buyer contracts with the third party company for transportation of the property.

Usually Needs Research

As you can see, it can be a little tricky. In some states, shipping charges are just flat taxable regardless of how they are stated, who paid for them, whether they occur before or after the sale, etc. In other states, just separately state them, and the shipping charges are not taxable. In most states, there are certain conditions that apply and they can be convoluted. Research is usually necessary. Feel free to email us to view a chart (posted by permission from and with credit to CCH) which is current as of 7/16/2009. Please remember that these charts are general in nature. Your situation may very likely involve some particular facts and circumstances that would yield a different result. This chart is a good starting point, but should not be your only research source.

Sales Tax Rate Changes Announced For: AL, IL, KS & NY

Monday, July 13, 2009 - NEW YORK CITY

New York City --Multiple Taxes: Senate Passes Combined Reporting, Sales Tax Rate Increase Bills

The New York Senate has passed A.B. 8615, A.B. 8866, and A.B. 8867, which contain a variety of New York City sales tax, corporation tax, and unincorporated business tax provisions that are part of a revenue package that was passed by the Assembly on June 16, 2009.

If signed, A.B. 8866 would do the following:

-- increase the New York City sales tax rate from 4% to 4.5%;

-- repeal the exemption for purchases of clothing items priced at $110 or more; and

-- apply the full New York City sales tax to electric and natural gas customers purchasing energy from non-utility companies.

Under A.B. 8615, a credit reducing the unincorporated business tax would apply if the annual tax amount is less than $5,400. The credit would completely offset unincorporated business tax amounts of $3,400 or less.

Among other changes, A.B. 8867 would phase in a single sales factor and generally require related corporations with substantial intercorporate transactions to file a combined report, regardless of the transfer price for such intercorporate transactions.

The text of the bills is available at http://assembly.state.ny.us/leg/?bn=a8615 for A.B. 8615, http://assembly.state.ny.us/leg/?bn=a8866 for A.B. 8866, and http://assembly.state.ny.us/leg/?bn=a8867 for A.B. 8867.

A.B. 8615, A.B. 8866, and A.B. 8867, as passed by the New York Senate on July 9, 2009

Tuesday, July 14, 2009 - ALABAMA

Alabama --Sales and Use Tax: New Local Tax Levy and Rate Changes Announced

The Alabama Department of Revenue has announced the following new local sales and use tax levy and rate changes.

The city of Adamsville began levying a local sales and use tax in its police jurisdiction, effective July 1, 2009. The rates for general items, admissions to places of amusement and entertainment, and retail sales of food for human consumption sold through vending machines are 3.5%. The rates for machines, machinery, and equipment used in planting, cultivating, and harvesting farm products, and machines used in manufacturing tangible personal property are 1.5%. The rate on the net difference paid for all automotive vehicles, truck trailers, semi-trailers, and house trailers is 1%.

The town of Hackleburg increased its general sales and use tax rate, rates on admissions to places of amusement and entertainment, and retail sales of food for human consumption sold through vending machines from 1% to 2%, effective July 1, 2009. The rates on machines, machinery, and equipment used in planting, cultivating, and harvesting farm products; machines used in manufacturing tangible personal property; and the net difference paid for all automotive vehicles, truck trailers, semi-trailers, and house trailers remains at 0.50%.

The city of Hamilton increased its lodgings tax rate from 2% to 7%, effective June 1, 2009.

Notices of these changes were first posted by the department on July 13, 2009, and can be found on the department's Web site at http://www.ador.state.al.us/salestax/ratechanges.htm.

Local Tax Notices, Alabama Department of Revenue, July 13, 2009

Wednesday, July 15, 2009 - ILLINOIS & KANSAS

Illinois --Sales and Use Tax: Rate on Candy, Hygiene Products, and Certain Drinks Increased

Beginning September 1, 2009, candy, grooming and hygiene products, and certain soft drinks will no longer be eligible for the 1% reduced state rate allowed for qualifying food, medicines, and drugs and instead will be subject to the full 6.25% state rate for purposes of Illinois retailers' occupation (sales) tax, service occupation tax, use tax, and service use tax.

The rate increases were imposed by H.B. 255 as part of a $31 billion public works program to renovate roads, bridges, and schools. S.B. 349 changed the effective date of the rate increases from August 1, 2009, to September 1, 2009. The bills also increase motor vehicle license fees and alcoholic beverage tax rates and impose a new video gaming tax.

Candy

"Food for human consumption that is to be consumed off the premises where it is sold" (which qualifies for the reduced rate) will not include candy, effective September 1, 2009. A new provision defines "candy" as a preparation of sugar, honey, or other natural or artificial sweeteners in combination with chocolate, fruits, nuts, or other ingredients or flavorings in the form of bars, drops, or pieces. However, "candy" does not include any preparation that contains flour or requires refrigeration.

In addition, candy sold through a vending machine is not considered food for human consumption that is to be consumed off the premises where it is sold, effective July 1, 2009.

Soft Drinks

Beginning September 1, 2009, "soft drinks" (which are ineligible for the reduced rate) will be defined as non-alcoholic beverages that contain natural or artificial sweeteners. However, "soft drinks" will not include beverages that contain milk or milk products, soy, rice or similar milk substitutes, or greater than 50% of vegetable or fruit juice by volume.

Prior to September 1, 2009, "soft drinks" are defined as any complete, finished, ready-to-use, non-alcoholic drink, whether carbonated or not, including soda water, cola, fruit juice, vegetable juice, carbonated water, and all other preparations commonly known as soft drinks that are contained in any closed or sealed bottle, can, carton, or container, regardless of size. However, "soft drinks" do not include coffee, tea, non-carbonated water, infant formula, milk or milk products as defined in the Grade A Pasteurized Milk and Milk Products Act, or drinks containing 50% or more natural fruit or vegetable juice.

Grooming and Hygiene Products

"Nonprescription medicines and drugs" (which qualify for the reduced rate) will not include grooming and hygiene products, effective September 1, 2009. The term "grooming and hygiene products" includes soaps and cleaning solutions, shampoo, toothpaste, mouthwash, antiperspirants, and sun tan lotions and screens, unless those products are available by prescription only, regardless of whether the products meet the definition of "over-the-counter-drugs."

The term "over-the-counter-drug" means a drug for human use that contains a label that identifies the product as a drug as required by 21 C.F.R. §201.66. The over-the-counter-drug label includes (1) a "Drug Facts" panel or (2) a statement of active ingredient(s) with a list of those ingredients contained in the compound, substance, or preparation.

P.A. 96-34 (H.B. 255) and P.A. 96-38 (S.B. 349) , Laws 2009, effective as noted

Kansas --Sales and Use Tax: Local Rate Changes Announced

The following local sales and use tax rate changes take effect throughout Kansas on October 1, 2009.

City Rate Changes

• La Cygne increases its rate 1%, increasing its total tax rate from 6.3% to 7.3%.
• Le Roy increases its rate 1%, increasing its total tax rate from 5.3% to 6.3%.
• Manhattan (Pottawatomie County) increases its rate 0.25%, increasing its total tax rate from 7.3% to 7.55%.
• Manhattan (Riley County) increases its rate 0.25%, increasing its total tax rate from 7.3% to 7.55%.
• McPherson increases its rate 0.5%, increasing its total tax rate from 6.8% to 7.3%.
• Meade increases its rate 0.5%, increasing its total tax rate from 6.8% to 7.3%.
• Neodesha increases its rate 1%, increasing its total tax rate from 7.3% to 8.3%.
• Neosho Rapids increases its rate 1%, increasing its total tax rate from 6.8% to 7.8%.
• Sterling increases its rate 1%, increasing its total tax rate from 6.3% to 7.3%.
• Topeka increases its rate 0.5%, increasing its total tax rate from 7.45% to 7.95%.
• Washington increases its rate 1%, increasing its total tax rate from 6.3% to 7.3%.-- Willard (Shawnee County) increases its rate 0.75%, increasing its total tax rate from 6.45% to 7.2%.
• Willard (Wabaunsee County) increases its rate 0.75%, increasing its total tax rate from 6.8% to 7.55%.
• Wilmore increases its rate 1%, increasing its total tax rate from 5.3% to 6.3%.

County Rate Changes

Finney County increases its rate 0.25% from 0.90% to 1.15%, increasing its total tax rate from 6.2% to 6.45%. As a result, the total tax rates for the following cities within Finney County increase as follows:

• From 7.2% to 7.45%: Garden City.
• From 6.7% to 6.95%: Holcomb.

Graham County increases its rate 1% from 0.25% to 1.25%, increasing its total tax rate from 5.55% to 6.55%. As a result, the total tax rates for the following cities within Graham County increase as follows:

• From 5.55% to 6.55%: Bogue.
• From 6.55% to 7.55%: Hill City and Morland.

Sheridan County increases its rate 1% from 1% to 2%, increasing its total tax rate from 6.3% to 7.3%. As a result, the total tax rates for the following cities within Sheridan County increase from 6.3% to 7.3%: Hoxie and Selden.

Special Taxing Jurisdictions

The total tax rates for the following transportation development districts (TDDs) increase 0.5% from 7.55% to 8.05%:

• Manhattan Marketplace TDD
• Manhattan (Riley County) TDD
• Manhattan (Pottawatomie County) TDD

The city of Kansas City creates the following three transportation developments districts with the following rates:

• Plaza at the Speedway #1 TDD will impose a 0.6% transportation district sales tax within the district, and the district's total tax rate will be 8.15%.
• Plaza at the Speedway #2 TDD will impose a 0.4% transportation district sales tax within the district, and the district's total tax rate will be 8.55%.
• Plaza at the Speedway #3 TDD will impose a 0.6% transportation district sales tax within the district, and the district's total tax rate will be 8.15%.

The Kansas City Waterpark Village STAR Bond Project begins. The tax rate in the Waterpark Village (also known as the Schlitterbahn Waterpark) will be 7.55%.

The city of Lansing creates the Lansing Town Center TDD. A 1% transportation district sales tax will be levied in the district, and the district's total tax rate will be 8.3%.

The city of Lawrence creates the Oread TDD. A 1% transportation district sales tax will be levied in the district, and the district's total tax rate will be 8.85%.

The city of Merriam ceases imposing the 1% transportation district sales tax in the Merriam Pointe Transportation District. As a result, the total tax rate in the district will decrease from 8.775% to 7.775% and the jurisdiction code changes from MERTD to MERJO.

The city of Overland Park deactivates the Corbin Park TDD. The district will resume October 1, 2010. For the one year of deactivation, the jurisdiction code changes temporarily from OVET3 to OVEJO.

State and Local Sales/Use Tax Rate Changes, Kansas Department of Revenue, July 13, 2009

Thursday, July 16, 2009 - ALABAMA

Alabama --Sales and Use Tax: Town of Livingston Imposed Local Rental Tax

The Alabama Department of Revenue has announced that the town of Livingston levied a local rental tax on the lease or rental of tangible personal property and linens at the rate of 3%, and a tax on automotive vehicle rentals at the rate of 1%, effective December 1, 2008. Notice of the new rental tax was first announced by the department on July 15, 2009.

Local Tax Notice, Alabama Department of Revenue, July 15, 2009

Friday, July 17, 2009 - NO CHANGES

New York City --Sales and Use Tax: Rate Increase, Repeal of Certain Exemptions Enacted

Legislation has been enacted that increases the New York City sales tax rate from 4% to 4.5%, effective August 1, 2009. It also increases the tax rate on credit rating and reporting services, and on beauty, barbering, and certain other personal services from 4% to 4.5%, and provides that the taxes on these services can only be imposed through November 30, 2011, unless they are renewed. Previously, these taxes could only be imposed through December 31, 2011.

In addition, the legislation repeals the New York City sales tax exemption for purchases of clothing items priced at $110 or more (the exemption for clothing and footwear costing under $110 is maintained) and applies the full New York City sales tax to the transmission and distribution of electric and natural gas service, even when the electricity or natural gas service is purchased separately from the transmission and distribution service.

Ch. 200 (A.B. 8866), Laws 2009, effective August 1, 2009