Are You Being Taxed Pre-Rebate?
Car buyers in some states are being taxed not on the final transaction amount but on the higher, pre-rebate sales price, according to a Washington Post story last month.Jack Gillis, of the Consumer Federation of America, said his group has had several complaints recently from car buyers who noticed that they had been taxed on a higher amount than they had paid.Under the laws of most states, a rebate is treated “as a form of cash payment (to the seller) so it doesn’t affect the transaction price,” George Hoffer, professor of economics at Virginia Commonwealth University, said in the Post story.Bob Lain, assistant director of Indiana’s Tax and Revenue division, said when car dealers report sales tax to the state they include taxes on new cars, old cars and even taxes on other sales such as auto parts. Because of that, Lain said, there is no way to separate auto dealers’ overall sales tax from sales taxes specifically earned on sale of new cars, he told the Post.Most states’ taxes on car sales follow a principle similar to grocery store coupons: if the store cuts the price via an in-store coupon or a “frequent-shopper” card, the coupon value is subtracted at the cash register before the tax is computed. But if a coupon is supplied and paid by a third party such as a product manufacturer, then the tax is based on the store’s shelf price for the product before the coupon is applied.In many states, taxes on cars work the same way. If the price of a car is simply lowered by the manufacturer or negotiated lower by the buyer, the tax is computed on that price. But if the manufacturer gives the customer a coupon (a rebate) that further lowers the price, the value of that coupon is subtracted after the tax is calculated.In other words, if the sticker price of a car is $30,000, and the carmaker cuts the price to $28,000, the tax is based on $28,000. But if the dealer holds at $30,000, and the manufacturer supplies a $2,000 coupon, the tax is computed on $30,000.Not all states tax car sales the same way. In Delaware, a state without a sales tax, consumers pay a 2.75 percent car tax at the time of sale. If a rebate or coupon is subtracted from the total at the time of sale, then the consumer pays tax based on the adjusted amount. If a rebate is paid to the consumer at a later time then at the point of sale, then they have the option to complete a state form requesting a refund on the rebate amount.