Although the IRS has made it clear, following the language of the enacting statute, that the amounts paid by the government to auto dealers as part of the cash-for-clunkers program is gross income to the dealers but not the purchasers, there are some important questions to be answered with respect to the state tax consequences of the program.
Over at
Right Wing News, to which Paul Caron
directed my attention, we are told, in a post entitled "Tax for Clunkers":
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 $4,500themselves.
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.
These assertions have been picked up and repeated throughout the Internet world, and soon may leak into print publications.
The point about the sales tax is correct for purchasers in South Dakota, but not necessarily for those in other states. For example, the Minnesota Department of Revenue
has advised that "the CARS incentive is deducted from the selling price before Minnesota motor vehicle sales tax is applied, effectively reducing the taxes owed." The Illinois Department of Revenue has reached
the same conclusion, as have the revenue departments in
Mississippi,
Connecticut,
Iowa, and
California. On the other hand, revenue officials in
Rhode Island,
Nebraska, and
Nevada agree with their counterparts in South Dakota. In releases not on the Internet, Florida, Georgia, Indiana, Kentucky, Louisiana, Massachusetts, Michigan, Texas, and Wisconsin line up with the states not subjecting the CARS payment to the sales tax, whereas Idaho, New Jersey, New York, Ohio, and Virginia take the route taken by South Dakota. Washington does not subject the CARS payment to its transportation tax. As of this writing, other states have not published guidance. Here's a
chart on the sales tax question that is worth a look, which I discovered after I looked at a bunch of state revenue department web sites.
Why the difference?
It depends on the wording of the statute. For example, California and Wisconsin treat the $4,500 as a tax-exempt sale to the United States. Other states have statutes that define the taxable cost as the net amount paid by the purchaser. I wonder how many of the assorted bloggers repeating the "the CARS payment is subject to sales in many states" mantra actually searched for, read, and analyzed the statute. The count at this point has more states NOT subjecting the rebate to sales taxation than taxing it. At best, the adjective should be "some."
And when it comes to the state income tax, I'm nowhere ready to agree with the conclusion that "many states will charge income tax on the $4,500... to the car buyer." Most states base their taxable income on federal taxable income, and provide for adjustments to increase or decrease that amount. Because the CARS payment is NOT included in federal taxable income, it will NOT be included in state taxable income unless the state legislature enacts a provision requiring an add-back adjustment. Thus, for example, the
Arizona Department of Revenue has explained that the CARS payment is NOT subject to Arizona state income tax in the hands of the purchaser. The same conclusion applies in
Nebraska. I'm unaware of any state legislature that has enacted add-backs for the CARS payment. Perhaps some state legislatures will do so, but there's a limited time in which to act, and not all state legislatures are in session or will be in session before such a statute would need to be passed.
The lesson here is that one needs to research things for one's self, and to research things before broadcasting to the world an assertion that not only is incorrect or misleading but that relates to a topic of such widespread interest that the risk of misinformation propagating throughout the world is very high. If the inaccuracies are intentional, there is another lesson, and that is the need for systems that deter people from skewing policy debates with what must be called propaganda. If the inaccuracies are the result of negligence, decency demands that corrective statements be issued, even though it is so difficult to chase down a falsity and purge it from the minds of those who have been lulled through ignorance and reluctance to think for themselves into believing an untruth. As I repeatedly tell my students, first figure out the facts. Don't be in such a rush to provide a legal conclusion on the basis of uncorroborated allegations. It's a tough message to sell in a world where "conclude first, think later (if at all)" permeates the culture.
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