Alpha Leasing Company
Auto Rebates Don't Help Tax Bite
In most states, the vehicle's full price is taxed before the rebate goes to the buyer
By Albert B. Crenshaw / The Washington Post
Saturday, August 27, 2005

WASHINGTON -- The recent explosion of cash-back coupons and rebates on the sale of cars and trucks has done great things for automobile manufacturers, for consumers, and -- largely unnoticed -- for many state tax collectors.

Edmunds.com, which tracks the automobile industry, put total cash rebates last year at more than $28 billion nationwide. And lots of states are collecting sales or excise taxes on that amount, even though it is ultimately returned to customers.

As a result, state tax collectors benefit two ways -- both from the rise in sales, which of course creates more revenue to be taxed, and from the tax on the higher, pre-rebate sales price.

"The state's hand is hidden in this, but it's in your pocket," said John Townsend, of AAA Mid-Atlantic.

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," said George Hoffer, professor of economics at Virginia Commonwealth University.

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. "That's outrageous," Gillis said. "Sales tax always has to be based on the actual sales price. With a rebate, that's price less the rebate. What's the next step -- you go ahead and charge tax on the MSRP (manufacturer's suggested retail price) even though you've negotiated $5,000 off the price?"

In the wake of the success of other forms of price reductions such as "employee discounts" that U.S. manufacturers offered this summer, some have been talking about moving permanently to lower prices rather than spasmodic rebate campaigns. Such a shift, if it were to take place and stick, might reduce revenue in some states, though in today's strong economy that prospect is not as worrisome as it might have been a few years ago.

Since not all states tax rebates, and those that do charge widely varying rates, figuring an overall revenue loss is difficult. But some states have calculated the possible consequences of a loss to rebate taxes. In Virginia, for example, early estimates put the figure in the $20 million to $30 million range.

Since the state's 3 percent auto excise tax brings in more than $600 million a year, such a loss would be noticeable but hardly devastating.

"The states' sales tax base is a big sucker, (and) although motor vehicles are a nontrivial component of the base, I'm not sure that would provide a really major shock," said John Mikesell, an Indiana University professor who studies sales and related taxes. "You're not zeroing out autos from the base, just diddling with a piece of it. I'm guessing it's not going to create a particular catastrophe."

Most states' taxes on car sales adopt a principle similar to the one that states often employ with grocery store coupons: If the store cuts the price, either directly or as a result of a lower price from the manufacturer, the sales tax is computed on the price the customer pays. Similarly, 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.

On the other hand, if a coupon is supplied and paid by a third party, such as a toothbrush manufacturer, then the tax is based on the store's shelf price for the toothbrush before the coupon is applied.

Manufacturers' coupons on groceries and other items amounted to $2.8 billion in redemptions last year, according to NCH Marketing Services Inc., a consulting and research firm based in Deerfield, Ill. However, that sum is small in comparison with automotive rebates.

In many states, taxes on cars work the same way. If the price of a car is simply lowered by the manufacturer -- for instance by giving shoppers the equivalent of an employee discount, or if the customer negotiates a lower price with the dealer, the tax is computed on that price. But if the customer is given a coupon by the manufacturer 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, or if the buyer simply talks the dealer down to $28,000, the tax is based on $28,000. But if the dealer holds fast at $30,000, but the manufacturer supplies a $2,000 coupon so the price to the customer is again $28,000, the tax is computed on $30,000.

"I don't think people really realize how all this discount stuff works," said Pat Pelino, a tax consultant with Vertex Inc., a tax consulting and software firm based in Berwyn, Pa., and specializing in state taxes.

States want to protect their tax base, she said. "They love to get you coming and going."

But not all states tax rebates, said Jeffrey Pretsfelder, senior tax analyst with RIA Group, a tax research and publishing firm based in New York. "Quite a number either categorically allow the rebates (before tax is figured) or allow them under certain circumstances," he said.

Some don't tax them if they are identified and stated separately on the sale documents, he said. Others don't tax them if they are used as part of the down payment.

Delaware, which has a tax of about 2.75 percent on car sales despite having no general sales tax, doesn't tax rebates that are figured into the price at the time of the sales transaction. And if the rebate doesn't show on the original transaction but is paid later by the manufacturer to the buyer, the state allows the buyer to fill out a form and claim a refund of tax paid on the rebate amount.

And some analysts don't think rebates are going away, no matter what carmakers say.

"Lower list prices and cutting dealer margins forces the dealer into narrow band of prices," Hoffer said. "It guarantees factories will have to come back with rebates."

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