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.
Alabama, California, D.C., Maryland, Michigan, New Jersey, North Carolina and Oklahoma,
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.
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.