August 26, 2009: Cash For Clunkers Is Taxable

Despite the insistence of the MSM and the Obama administration, the implementation of the Cash for Clunkers program has been, at best, clunky. And now, a new problem has emerged from beneath countless piles of paperwork, red tape and processing delays...

Cash for Clunkers rebates are taxable! At least in some states...

Source: KELO-TV (South Dakota)

The Cash For Clunkers program is adding to the activity at treasurers' offices all around South Dakota. First, people were asking for proof of ownership, so they could show they owned their vehicle for a full year, allowing them to cash it in. Now, they'll be returning to register their new vehicle. And when they do, new owners need to bring every bit of paperwork provided to them by their dealer.

"That means they need their title, their damage disclosure, their bill of sale and the dealers have 30 days to get that to them," Minnehaha County Treasurer Pam Nelson said.

But many of those cashing in on the clunkers program are surprised when they get to the treasurer's office windows. That's because the government's rebate of up to $4500 dollars for every clunker is taxable.

"They didn't realize that would be taxable. A lot of people don't realize that. So they're not happy and kind of surprised when they find that out," Nelson said.

Source: Professor James Edward Maule

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.

So not everyone's rebate will be taxed. That's certainly good news, but this is just another example of a well-intentioned government program leading to all sorts of unintended negative consequences. It will be interesting to see what kind of long-term effects the clunker program has on car sales, both used and new.