Cash for Clunkers has a nasty surprise for some people! (h/t: Jay Yarow)

When you buy a new car you pay tax on the difference between the new car's purchase price and the trade-in you present to the dealer. This is an intentional distortion in the law that is intended to favor dealers over private-party used car sales; if you sell your used car privately the new buyer pays sales tax but you do not get the offset on the purchase of your replacement vehicle - the only way to get that is to trade the car.

Dealers use this, of course, in negotiations, effectively pocketing the sales tax - and why not? It's a real difference to you!

But the "cash for clunkers" is not a trade-in. That's a $4,500 check from the government, basically.

So you get nailed at least once and possibly twice. Specifically, you pay sales tax on the full vehicle price (effectively paying sales tax on the $4,500!) and what's worse those states that tax income (that would be most of them!) might wind up counting this as income for state income tax purposes too, effectively taxing you twice.

Minnesota has such a law, so I'd've thought Minnesotans have to pay an extra $292.50 in taxes you're paying on that clunker if you got the $4500 government payment.

But according to the Minnesota Department of Revenue, not so:

The Minnesota Department of Revenue is reminding consumers that the CARS incentive is deducted from the selling price before Minnesota motor vehicle sales tax is applied, effectively reducing the taxes owed.

They advised the Minnesota Auto Dealers Association the same thing. This is curious; there's nothing in the law that says you would have to do that.

No word on whether Clunkfare is taxable income.

Labels: economics, Minnesota