ST 2009-02 - Sales and Use Tax: Car Allowance Rebate System (CARS) – Issued July 2009
Recent federal legislation has created the Car Allowance Rebate System (CARS), commonly referred to as “Cash for Clunkers.” The system allows owners of certain older, low gas mileage vehicles to receive assistance totaling $3,500 or $4,500 on the purchase or lease of a new, higher mileage vehicle from a participating dealer. The owner of the “clunker” must have owned the vehicle for at least one year prior to turning in the vehicle. The vehicle must be less than twenty-five years old, be in operating condition, and must get an average gas mileage of no more than 18 miles per gallon.
The dealer will give the customer the appropriate credit on the purchase or lease of a new vehicle. Participating dealers must have the vehicle that is turned in scrapped. The dealer then submits a claim for reimbursement with the National Highway Transportation Safety Administration, the federal agency that is responsible for the program.
More information on the CARS program is available on the official Web site of the program, http://www.cars.gov.com/ (No Longer Active).
The question has arisen whether the $3,500 or $4,500 allowance provided to the new vehicle purchaser or lessee is part of the sales price for computing Ohio sales and use tax, or can be deducted from the price as a “trade-in.” Ohio Revised Code (“R.C.”) section 5739.01(H) defines “price” for sales tax purposes. Division (1)(b) of that section provides, in pertinent part:
(b) "Price" includes consideration received by the vendor from a third party, if the vendor actually receives the consideration from a party other than the consumer, and the consideration is directly related to a price reduction or discount on the sale; the vendor has an obligation to pass the price reduction or discount through to the consumer; the amount of the consideration attributable to the sale is fixed and determinable by the vendor at the time of the sale of the item to the consumer; and one of the following criteria is met:
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(iii) The price reduction or discount is identified as a third party price reduction or discount on the invoice received by the consumer, or on a coupon, certificate, or other document presented by the consumer.
Division (H)(2) of R.C. 5739.01 states:
In the case of a sale of any new motor vehicle by a new motor vehicle dealer, as defined in section 4517.01 of the Revised Code, in which another motor vehicle is accepted by the dealer as part of the consideration received, "price" has the same meaning as in division (H)(1) of this section, reduced by the credit afforded the consumer by the dealer for the motor vehicle received in trade.
Based on the foregoing statute, the allowance under the CARS program is not a trade-in, and does not reduce the price of the vehicle being purchased for tax purposes. The amount provided under the program does not represent a credit afforded to the customer by the dealer for the “clunker.” Rather, the allowance is consideration received from a third party (the federal government) which is directly related to the allowance given to the consumer and which the dealer is required to pass on to the customer. The amount is fixed and determinable by the federal law and the dealer will show the amount of the credit on the invoice. As such, under Ohio sales tax law, the CARS credit is included in the taxable price of the new vehicle.
If you have any questions regarding this information release, please contact our Taxpayer Service Center at 1-888-405-4039, or e-mail us through our Web site: tax.ohio.gov.
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