Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales and Use Tax Annotations

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140.0000 BARTER, EXCHANGE, "TRADE-INS"—Regulation 1654

Annotation 140.0100

140.0100 Trade-Ins—Underallowance. When a used automobile is traded in on the purchase price of a new automobile, the dealer accepting the trade-in must include in the measure of tax the amount agreed upon between the seller and the buyer as the allowance for the merchandise traded in. However, if the allowance stated in the agreement is less than the fair market value, the stated value will not be accepted if there is sufficient evidence to establish that the underallowance on a trade-in was not the result of a bona fide transaction between the seller and the buyer, that is, the dealer deliberately lowered the trade-in value of an automobile to reduce the measure of tax. A dealer's intent to evade paying the proper amount of tax due may be evidenced by, among other things, recorded trade-in
allowances that are consistently below market value and which are not attributed to trade in automobiles that are in less than fair condition; gross profit margins that are consistently lower on transactions involving trade-ins than on transactions without trade-ins and which are not attributed to business practices pursued by the industry, such as trades on loss-leader automobiles, or trades during promotional sales; and a widespread pattern of underallowances occurring consistently throughout the audit period. If an underallowance is an isolated transaction, the Board would examine whether the difference in the trade-in value and the fair market value listed in the Kelley Blue Book is attributable to the condition of the particular automobile. Where an underallowance is not a bona fide transaction, the Board would tax the underallowance as additional gross receipts and consider whether a 25 percent intent to evade penalty should be imposed. 6/26/96.