Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2013

Sales and Use Tax Annotations

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

Annotation 140.0500

140.0500 Underallowance on Trade-Ins—Automobiles. 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 automobile traded in. (Regulation 1654(b)(1).) If an underallowance on a trade-in is the result of a bonafide transaction between the seller and the buyer, additional tax should not be computed on the underallowance for the same reason that the Board does not redetermine the fair market value of a trade-in when the agreed upon price is above the price listed in the Kelly Blue Book. Instead, the agreed upon trade-in value is included in the measure of tax from the sale of the automobile.

Regulation 1654(b)(1) also provides that should the Board find that the allowance stated in the agreement is less than the fair market value, it shall be presumed that the allowance actually agreed upon is such market value. However, if there is sufficient evidence to establish that the dealer deliberately underallowed the trade-in value to reduce the measure of tax, the underallowance is additional gross receipts. If this is the case, an intent to evade penalty would also be imposed. In summary, the underallowance is part of gross receipts when a transaction is structured to evade tax and not simply because the dealer has negotiated a favorable contract. 12/21/95.