Are PA Customers Entitled to Sales Tax Credit on a Trade-In Vehicle?
Updated: August 25, 2023
The Pennsylvania Automotive Association (PAA) recently answered the question on whether a customer is entitled to sales tax credit on a trade-in vehicle. The customer is entitled to sales tax credit on the trade-in vehicle if the dealership takes the trade-in vehicle into inventory at the time of sale, even if the purchased vehicle will be delivered at a future date.
Trade-In Valuation
If the trade-in occurs at the time of sale, a deduction from the purchase price is allowed for an amount equal to the amount of trade-in allowed on the purchase. When providing a customer with cashback from the trade value, the value of the trade-in vehicle may not be misrepresented on the buyer’s order. The cashback portion does not reduce the purchase price that is subject to sales tax.
Courtesy Trades
A courtesy trade is when a new car shopper arranges to sell their vehicle but trades it to a dealership for the buyer to purchase from the dealer instead. When the dealer completes the paperwork, they need to ensure that the sales tax warranty is being handled properly to avoid listing an improper sales tax credit amount on the buyer’s order which would subject the dealership to a sales tax liability in the event of an audit.
The sale of a vehicle to anyone besides the dealer is not considered a trade-in, even if the proceeds from the sale are immediately applied to a purchase of a vehicle from the dealer due to the concern with sales tax. To qualify for the sales tax credit, the dealership needs to obtain the vehicle’s title. Once the dealer takes the title, the vehicle can be sold by the dealer to the customer’s pre-established buyer and the customer could receive trade-in credit.
Warranty Concerns with Courtesy Trades
If the dealer assigns the title of vehicle to itself in the chain of sale, the dealer is responsible for the disclosure and warranty requirements. If the dealer does not take the title but completes the paperwork in a courtesy trade, the dealer is not responsible for warranty concerns. The buyer can still return to the dealership if any issues arise with the vehicle. When a courtesy trade takes place, there should be a clear disclosure to the customer to avoid any misunderstanding. The dealership must retain these records in the same manner as other sales. If the dealership allowed the customer a trade-in exemption when taking a courtesy trade into inventory, the dealer must be able to show record MV-27B.
Ghost Trade-Ins Are Prohibited
Dealerships using vehicles in dealer inventory and listing them as trades owned by the customer are known as ghost trade-ins and are prohibited in Pennsylvania. A few used car dealerships have been cited for giving sales tax credit for a trade-in not owned by the customer. PA State Police citations have resulted in sales tax credit being repaid and large fines imposed.
Multiple Owners Involved
The PAA announced guidance on the sales tax credit for trade-ins when multiple owners are involved.
Spouses: Transfers between spouses are presumed to be for no purchase price and, therefore, are not taxable. In this scenario, the only instance that would allow for the sales tax credit would be if the trade-in vehicle is in both spouses’ names and traded to a dealer for the purchase of a vehicle being titled only in one spouse’s name. Then that spouse may take the full amount allowed.
Parents/Children: If the title of the vehicle is being traded to the child using a gift tax exemption before the transfer to the dealership, then the child would receive a full tax credit for the trade-in. If not, the child cannot get a tax credit because they do not own the vehicle. If the parent wants their name and the child’s name on the title, the parent must exchange the trade-in vehicle for the purchased vehicle and obtain the title in their name alone first in order to obtain the credit. After that, the parent may transfer the purchased vehicle to . When the vehicle is titled in both the parent’s and child’s name and they want to trade it in to a dealer for the purchase of a vehicle being titled in only the child’s name, they would have to transfer the title of the trade-in vehicle to the child prior to trade-in to obtain the credit.
Friends: When a vehicle is titled in two friends’ names and being traded to a dealer for the purchase of a vehicle being titled only in one friend’s name, they must first transfer the title of the trade-in vehicle to only one friend prior to trading in the vehicle in order to obtain the credit. Otherwise, a sales tax credit cannot be taken.
Documentary Fees
If the dealer is not engaged in a vehicle sale then no documentary fee can be charged according to issuing agent regulations. If the customer requests the dealer as an agent, the dealer can charge up to $34 for a temporary registration plate. No fee can be charged for transferring the buyer’s own plate. A market-driven clerical fee may be charged if the dealer is completing the title work in a non-sale instance. The dealer may charge $5 for each notary seal required, any messenger fees can be passed on and no charge can be made for an employee verifying signatures.
If you have any questions on sales tax credit on trade-in vehicles, contact your Brown Plus advisor.