Court Case Clarifies Trade-in Timing

A recent New Jersey tax court decision made it clear about the required relationship between a trade-in and subsequent vehicle purchase to make the transaction eligible for the trade-in tax credit to reduce the amount of sales tax paid by the purchaser.

The case (Botwin v. Div. of Taxation , N.J. Tax Ct., No. 013411-2019, 2021 BL 64154, Opinion 2/23/21) was about more than just the trade-in tax credit. The consumer had purchased a vehicle using $29,000 in equity on his trade to off-set the taxable amount of the sale. That vehicle was subsequently repurchased by the manufacturer under a lemon law ruling and the customer was refunded the full transaction amount, including the trade value. Apparently, having lost faith in the brand, the customer chose a replacement vehicle from another manufacturer. The consumer asked to have his trade-in credit from the first sale applied to the second.

The tax payer argued that the two transactions were linked. That not for the fact of the first purchase being ruled a lemon the second transaction would not have taken place. We agree – the two transactions were intertwined. In the same way, if he had bought a new vehicle and it was stolen a week later, a replacement vehicle would need to be purchased. The relationship of the activity is not the determining factor for allowing the trade-in credit.

We will always reiterate that the purchase and the trade have to occur at the same time and on the same sales invoice.

The NJ tax director made this determination and the tax court agreed. To be eligible to obtain a “credit against the sales price for the value of a trade-in is the contemporaneous timing of the trade-in with the purchase.” The NJ regulation states the credit only applies when, “the purchase and trade-in occur at the same time. A separate or independent sale of a motor vehicle is not considered a trade-in even if the proceeds of the sale are immediately applied by the seller to a purchase of a motor vehicle from the buyer.”

The trade-in credit is a specific carve-out in the tax code that requires specific criteria to be met. It is a limited exemption that only applies to transactions with licensed motor vehicle dealers (new and used) and within the confines noted above.

Occasionally, this timing can be blurred in the various activities and in attempting to meet the needs of dealership customers. It can get tricky, but if money changed hands or the trade-in vehicle was paid off at a different time than the sale, the state could easily make the case that the transactions are not simultaneous even if on the same retail sales order.