Everyone who is in the market to buy a car is looking for savings anywhere is it available. The easiest savings for a customer to take advantage of is the trade-in credit which would allow sales tax to be applied to a lower sales price.
In New Jersey, residents are encouraged to trade in their old vehicle when purchasing a new one by the generous sales tax credit laws. This helps dealerships increase their inventory of pre-owned vehicles in these times of low inventory and it also encourages buyers to make a purchase in today’s inflated economy. This is accomplished by offering a dollar-for-dollar credit on the amount the dealership offers the buyer for the vehicle they are trading. The amount allowed by the dealership varies from the ACV (actual contract value) and can potentially give the buyer a credit for more than the amount that the car is worth to the dealership.
The amount of tax credit that the customer will receive is not impacted by any rebates or incentives the customer receives. Tax is charged on the purchase price less the agreed-upon trade-in value. Any rebates or incentives are applied to the amount the customer owes after-tax much like a coupon is applied in any other retail store.
The trade-in credit is a one-for-one, or This for That transaction, meaning that only one transaction is eligible for the credit. A customer may trade in multiple vehicles on one new purchase but if the trade-in is worth more than the purchase the customer will not be eligible to transfer that credit to another purchase, rather they will receive an equity check.
When Is the Trade-in Credit Not Applicable?
The trade-in credit is not applicable on consignment vehicles. This is because the vehicle is not in the dealer’s inventory and upon sale, the third party who you are selling the vehicle on behalf of, for a commission, is the seller of record and they do not hold a dealer’s license and cannot offer a trade-in credit. The only way to offer a trade-in credit on a transaction like this is for the dealer to purchase the vehicle from the third-party seller, transfer the vehicle title into their name and then sell the vehicle from their inventory, which goes against all consignment practices. In addition, many dealers who conduct consignment transactions have been asked by the third party to hold the money they owe to them as a “pre-trade” against a future vehicle they will be purchasing. This is not a legal interpretation of the trade-in laws. Since the vehicle that was sold was never in the dealer’s inventory this transaction does not qualify for the credit.
Trade-in credit is not eligible on leased vehicles that are being returned to a dealership at the end of the lease. Only vehicles that are owned and titled to the individual trading in the vehicle are eligible for the trade credit. If the registration is in the name of the bank, then the trade-in credit is not applicable.
When is a vehicle that is not in the customer’s name eligible for a credit? The short answer is never. The expanded answer is that to be eligible, the vehicle that is being traded and the vehicle that is being purchased need to be in the same person’s name. The other party must first sell the vehicle to the individual trading in the vehicle before it is eligible for the credit. If the owner of the vehicle is deceased, the transfer needs to be done within 30 days of death, as soon as the death certificate is available, at NJMCV prior to the credit being applicable.
With sales tax audits on the rise in New Jersey, it is important to make every effort to train your team on the rules and regulations surrounding trade-in credits. Please contact your Withum team member for assistance or clarification on anything relating to trade-in credits. We are also available to support your team with virtual training classes.
Author: Michele D’Antonio | [email protected]
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For more information on this topic, please contact a member of Withum’s Dealership Services Team.
