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Preventing another Michigan-- Pushing back against dealers

Discussion in 'Tesla Motors' started by TexasEV, Oct 27, 2014.

  1. TexasEV

    TexasEV Active Member

    Joined:
    Jun 5, 2013
    Messages:
    3,766
    Location:
    Austin, TX
    I have been thinking of how to dissuade auto dealers from trying to change state laws to make it harder for Tesla or others without dealers to sell directly to the public. What benefit do dealers now enjoy that could be threatened if they put their state’s auto dealer law into play, so there is risk to them in trying to change the law?

    I think the answer is the trade-in credit for sales taxes that exists in most states. This appears to benefit consumers, but actually is a hidden subsidy to dealers that lowers state tax revenue. The economic effect is that a portion of the sales tax is being paid to dealers in the form of obtaining used cars at below market value. Dealers always talk about how much tax revenue their sales generate, when in fact the state is giving up tax revenue to the dealers. We should be talking to state legislators about this.

    Here is how it works:
    Suppose you are buying a new car for $30,000, the sales tax rate in your state is 6%, and you want to trade-in or sell your existing car which has a wholesale value of $7500. You have an offer from two used car dealers to purchase it for that amount.

    Scenario A- Sales tax owed on purchase price (only CA, MD, VA, HI, KY)
    If the new car dealer matches that trade-in value, the transaction is $30,000 +6% = $31,800, less $7500 trade, means your out the door price is $24,300. Or you could sell your old car for the $7500 and your net would still be $24,300. Of that price the sales tax you paid was $1800.

    Scenario B- Sales tax owed on difference between purchase and trade-in (all other states with sales tax)
    The new car dealer can offer $7075 trade-in for your car worth $7500 and you accept that because you will be made whole by the sales tax credit. The transaction is $30,000-$7075= $22,925 +6% = $24,300. Of that price the sales tax you paid was $1375.

    BY CREDITING THE TRADE IN BEFORE THE SALES TAX, THE DEALER SAVED $425 ON THE USED CAR PURCHASE AND THE STATE LOST $425 TAX REVENUE. THE CONSUMER IS JUST A BYSTANDER.

    How much do auto dealers make this way? It’s the value of trade-ins times the sales tax rate. That’s probably a lot that they don’t want to give up. How much does the state lose in sales tax revenue? The same amount. When the auto dealer lobby in those states speaks of wanting a “level playing field”, I’m sure they don’t mean leveling the sales tax treatment of trade-ins vs. selling the used car to another dealer or private party!

    State legislators need to know how much revenue they’re losing by these laws, and it’s not staying in the consumer’s pocket, it is a transfer to the auto dealers. If this could be put in play when the auto dealers try to restrict the franchise laws even further they may find it’s in their interest to back off.
     

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