Last year cash rebates totaled more than $28 billion, according to Edmunds.com. Although much of the 28 billion is returned to the consumer, many states collect sales or excise taxes on the pre-rebate sale price.
"The state's hand is hidden in this, but it's in your pocket," said John Townsend, of AAA Mid-Atlantic, as quoted by the Washington Post.
Consumers are Catching On
Car buyers are launching complaints when they discover that they paid sales tax on the pre-rebated amount of their automobile purchase.Jack Gillis of Consumer Federation of America told the Washington Post that he finds the policy outrageous and said "Sales tax always has to be based on the actual sales price. With a rebate, that's price less the rebate. What's the next step - you go ahead and charge tax on the MSRP (manufacturer's suggested retail price) even though you've negotiated $5,000 off the price?"
In many states, car sales taxes are handled much the same way as grocery store coupons. If an in-store coupon or frequent shopper card results in the consumer paying a lower amount for an item, then the savings is subtracted from the total before the tax is computed.
However, if the consumer uses a coupon supplied by a manufacturer, then the tax is figured on the total sale first then the coupon amount is deducted. If the consumer savings comes by mailing in a rebate, the sales tax is based on what the consumer pays at the time of purchase.
In car sales, consumers who purchase a car using the popular "employee discount" method would pay taxes based on what they paid at the time of sale. However, if the consumer receives a manufacturers coupon that reduces the price, the tax is calculated at the full sale price and then the coupon amount is deducted from the sale.
How Much is it Costing Consumers?
Example:- Auto Price - 30,000
- Automatic Manufacturer Discount - 10 percent
- Adjusted Auto Price - 27,000
- Sales Tax (Based on 6 percent) - $810
- Total Price Paid by Consumer - $27,810
- Auto Price - 30,000
- Manufacturer Rebate Coupon - 10 Percent
- Sales Tax (Based on 3 percent) - $900
- Adjusted Auto Price - $30,900
- Coupon Deduction - $3,000
- Total Price Paid by Consumer - $27,900
Difference - $90
Because of consumer confusion about coupons, rebates and sales tax, some manufacturers are considering reducing the prices of the automobiles on a permanent bases which would mean consumers are taxed based on how much they actually pay for the car.
Not all states tax car sales the same way. In Delaware, consumers pay 2.75 percent of the price consumers pay at the time of sale. If a rebate or coupon is subtracted from the total at the time of sale, then the consumer pays tax based on the adjusted amount. If a rebate is paid to the consumer at a later time then at the point of sale, then they have the option to complete a state form requesting a refund on the rebate amount.
The debate over the future of rebates in the auto industry continues with some analysts who believe they are here to stay.
George Hoffer, professor of economics at Virginia Commonwealth University, told the Washington Post, "Lower list prices and cutting dealer margins forces the dealer into narrow band of prices. It guarantees factories will have to come back with rebates."
More: Auto Rebates, Cash-Back Coupons Don't Stop Tax Bite