Sales Tax Slice: For Volkswagen Owners Who Choose A Buyback, No Trade-in Sales Tax Break



Whenever I hear about product recalls, I get just a little uneasy. I find myself taking mental inventory of my own gadgets, appliances, widgets and what-nots, and wondering what among my treasures might now be hazardous to my safety or health. Admittedly, potential sales tax issues are not ordinarily a major, or even a minor, consideration when these recalls are announced. But the issue of taxes became more prominent in my mind recently when Wisconsin joined a handful of states that have proactively issued guidance to help consumers understand the sales tax implications of Volkswagen’s “buyback” of some of its diesel engine cars. Technically, there has been no “official” Volkswagen recall, but it’s coming.

The notorious scandal has resulted in a massive $14.7 billion settlement with federal regulators and the state of California, in which Volkswagen has agreed to make unsuspecting VW owners in the U.S. whole for the company’s use of faulty software that gave false emissions readings in certain Audi, Porsche and Volkswagen models. Owners have been given a couple of options: they can sell the flawed car back to Volkswagen (or opt to terminate the lease) for a cash payment that includes compensation for the company’s wrongdoing, or they can keep the car, get an emissions modification and take a restitution payment.

In response to news of the settlement, Wisconsin’s Department of Revenue published a notice on its website last month counseling affected Volkswagen owners who choose the buyback option that selling the car back to Volkswagen is not taxable. I’m betting unlucky Wisconsin VW owners are relieved to hear that. The trade-in issue is another matter, however. In a typical trade-in transaction, the value of an old car that’s traded in is used to reduce the sales price of the new car being purchased. The typical trade-in deal also results in a lower tax bill since the sales tax is applied to a reduced sales price.

Wisconsin’s advisory points out that if an owner chooses to use the money from the buyback to buy another Volkswagen vehicle, no reduction in the new car’s sales price will be allowed for a trade-in. Why? Because the old car sold back to the company is not considered a trade-in. Owners will have to pay Wisconsin sales tax on the full purchase price of that new VW.

Connecticut similarly “warned” Volkswagen owners that taking the buyback option will not be considered a trade-in. The state’s Department of Revenue Services issued its notice two weeks before the Oct. 25 federal court approval of the VW settlement. The agency explained that the buyback is “not a typical trade-in under Connecticut law.” There are two different transactions: one in which the owner receives payment for selling his or her car back to Volkswagen; and the other in which the now former owner buys another car from the dealer using the proceeds from the buyback. Connecticut says sales and use tax is due on the full price of the car in the second transaction.

Back in September, Washington’s Department of Revenue issued guidance regarding the then proposed VW settlement, but not on the trade-in question. The state’s brief notice clarified that sales tax refunds for car owners in the context of the settlement are not available under Washington law. Wisconsin, too, has made it clear that refunds cannot be claimed on the sale or purchase of the original diesel vehicle by the owner, the dealer or Volkswagen.

Whether VW diesel car owners take the buyback option or not will likely depend less on getting a trade-in credit (and consequent sales tax break) for a new car, and more on the actual amount of cash a person will likely receive. Even those who decide to keep their cars can expect somewhere between $5,500 and $9,900. In the grand scheme of things, sales tax savings are likely a drop in the bucket, since VW owners are entitled to an extra chunk of change over and above the book value of their cars. I suspect that for a lot owners, the extra cash will be enough to entice them to ditch their flawed diesel engine cars and spend the money on a shiny, new and hopefully unsullied, ride.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: What is your state’s stance regarding the sales tax implications of the Volkswagen settlement? 

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By René Y. Blocker