Taxpayer asks:
I live and bought a car in NJ for $30,000 and paid $2,100 in sales tax. After two years sold the car to a neighbor for $20,000. When he transferred the title he had to pay $1,400 in sales tax. Is this double taxation?
Taxgirl says:
I’m afraid not but it is understandable why you’d think so.
Usually sales that are classified as “resales” are exempt from a second sales tax. An example is that merchandise – let’s use a block of wood as an example – which is purchased specifically to be resold is exempt at the first sale (usually by providing a wholesalers certificate or other proof of resale).
As a rule of thumb, if an item which is sold a “second” time has been modified, it is subject to sales tax. Using the example of the block of wood, if I use the wood to make a table or carve a sculpture, I’ve modified the wood and it becomes subject to sales tax.
In most states (remember that sales tax is state specific), your used car is considered a modified sales item and is subject to sales tax. If you were a Ford dealer, the result would not be the same – Ford would not pay sales tax on a car that it purchases and subsequently sells to the consumer, though sales tax would be imposed on the final sale. Ford does this by providing the manufacturer with proof of exemption. Individuals not engaged in retail as a business are not generally entitled to the same.
Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.
As a practicing sales and use tax consultant, one of the most difficult concepts to explain is sales and use tax — especially given the fact that there are hundreds of jurisdictions that assess some sort of sales and/or use tax in the United States. More difficult to explain is the seemingly random basis for what is taxable and what is not taxable.
The best way, however, to think of sales tax is that it is a tax on the transaction. Usually a transaction is either taxable or exempt. In Kelly’s Ford example, any materials (or components) that Ford buys to manufacture that hot new Mustang you want to buy are exempt transactions. After Ford has built the Mustang, the dealer purchases the car from Ford. That purchase is also an exempt transaction because the dealer intends to resale the vehicle to you.
Now, if you were in the business of resale, you could present the dealer with a resale certificate (depending on the jurisdiction) and that transaction would also be an exempt transaction. However, when the car is sold to a person who does not have a resale certificate, then the transaction becomes a taxable transaction.
In most states, anytime a transaction occurs there usually is an obligation by the seller who is in the business of selling, to have a permit requiring the seller to collect and remit sales tax. However, private transactions between parties who are generally not in the business of selling are (usually) subject to a transaction tax.
Most states have a provision where the party who has purchased an item privately must remit “use tax”, which is usually the same rate as the sales tax. Since car purchases are usually the largest taxable transactions that private parties will conduct, some states have closed the apparent “use tax” loophole by requiring buyers to remit tax at the time the car is retitled. New Jersey is one such state.
Double taxation is usually when there are two taxes imposed on the same transaction or income. Unfortunately, the Courts have held the subsequent resale of an item not to be double taxation because they are different transactions.
As as side note, many people erroneously believe that there is no tax on purchases you make over the Internet. If the transaction is taxable in your home state, then you are usually liable to pay the use tax on it.
Here is how ridiculous Tax Girl’s explanation is…..let’s say I bought the car for $30,000 new and paid $2100 in taxes. I sell it (used) 1 year later for $20,000 and the buyer pays $1250 in taxes. He sells it one year later for $18,000 and that buyer pays $1175 in taxes. If this $30,000 car gets sold 5 times used within 7 years it could easily generate over $10,000 in taxes, gouging several people along the way.
Here’s my question….how on God’s green earth can we (or you, Tax Girl) justify the collection of over $10,000 in taxes for a single car that started it’s valuation life at $30,000? Please don’t explain the law to me, explain the reasoning on the government collecting that much tax on one item.
Feel free to criticize all you want… but it’s the right answer. If you want to change it, contact your Congressional officials. I don’t make the rules, so I think your ire is a little misplaced.
Whoaaaa Nellie! (or in this case, Greg)
It has been awhile since I’ve read any posts here, but thought I’d comment. As a specialist in sales tax, I often explain sales tax as a transaction tax. In fact, in Arizona sales tax is referred to as a transaction tax. It is the “transaction” that is being taxed and not necessarily the “item”. New Mexico has a similar “gross receipts tax”.
While it may seem that a person is being “gouged”, sales taxes make up an important part of the general fund in each jurisdiction that collect them. Transit systems, water districts, police protection, education, and every other vital public infrastructure relies on sales taxes in some way.
My question to you, Greg, is how can we pay for all the modern convenience without some form of taxation?