Ask the taxgirl: Sales Tax on Resold Items
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.
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
Have a question? Ask the taxgirl!
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1 opinion for Ask the taxgirl: Sales Tax on Resold Items
Christopher Stout
Jun 22, 2008 at 10:24 pm
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.
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