Sunday, August 02, 2009

Cash for Clunkers rebate is taxable to dealers

From Automotive News:

It turns out dealers will have to pay taxes on the thousands of dollars in rebates they receive under the federal cash-for-clunkers program, according to an IRS advisory bulletin issued today.

The cash-for-clunkers measure, known as the Consumer Assistance to Recycle and Save Act of 2009, exempts consumers who take advantage of the program from paying taxes on the rebate. But it does not exempt car dealers.

"Gross income generally means all income from whatever source derived unless specifically excluded by law," wrote Terri Harris, who heads an IRS division specializing in automotive issues. "Gross income derived from a business means the total sales, less the cost of goods sold."

It likely will be treated like a cash downpayment from the consumer.

So the federal government is borrowing money from current/future taxpayers to help some people purchase certain types of cars and then taxing the dealers on the tax dollars they're getting?

If dealers are now going to be taxed on these funds, will they be as enthusiastic about participating? And will this impact the Senate decision on the additional $2 billion the House voted to put toward the program?

Of course, Americans For Limited Government, on their Facebook page, posted this little gem on the program:

With everyone weighing in on the "Cash for Clunkers" funding problem (including Slate, Heritage, and Malkin) it is hard to believe that nobody hit the nail on the head. This is the next bubble. This is exactly like the housing bubble:

Step 1: The government encourages easy money.
Step 2: People then use that easy money to buy things they wouldn't have bought under normal market conditions.
Step 3: They realize that they could not afford this at all.

It happened with the housing bubble, it will happen again with this "Cash for Clunkers." Since most people will buy these car on loans this will cause an artificial demand in the auto industry causing some already failing companies to malinvest more into the wrong cars and dealerships. Because once this credit expires whatever is left on the lot will bust in the hands of the dealers and what was thought to be what people wanted was just a mirage due to the credit.

Only in Washington does this make sense.


Bob said...

Well done piece. I will link up soon!

Hooda Thunkit (Dave Zawodny) said...

The lord obama giveth and the lord obama taketh away...

IOW, gubment as usual. . .

DeeDee Liedel said...

Is this really any different from having to pay sales tax on the value of your trade-in? Speaking of which, has anyone asked if buyers have to pay sales tax on the value of their Cash for Clunkers rebate?

Maggie Thurber said...

DeeDee - I think the point is that it was advertised as not being taxable to the individuals and the fact that it was taxable to the dealers was a 'hidden' point.

Technically, you don't pay sales tax on the value of your trade-in ... you're technically paying sales tax on the value of the new purchase, even if that purchase price is offset by the trade-in.

With this understanding, I would presume that the value of the cash-for-clunkers will be treated the same as any other pay sales tax on the value of the new car purchase.

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