"Tax Releases" are designed to provide answers to the specific tax questions covered, based on the facts indicated. In situations where the facts vary from those in a tax release, the answers may not apply. Unless other-wise indicated, tax releases apply for all periods open to adjustment, and all references to section numbers are to the Wisconsin Statutes. (Caution: Tax releases reflect the position of the Wisconsin Department of Revenue, of laws enacted by the Wisconsin Legislature as of the date published in this Bulletin. Laws enacted after that date, new administrative rules, and court decisions may change the answers in a tax release.)
NOTE: This Tax Release was revised on November 16, 2012 to correct a minor error in Example 20.
Statutes: Sections 77.51(12m)(b)5. and (15b)(b)5., and 77.54(8), Wis. Stats. (2009-10)
Wis. Adm. Code: Section Tax 11.83(2)(a), Wis. Adm. Code (November 2010 Register)
NOTE: The deadline for retailers that have been incorrectly collecting sales tax from their customers on insurance charges, GAP waiver charges, and trade-ins and discounts to make necessary programming changes has been extended to July 1, 2013. The prior deadline was April 1, 2013.
It is common for a person who is purchasing or leasing a new motor vehicle to trade in his or her old vehicle to a motor vehicle dealer. This tax release explains the sales and use tax treatment of trading in one vehicle for another. Examples include transactions where vehicles are leased.
Wisconsin law allows a deduction from the sales price of the sale of a motor vehicle for the amount of the trade-in allowed for another motor vehicle in the same transaction. Sections 77.51(12m)(b)5. and (15b)(b)5., Wis. Stats. (2009-10), provide that "purchase price" and "sales price," respectively, do not include the following:
"In all transactions in which an article of tangible personal property … is traded toward the purchase of … property… the amount of the purchase [sales] price that represents the amount allowed for the … property… traded…."
Section 77.54(8), Wis. Stats. (2009-10), provides an exemption from Wisconsin sales and use taxes for "[c]harges for insurance … where such charges are separately set forth upon the invoice given by the seller to the purchaser." Therefore, when a lease agreement includes a separate charge for insurance, the insurance charge is not taxable. GAP insurance and GAP waiver charges are not taxable.
If a motor vehicle is traded in for a motor vehicle of greater value, the amount subject to tax is the difference between the full purchase price and the amount allowed for the motor vehicle traded in. If the motor vehicle is traded in for a motor vehicle of lesser value, and there is no other consideration given, the amount subject to tax is zero.
In order to reduce the sales price for a trade-in amount, the trade-in must occur in the same transaction as the purchase (i.e., the vehicle must be traded-in to the same party that sells the new vehicle).
A lessee of a motor vehicle may replace his or her motor vehicle by purchasing or leasing another motor vehicle and "trading in" his or her leased vehicle. If the new dealer/lessor chooses to purchase that motor vehicle, the new dealer/lessor may purchase the motor vehicle that its customer "trades in" from the lessor of the "traded in" vehicle using its customer's option to purchase.
When a lessee "trades-in" a leased motor vehicle on the purchase or lease of another motor vehicle, there are two transactions that occur. One is the sale of the leased motor vehicle (with permission of the lessee if the lessee has the option to purchase or at the discretion of the lessor if the lessee does not have the option to purchase) from the lessor to the dealer at the purchase option amount price (or the subsequently negotiated price). The other is the sale or lease of the replacement vehicle to the dealer's customer. Because there are two transactions, the seller or lessor of the replacement vehicle may not reduce its taxable sales price by the amount allowed for a "trade-in."
Note: Examples 9 and 19 illustrate how the sales price may be reduced by the amount of positive equity allowed as a discount.
A lease "turn-in" occurs when the seller or lessor of the replacement vehicle receives the previously leased vehicle and facilitates the return of the vehicle to the original leasing company by doing the following:
- Remitting the payoff amount and related tax to the original leasing company on behalf of the customer.
- Collecting the payoff amount and related tax from the customer on behalf of the original leasing company.
In a lease "turn-in," the seller or lessor is not accepting a trade-in towards the purchase of the replacement vehicle. Rather, the seller or lessor is merely facilitating the return of the leased vehicle to the original lessor. The seller or lessor of the replacement vehicle may not reduce its taxable sales price for a "turn-in."
When total payments made by a lessee or other party throughout the course of the lease are more than the agreed upon amount, it is considered "positive equity." A lease agreement can result in positive equity if:
- Insurance settlement is greater than the amount owed by the lessee.
- Additional payments or pre-payments are made by the lessee.
When a lessee owes an additional amount to a leasing company at the termination of a lease, it is considered negative equity. A lease agreement can result in negative equity if:
- Lease is terminated prior to the end of the lease agreement (e.g., lessee owes a lease termination fee to lessor).
- Excess mileage.
Examples of Trade-Ins and "Turn-Ins" With Respect to Motor Vehicle Leases
Comprehensive examples explain when a deduction can and cannot be used to reduce the taxable sales price. Click here for examples.
March 21, 2013