Trading vehicles in Pennsylvania - Sales Tax?

[ajr245]

Can 3 people trade vehicles in Pennsylvania (not equal values) and avoid or at least reduce the sales taxes to be paid?

-Person 1 is buying a vehicle from person 2 for $25k
-Person 2 is buying a vehicle from person 3 for $9k
-Person 3 is buying a vehicle from person 1 for $10k

The only money that would change hands would be:
-Person 3 gives $1k to person 2 ($10k - $9k)
-Person 1 gives $15k to person 2 ($25k - $10k)

 

[Zigner]

Can 3 people trade vehicles in Pennsylvania (not equal values) and avoid or at least reduce the sales taxes to be paid?

-Person 1 is buying a vehicle from person 2 for $25k
-Person 2 is buying a vehicle from person 3 for $9k
-Person 3 is buying a vehicle from person 1 for $10k

The only money that would change hands would be:
-Person 3 gives $1k to person 2 ($10k - $9k)
-Person 1 gives $15k to person 2 ($25k - $10k)

Person 1 pays tax on $25k
Person 2 pays tax on $9k
Person 3 pays tax on $10k

It's really not rocket science

 

[ajr245]

It's confusing to me though...

I'm person 1. If I traded my vehicle in at a new car dealership and they give me $10k for the trade when I buy a vheicle from them for $25k, I would only have to pay tax on the $15k difference.

What's different between that and a private party trade? I've already paid taxes on the vehicle I'm selling for $10K. I paid a lot more than $10k worth of taxes too, it was $30k when I bought it new.

 

[Zigner]

It's confusing to me though...

I'm person 1. If I traded my vehicle in at a new car dealership and they give me $10k for the trade when I buy a vheicle from them for $25k, I would only have to pay tax on the $15k difference.

What's different between that and a private party trade? I've already paid taxes on the vehicle I'm selling for $10K. I paid a lot more than $10k worth of taxes too, it was $30k when I bought it new.

What is different is that you are wrong. The vehicle will sell for $25,000. You will receive a credit or $10,000 (no different than if you wrote them a check for $10k as a down payment). The sales tax is still due on the sales price of the vehicle ($25k)

 

[tranquility]

The dealership issue is as the OP says. The sales tax is on the difference and not on the full price. Not the best reference as I don't have the time to research it, but it seems legit at:

http://www.dmv.state.pa.us/pdotforms/fact_sheets/fs-buysell.pdf

However, there's not enough information to tell what the private party calculation would be. Do you guy's know each other? If this is a true arm's length sale, I'd say:

-Person 1 is buying a vehicle from person 2 for $25k
-Person 2 is buying a vehicle from person 3 for $9k
-Person 3 is buying a vehicle from person 1 for $10k

The only money that would change hands would be:
-Person 3 gives $1k to person 2 ($10k - $9k)
-Person 1 gives $15k to person 2 ($25k - $10k)

There is no "trade-in" but a trade around. Totally different from a tax point of view. I'd love to do some research to find out the exact wording of the statute, but I bet Zigner is correct.

 

[ajr245]

OK, maybe I'm an idiot, but I'm looking at the paperwork from when I bought this vehicle.

It is as follows:
Vehicle Sale Price
+Extended Service Contract
+Dealer Installed Accessories
-Trade-In Allowance
+Dealer Documentation Fee
=Subtotal

Next line after that is "PA Sales Tax on Above Subtotal".

So they subracted my trade-in from the total price of the vehicle before they calculated the tax... Have the tax laws changed in the last 5 years? What am I missing here? This is a standard form from a major dealership, so I highly doubt that their form calculates it incorrectly...

 

[FlyingRon]

Sorry Zig, but you are the one who is wrong here. The Pennsylvania sales tax does indeed take into account the trade in. The sales tax is computed on the price of the vehicle purchased less the FMV of the trade.

Unfortunately, in the three-way the purchase and sale are NOT made by the same entities, this isn't going to be considered a trade-in but indeed two separate sales.

Now if there were a dealer involved here that took the three trades and sold the three cars, they might get away with it.

 

[ajr245]

... Do you guy's know each other? ...

Yes, we all know each other.

Person 1 = Me
Person 2 = My Aunt
Person 3 = Cousin's Fiance

Would a gift sitution be possible since my aunt and I are family?

 

[tranquility]

Well, he's right in the result. He's just wrong in the reason why.

To the OP, the reason I asked is because it is more likely the valuation of the vehicles is challenged if it is not a bonafide arms length sale. The tax is based on the purchase price *OR* the current market value. With related parties, I'd be sure to be able to valuate the vehicles in a different way with a near similar result.

 

[ajr245]

tranquility,

Does that mean I could end up paying taxes on even more than the purchase price? According to New Cars, Used Cars, Blue Book Values & Car Prices - Kelley Blue Book, the vehicle is worth $32k in a private party sale, but I am buying it for $25k. Can they tax me on $32k even though I'm only paying $25k? That just doesn't seem fair... Of course, no one ever said taxes were fair i guess...

 

[tranquility]

Yes. Sorry.

I bet there's a way around some of this with a little thought. It's just a bad time of year for thinking.

Ask again in a week.

 

[Zigner]

Sorry Zig, but you are the one who is wrong here. The Pennsylvania sales tax does indeed take into account the trade in. The sales tax is computed on the price of the vehicle purchased less the FMV of the trade.

I stand corrected on this point.

 

[ajr245]

Yes. Sorry.

I bet there's a way around some of this with a little thought. It's just a bad time of year for thinking.

Ask again in a week.

I'll hold you to that, we're making the deal in about 2 weeks.

Would this work?
I trade the vehicle that I would be selling to my cousin's fiance for $10k to my aunt and give her $15k to make the $25k. Then I "traded-in" my vehicle so to say and could possibly save $10k worth of taxes. After that my aunt and my cousin's fiance could just do an even trade of the 2 vehicles they have and everything would work out. Is it possible / legal to do all of these transactions in a single trip to the notary? My vehicle would go to my aunt and she would trade it away before the title ever went to the DMV for processing.

 

[davew128]

It could be your father's brother's nephew's cousin's former roommate but I seriously doubt thats considered related for sales tax purposes.

 

[ajr245]

I'm not counting on relation for anything... I'm counting on the fact that when you trade in a vehicle (ie. trading in my $10k vehicle for a $25k vehicle) you only pay sales tax on the sales price minus that trade in value. In that case, I would pay sales tax on $15k instead of $25k. And if the other 2 parties do an even trade on the other 2 vehicles, they don't pay any sales tax at all. Relation has no bearing in this situation.