Trade-In Allowance

James Fleming, President of the CT Automotive Retailers Association breaks down the proposed trade-in tax.

What is the Connecticut legislature proposing regarding the double tax issue when it comes to purchasing a car?

Legislation has been introduced to repeal the sales tax trade-in exemption. Essentially, this is double taxation on the value of a trade-in vehicle that consumers use as a down payment when purchasing a new car. This means that consumers will be taxed twice on the car they are trading in. Once when they originally purchased the car and now a 2nd time when they trade it in. The tax exemption is often used as a down payment towards the purchase price of a new car.  

Does this tax exist in other states? 

All states, with the exception of California, that have a sales tax on motor vehicle sales similar to Connecticut’s have some type of allowance exempting the trade-in from the sales tax. 

More importantly, all northeastern states (MA, ME, NY, NJ, RI,VT) with the exception of New Hampshire, which has no sales tax, give consumers a trade-in exemption. Nationally 41 states have a sales tax on vehicles and grant an exemption, 5 states have no sales tax at all, and 3 states have some type of vehicle tax or fee that does not lend itself to an exemption. 

California has a bill pending to provide for an exemption.

Have any other states tried to impose this double tax on vehicle purchases?

Yes, a number of years ago the state of Maine adopted a double taxation bill on trade-ins during its regular legislative session. 

What happened as a result?  

After consumer outrage and rapidly dropping new car sales, the Maine legislature held a special session to reinstate the sales tax credit for trade.

What will happen if Connecticut passes this legislation? 

Passage of this bill will on average increase the cost to a consumer financing a vehicle by between $1200-$1500. This kind of price increase will directly impact consumer behavior resulting in no sales, delayed/postponed sales, or sales of less expensive vehicles. 

How might this change the auto industry in Connecticut in the short term and the long term?

CARA estimates that in the first-year of this sales tax change, vehicle sales will fall 25% for a loss of $3 billion in sales to just the 270 new car dealers in Connecticut. (This does not include used car only dealers.) The estimated loss in sales tax loss in the 2019-2020 FY will total $47,625,000. When coupled with consumers that purchase less expensive cars or those who buy from out of state dealers and then service those vehicles out of state, the additional revenue loss will be $40,000,000 or a total loss of $87,625,000 in sales tax.

Loss of this revenue to dealerships will result in layoffs by as much as 10% of the 14,000 people employed in CARA dealerships. Additionally, municipal grand lists and associated property tax review will be negatively impacted as consumers will keep older cars longer; consumers who do purchase, will purchase lower priced vehicles. 

Finally, many consumers will choose to sell their vehicles privately to avoid the double taxation 6.35% loss. This will impair and impact the safety of vehicles on our roads. This is because CT state law requires safety inspections for all used cars sold via a licensed dealer and when private sales occur, no safety inspection will be performed.  CT-DMV does not inspect private vehicle sales.