Accelerating the Sales Tax on the Difference Deduction

Date: January 22, 2018

2018 Victory – Sales Tax on the Difference

In January of 2018, the Michigan Legislature voted to override Gov. Rick Snyder’s veto on legislation accelerating the phase-in of the sales tax on the difference for trade-ins on vehicles and recreational vehicle purchases. This marks the first gubernatorial veto override since 2002.

The NFIB-supported legislation would accelerate the 2013 phase-out of applying the sales tax to the value of a trade-in when purchasing a vehicle or RV. The bills were originally vetoed in July of 2017 after passing both the House and Senate.

Under the original bill that was passed in 2013, boat buyers could take a full trade-in deduction immediately, but the tax break for cars and RVs is phased in slowly with an initial trade-in value deduction of up to $2,000 and an increase in the maximum deduction by $500 annually over the course of the next 25 years beginning in 2013. Currently, the maximum trade-in allowance for 2018 is $4,000.

“The law lets people who buy vehicles subtract the value of their trade-in from the sales price of the new or used one for sales tax purposes – potentially knocking hundreds of dollars off the total bill.”

Under the new bills, the acceleration of the phase-out increases the amount of a trade-in’s value exempt from the sales tax by $1,000 a year instead of the current $500 and the tax on the value of a trade-in would be eliminated 10 years sooner by 2029 instead of the previously planned 2039.

The law lets people who buy vehicles subtract the value of their trade-in from the sales price of the new or used one for tax purposes – potentially knocking hundreds of dollars off the total bill.

For example: if you are purchasing a new or used vehicle or RV for $10,000 and get $2,000 for your trade-in, the sales tax is only applied against the difference or $8,000. In this example, a savings of $120 in sales tax. ($10,000 X 6% = $600) vs ($10,000 – $2,000 X 6% = $480).

Prior to the change in the law, Michigan was one of just six states that applied its 6 percent sales tax to the full sale price even if the transaction included a trade-in.

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