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New Jersey Tax Court Reinforces Automobile Trade-in Tax Law

Mar 02, 2021

On February 23, 2021, the New Jersey Tax Court handed down a decision that should influence a customer’s decision in a Lemon Law claim involving a new vehicle and whether to accept a replacement vehicle from the manufacturer or a return of monies and fees paid (including sales tax).  In Botwin v. Div. of Taxation (N.J. Tax Ct., No. 013411-2019, 2021 BL 64154, Opinion 2/23/21), the New Jersey Tax Court reinforced long-established statutory and regulatory law that, in order to receive a sales tax credit for a trade-in vehicle, the trade-in and the purchase of the new vehicle must occur at the same time.

On July 11, 2017, Andrew and Laura Botwin purchased a new pickup truck valued at $51,978.27 with a reduced sales price of $22,978.27, after they received a credit of $29,000 for their trade-in. They paid sales tax in the amount of $1,600.32 on the reduced sales price.  The Botwins later settled a Lemon Law claim with the manufacturer and returned the vehicle and opted to receive a full refund of the selling price of $51,978.27, including the sales tax paid on the trade difference, rather than receiving a replacement vehicle from the manufacturer.

Subsequently, the Botwins purchased another truck from a different dealer for $67,849.06, plus sales tax. They then sought a refund from the Division of Taxation for the sales tax they would have saved based on the value of the vehicle they used as a trade-in as part of the first transaction. The Division denied their request. On appeal, the Botwins argued that their first and second new vehicle purchases were a single transaction, and that the trade-in credit should be applied to the second purchase, thereby reducing their sales tax obligation on the second purchase.

In ruling in favor of the Division of Taxation, the Court stated that the Botwins were not entitled to a sales tax credit for the value of the vehicle originally traded, because the vehicle was not physically traded when they made their second purchase.

The significance of this case is the interplay between the New Jersey (New Car) Lemon Law and the Sales Tax Law, as they relate to a trade-in vehicle.  Under the New Car Lemon Law, if a motor vehicle is not repaired in a specified time, a manufacturer can issue a refund including all paid fees (including  sales tax), less a reasonable allowance for personal  use, or the manufacturer can offer a replacement vehicle, in lieu of a refund, at the purchaser’s option.

The Court noted that “under the New Car Lemon Law, the Botwins had the option to take a replacement vehicle from the manufacturer as their remedy, in which case no additional sales tax would be due.  However, the Botwins opted for the full refund, including sales taxes previously paid, instead of accepting a replacement vehicle from the manufacturer “thus losing their trade-in credit” when they purchased a vehicle from the second dealership using the monies refunded to them from the original purchase.

It may make good business sense for dealers faced with a similar new vehicle lemon law claim  involving a trade vehicle to advise the purchaser that if they are successful with a Lemon Law settlement with the manufacturer, it is the better option to select a replacement vehicle instead of accepting a refund, including sales tax paid.  As the Court noted, “the Lemon Law does not contemplate that the return of a previous trade-in would ever be available to a consumer as relief.”