What is it?
The "Lemon Law" is a law which allows customers who purchase a new vehicle which is defective or has chronic problems to obtain relief.
What relief is given?
The law allows the consumer to obtain retail sales tax refunds directly from the manufacturer or new car dealer acting on behalf of the manufacturer when the manufacturer or the new car dealer buys back the "lemon." The manufacturer or new car dealer acting on behalf of the manufacturer may then request a refund or credit directly from the Department of Revenue.
To obtain a refund or credit, the manufacturer or new car dealer acting on behalf of the manufacturer must retain a copy of the arbitration document, a signed statement from the customer showing the tax was refunded, copies of sales invoices showing actual amount of the sale and the tax collected, and copies of the refund checks drawn payable to the consumer and/or lien holder.
The signed statement from the manufacturer or new car dealer acting on behalf of the manufacturer should include the customer's name, date, amount of tax refunded, the repurchase amount, mileage use fee calculation, and the name of the dealer or manufacturer making the refund.
Mileage use fee
A mileage use fee may be charged for the amount of time the customer has used the vehicle. The mileage use fee is not subject to further taxation. This is the part of the purchase price not refunded and has already been taxed.
How to calculate the retail sales tax refund
When the retail sales tax and licensing fees are included in the "purchase" price, a ratio must be used to remove ancillary fees from the purchase price. The ratio is to be calculated as follows:
|Sales price of Vehicle
|Less: Trade-in (if applicable)
|Sales Tax (8.4%)
The ratio is calculated as the sum of (2,520 + 50) ÷ 32,570 =.079
Calculate the new sales price used to refund sales tax as $32,570 - $2,200 (Mileage usage fee) X .079 = $2,399.23. This is the amount to be deducted from the resulting repurchase price of $30,370 (Purchase price minus the mileage usage fee). In this example it would be $30,370 -$2,399.23 = $27,970.77. This is the repurchase price and the sales tax to be refunded would be $2,349.55 ($27,970.77 X 8.4%).
Credit on tax return
The manufacturer or new car dealer acting on behalf of the manufacturer may take the credit on the excise tax return for the retail sales tax on the repurchase amount, but only after all required documentation has been received by and approved by the Department of Revenue.
When a customer opts to exchange the "lemon" for another vehicle of the same or higher quality, the customer is required to pay retail sales tax on any charge above the amount allowed for repurchase. The Retailing B&O tax is also due only on the additional charge.
In many cases, the dealer will allow the customer to exchange the "lemon" for a higher quality vehicle for no additional charge. Because there is no additional charge, the dealer is not required to pay Retailing B&O tax or charge the customer retail sales tax on this additional value.
The charges for additional options on a replacement vehicle are subject to the retail sales tax and the Retailing B&O tax.
Trade-in - not Lemon Law
When the "lemon" is used as a trade-in on another vehicle without going through the "Lemon Law" process, the "lemon" value may be deducted from the price of the new vehicle and retail sales tax is due on the balance, if there is any. The dealer owes Retailing B&O tax on the total selling price on this type of transaction.
Dealer voluntary buy-back - not Lemon Law
When a customer purchases a vehicle and later determines the vehicle is unsatisfactory, for whatever reason, and the dealer voluntarily buys the car back, without "Lemon Law" arbitration, the customer is not entitled to a return of the retail sales tax.
The dealer has purchased the vehicle, not refunded the customer's money.
The Attorney General's Office has the authority to contract with private entities to conduct the arbitration hearings. The Attorney General should be contacted for more information about the "Lemon Law" for areas other than the retail sales tax.
Note: Only the manufacturer will be reimbursed for the retail sales tax refunded to the customer on repurchases of used vehicles. Used car dealers are not eligible for the refund.