What is a "trade-in?"
"Trade-in property of like kind" means articles of tangible property traded in on property of the same generic classification. This means motor vehicles traded for motor vehicles and licensed recreational land vehicles for licensed recreational land vehicles. Property, such as a motor home, may be allowed as a trade-in in either classification. More than one trade-in is allowed, if the property fits the same generic classification as the item sold.
Licensed vehicle trade-in categories
The licensed vehicle categories for "trade-in property of like kind" are:
- Motor Vehicles: Cars, trucks, trucks with canopies, motorcycles, motor homes, mopeds, ORVs, and wheelchair conveyances.
- Trailers: Boat trailers, utility trailers, animal trailers, commercial trailers, and all other trailers except travel trailers.
- Recreational Land Vehicles: Travel trailers, campers, tent-camper trailers, and motor homes.
- Personal property: Mobile homes, travel trailers, motor homes, tent-camper trailers, and campers.
What can't be traded?
Examples of trade-ins that don't qualify include:
- Boats for cars
- Farm machinery for trucks
- Recreational land vehicles for cars or pickups
- Jewelry for motor vehicles
For purposes of the retail sales tax measure, the selling price excludes "trade-in property of like kind." This means that dealers will collect retail sales tax from retail customers on the price after the value of the trade-in is deducted.
The seller must accept ownership of the trade-in property and reduce the price of the purchased property at the time of sale by the value of the trade-in property. The trade-in must be used as consideration for the purchase of the property.
Trade-in clearly identified
The trade-in value is negotiated between a seller and a buyer. The value and type of trade-in must be clearly identified on the sales agreement or invoice. The value cannot be reduced by over allowances, payoffs or other encumbrances. Payment to lien holders does not decrease the trade-in value. Cash back to the customer for all or a part of the trade-in value does not constitute a trade-in for tax reduction.
- A dealer gives the customer a $4,000 trade-in value on a transaction. The traded-in vehicle is posted in the records at a $3,000 inventory value and $1,000 over allowance. The allowable trade-in value is $4,000.
- A dealer accepts a trade-in vehicle with a fair market value of $4,000 upon purchase of a new $10,000 vehicle. The purchaser still owes $1,500 on the trade-in vehicle, but the dealer agrees to pay off this remaining balance to the bank. Sales tax exemption is still allowed for the full $4,000 trade-in value, and sales tax is computed on the remaining $6,000 of the new purchase price.
- A dealer accepts a trade-in with a fair market value of $10,000 on a $25,000 vehicle. The buyer asks to have $5,000 in cash. The sales tax exemption is allowed only for the remaining $5,000. Retail sales tax is computed on $20,000. The cash given to the customer is not considered part of the trade-in.
Previous tax payment not required
Previous payment of sales or use tax on the item traded is not a requirement for trade-in credit. The following are examples of instances when credit for trade-in value is granted:
- An item purchased in another state by a resident of that state who then becomes a Washington resident.
- An item received as a gift.
- An item for which the owner has not transferred title to his/her name before trading it in.
Trade-ins and consignment sales
A consignee may exclude from the sales tax, the value of a vehicle traded-in by a purchaser of a consigned vehicle, provided the traded-in vehicle was delivered as consideration for the purchase of the consigned vehicle.
Applying trade-in to leased items
Owned items (even encumbered) may be traded-in on leased items of like kind. Two methods are used to apply the trade-in value to the lease.
The trade-in value may be applied against the value of the leased vehicle, thereby reducing the monthly payments and the sales tax due on those payments. Example: A dealer leases a vehicle for 36 months at $250 per month. The value upon which the lease payments are based is $9,000. A customer trading in a vehicle for $2,000 reduces the payments to $195 per month for 36 months. Retail sales tax would be due on the $195 lease payments.
The trade-in value can be applied against the initial lease payments, with no retail sales tax due until it is used up.
- Using the example above, retail sales tax would not be collected during the first eight months (8 x $250 = $2,000). Retail sales tax would be collected on all of the $250 lease payments thereafter.
The two methods can also be used in combination with each other.
Trade-in with a loan (Encumbered Trade-in)
When buying or leasing a vehicle, a buyer is entitled to the full amount of the agreed upon trade-in value. The trade-in allowance is not reduced by any amount owed on the vehicle being traded in (i.e., “equity” is not a factor in determining the trade-in allowance).
For leases, the trade-in allowance can be applied to both the cap cost reduction and it can be applied to exempt the lease payments until the trade-in allowance is exhausted.
A dealer accepts a trade-in with an agreed upon value of $15,000 and the buyer/lessee still owes $16,000 on the traded vehicle. The trade-in allowance is still $15,000.
The customer agrees to lease a vehicle for 36 months at $500 a month. There is a $3,000 cap reduction payment due at signing and the customer makes a $3,000 cash payment. The $15,000 trade-in allowance is applied toward the first 30 monthly lease payments.
The customer owes sales tax on the $3,000 cash payment. The first 30 lease payments were exempted by the trade-in allowance. Sales tax will apply to lease payments 31 through 36.
A dealer accepts a trade-in with an agreed upon value of $15,000 and the buyer/lessee still owes $13,000 on the traded vehicle. The trade-in allowance is still $15,000.
The customer agrees to lease a vehicle for 36 months at $500 a month. There is a $5,000 cap reduction payment due at signing. The customer makes a $3,000 (cash) cap reduction payment and applies $2,000 of the trade-in toward the remaining cap reduction. The residual $13,000 trade-in allowance is applied toward the first 26 monthly lease payments.
The customer owes sales tax on the $3,000 cash payment. The $2,000 paid with the trade-in and the first 26 lease payments were exempted by the trade-in allowance. Sales tax will apply to lease payments 27 through 36.
A dealer accepts a trade-in with an agreed upon value of $30,000 and the buyer/lessee still owes $35,000 on the traded vehicle.
There is a $3,000 cap reduction payment due at signing and the customer makes a $3,000 cash payment. The customer agrees to lease a vehicle for 36 months at $500 a month ($18,000). Since the total cost of the lease ($21,000) is less than the value of the trade-in ($35,000), the trade-in allowance is $21,000.
Sales tax is not due on the cap reduction payment or any of the lease payments as the allowance is applied to the cap reduction payment and all 36 lease payments.
Extended warranties and maintenance/service agreements
The trade-in allowance cannot be used to reduce the sales tax due on an extended warranty, maintenance agreement or service contract.
No B&O tax deduction
The selling price before deducting the trade-in value must be reported in the gross amount columns of the excise tax return under the Retailing and Retail Sales tax classifications. The "trade-in" deduction is allowed only under the Retail Sales tax classification. No B&O tax deduction is allowed for the amount attributed to the over allowance.
Summarized each reporting period
Trade-in values should be summarized for each reporting period. Trade-ins on sales to nonresidents should not be included if the total sale is treated as an interstate or nontaxable sale.
Trade-in value exceeds selling
If the trade-in value exceeds the selling price of the item price sold, the selling price should be used as the trade-in value.