Ohio Adopts Rule on Negative Equity in Vehicles Sales

The Ohio Department of Taxation has adopted a regulation on the tax treatment of negative equity in a vehicle sales transaction. “Negative equity” is a term applied when a motor vehicle purchaser is trading in a vehicle with a current value that is less than the amount owed on the existing loan for that vehicle. For example, a customer trades in a motor vehicle to a dealer in connection with the purchase of another vehicle. The dealer allows a $4,000 trade-in credit towards the purchase of the second vehicle, but the customer still owes $7,000 on the existing loan. The negative equity amount is $3,000.

The manner in which the trade-in allowance, negative equity, or loan payoff amount is displayed on the retail buyer’s agreement determines if it is part of the total vehicle price paid for the newly-acquired vehicle and subject to sales tax. If the negative equity amount is included by the dealer in the total vehicle price, it will be included in the base on which sales tax must be charged. If it is not included in the total vehicle price, the negative equity amount will not be included in the calculation of sales tax. In order to exclude the negative equity from the tax base, it may be shown as an additional amount due to a third party (perhaps financed) after the computation of the total vehicle price. The regulation also provides examples of the application of Ohio sales and use tax to sales of motor vehicles when the purchaser is trading in a vehicle with negative equity. (OAC 5703-9-36, Ohio Department of Taxation, effective October 25, 2009)
(11/8/09)

Ohio Administrative Code
109:4‑3‑16 Advertisement and sale of motor vehicles.
[Definitions]
(A) For purposes of this rule, the following definitions shall apply:
(5) “Purchase price” means the total amount the consumer is required to pay the dealer pursuant to the contract, but excluding tax, title and registration fees and documentary service charges. A negative equity adjustment may be included in the purchase price.
(12) “Negative equity adjustment” means an equal amount which is added to both the purchase price of a vehicle and the trade‑in allowance for the trade‑in vehicle in a transaction.
(B) It shall be a deceptive and unfair act or practice for a dealer, manufacturer, advertising association, or advertising group, in connection with the advertisement or sale of a motor vehicle, to:
(17) Raise or attempt to raise the actual purchase price of any motor vehicle to a specific consumer except that a trade‑in re‑evaluation may occur pursuant to paragraph (B)(19) of this rule, a negative equity adjustment for a trade‑in vehicle may be made, or the consumer otherwise consents to such price increase. In the instance that a motor vehicle is ordered by the dealer, the purchase price cannot be increased by that dealer after submission of the order to the manufacturer for a specific consumer except that the dealer may raise the actual purchase price by an amount equal to the increase if the dealer has actually paid the increased charge. In any instance where the purchase price of a vehicle has been increased, the consumer shall have the right to either pay the increased amount or rescind the transaction. A price increase due to a change in freight charges does not entitle a consumer to rescission;

Ohio Dealers should read the Ohio Administrative Code for examples: Click here: http://codes.ohio.gov/oac/5703-9-36