Could an auditor tax the gap between an automobile's agreed trade-in allowance and a higher guidebook value?

Plain-English summary

The agreed automobile trade-in allowance generally represented fair market value for the taxable measure, even when it fell below Kelley Blue Book. The Board likewise did not replace an above-guidebook allowance simply because it exceeded the listed value.

An auditor could rebut the agreed-value presumption only with sufficient evidence that the dealer deliberately underallowed the trade-in to reduce tax. Examples included repeated below-market allowances not explained by poor vehicle condition, lower margins on trade-in transactions not explained by industry practices such as loss leaders or promotions, and a widespread pattern throughout the audit period.

An isolated low allowance required examination of the vehicle itself. Poor condition could explain a bona fide lower value. Deliberate tax reduction meant the difference should be taxed as additional gross receipts and the 25-percent intent-to-evade penalty imposed.

Common questions

Was a guidebook price conclusive fair market value?

No. The memorandum said the parties' bona fide agreed price controlled unless the auditor proved deliberate tax structuring.

What was the memorandum's bottom-line enforcement rule?

It said an underallowance should be taxed only where the facts also supported imposing an intent-to-evade penalty.

Citations and references

• California Sales and Use Tax Regulation 1654(b)(1) (agreed allowance and fair-market-value presumption, as cited)
• California Revenue and Taxation Code section 6485 (25-percent intent-to-evade penalty, as cited)
• Hawley v. Johnson (1943) 58 Cal.App.2d 232 (bona fide agreed trade-in value, as cited)
• Kelley Blue Book (valuation benchmark discussed but not treated as conclusive)

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/140-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/140-0500.pdf

Original ruling text

140.0500
State of California

Board of Equalization

Memorandum
To:

From:

Subject:

Mr. William D. Dunn
Audit Program Manager

Date:

December 21, 1995

Sophia H. Chung
Staff Counsel
Underallowance on Trade-Ins
This is in response to your memorandum to Gary J. Jugum, Assistant Chief Counsel, dated October 6, 1995. The Legal Division’s opinion regarding the taxation of an underallowance on a trade-in constituting part of the consideration paid for a new automobile is set forth below. When a used automobile is traded in on the purchase price of a new automobile, the dealer accepting the trade-in must include in the measure of tax the amount agreed upon between the seller and the buyer as the allowance for the merchandise traded in. (Reg. 1654(b)(1).) Regulation 1654(b)(1) provides that, “[s]hould, however, the board find that the allowance stated in the agreement is less than the fair market value, it shall be presumed that the allowance actually agreed upon is such market value.” Accordingly, if an underallowance on a trade-in is the result of a bona fide transaction between the seller and the buyer, additional tax should not be computed on the underallowance. Under such circumstances, the fair market value of the trade-in is presumed to be the price actually agreed upon by the seller and the buyer. (See Hawley v. Johnson (1943) 58 Cal.App.2d 232.) The board should not redetermine the fair market value of the automobile merely because the agreed upon price is below the price listed in the Kelley Blue Book. Likewise, the board should not, and does not, redetermine the fair market value of a trade-in when the agreed upon price is above the price listed in the Kelley Blue Book. However, an auditor may rebut the presumption provided in Regulation 1654(b)(1) that the agreed value of the trade-in represents the fair market value if there is sufficient evidence to establish that the dealer deliberately underallowed the trade-in value to reduce the measure of tax. Under such circumstances, the board should tax the underallowance as additional gross receipts and a 25 percent intent to evade penalty should also be imposed. (Rev. & Tax. Code § 6485.) The taxpayer’s intent to evade may be evidenced by, among other things, recorded trade-in allowances that are consistently below market value and which are not attributed to trade-in automobiles that are in less than fair condition; gross profit margins that are consistently lower on transactions involving trade-ins than on transactions without trade-ins and which are not attributed to business practices pursued by the industry, such as trades on loss-leader automobiles, or trades during promotional sales; and a widespread pattern of underallowances occurring consistently throughout the audit period. If an underallowance is an isolated transaction, further examination is necessary to determine whether the difference in the trade-in value and the fair market value listed in the Kelley Blue Book is attributable to the condition of the particular automobile. If the dealer underallowed

Mr. William D. Dunn

-2-

December 21, 1995
140.0500

the value of the trade-in because the automobile was in less than fair condition, the underallowance should not be taxed. However, if the dealer deliberately underallowed the trade-in value to reduce the measure of tax, the underallowance should be taxed as additional gross receipts and an intent to evade penalty should be imposed thereon. In summary, the Legal Division’s opinion is that an underallowance should be taxed only under circumstances where an intent to evade penalty will be imposed. By doing so, the board would redetermine the fair market value of a trade-in only in situations where a transaction is structured for the purpose of evading tax, rather than a transaction where the dealer has negotiated a good deal. SHC:rz cc:

Mr. Gary J. Jugum
Mr. David H. Levine
Mr. Ronald L. Dick
Sales and Use Tax Attorneys