You’ve undoubtedly heard about the Volkswagen Dieselgate scandal. But have you thought about the sales tax implications of the fix?

When the news broke, the outrage was palpable. VW owners, VW dealers, and state and federal lawmakers who helped establish tax breaks for the clean diesels demanded retribution, or at least recompense. New York Attorney General Eric T. Schneiderman helped lead the investigation into Volkswagen that culminated in a settlement. Affected consumers have two options:

Buyback: VW will pay the National Automobile Dealers Association (NADA) September 2015 value of affected vehicles

Have the car fixed with an Approved Emissions Modification

An additional cash payment, or “Owner Restitution,” will accompany either fix.

Sales tax and the buyback option

Under normal circumstances — and this situation is far from normal — most states allow a trade-in credit when a car is traded in exchange for another: only the difference between the trade-in amount and the sales price of the vehicle purchased is subject to sales tax. Yet this policy does not apply to the VW buyback option, which “does not provide for the reimbursement for sales taxes and other fees . . .”

To offset the cost of the taxes and fees, the settlement will award VW owners 112% of their eligible vehicles’ September 2015 value.

The majority of states have not yet issued statements on the applicability of sales tax to the Volkswagen settlement. Those that have are in step with the terms of the settlement, that this is not a normal trade-in but is actually two separate transactions: 1) Volkswagen buying back a car and providing the owner with cash; and 2) the former VW owner buying a new car. As a result, there is no trade-in allowance to reduce the amount of sales tax owed on any car purchased to replace an affected diesel.

The following states have issued notices regarding the Volkswagen settlement and sales tax (click on the links to see the notices):

Connecticut

Maine

Tennessee. The Tennessee Department of Revenue adds that a trade-in deduction is allowed for affected diesel owners who trade-in their vehicle to a dealer for a new vehicle.

allowed for affected diesel owners who trade-in their vehicle to a dealer for a new vehicle. Wisconsin

Washington has not issued a statement on how sales tax will or won’t apply to the buyback option. However, the Washington Department of Revenue has issued the following statement: “State law does not permit the Department of Revenue to provide direct sales tax refunds to consumers in the context of class action settlements.” In other words, it won’t refund sales tax collected on the purchase of an affected diesel VW.

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