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)