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IRS Statement about Luxury Tax

Luxury Tax
The luxury tax is imposed on the first retail sale of a passenger vehicle with a price exceeding the base amount. The seller of the vehicle is liable for the luxury tax.

For 2002, the tax is 3% of the amount the sales price exceeds the base amount of $40,000. However, the base amount is increased for the following vehicles.

For an electric vehicle, the base amount is increased by 50%.
For a clean-fuel vehicle, the base amount is increased by the amount the price of the vehicle increases due to the installation of retrofit parts and components that permit the vehicle to be propelled by a clean-burning fuel.

TIP: The luxury tax is scheduled to expire after 2002.

Passenger vehicles. Generally, the tax applies if the passenger vehicle has an unloaded weight of 6,000 pounds or less. However, the tax applies to a truck or van only if it has a maximum loaded weight of 6,000 pounds or less. The tax applies to limousines regardless of their weight.

Leases. Generally, a lease is considered a sale of the vehicle. The sales price is the lowest price for which the vehicle is sold by retailers in the ordinary course of business. For rules on paying the tax on a lease, see section 4217(e)(2) of the Internal Revenue Code.

Use treated as sale. If any person uses a passenger vehicle before its first retail sale, the person is taxed on such use as if that person sold the vehicle at retail.

Exceptions. The luxury tax does not apply to the following uses of a vehicle.

Use of the vehicle as material in the manufacture or production of, or as a component part of, another taxable vehicle manufactured or produced by the user.
Use of the vehicle as a demonstrator.
Use of a vehicle after importation if the user or importer establishes that the first use of the vehicle occurred before January 1, 1991.
Parts and accessories. Certain parts or accessories installed within six months of the date on which a passenger vehicle is placed in service may be subject to the tax. The same rate of tax applies to parts and accessories that applies to vehicles.

The owner, lessee, or operator of the vehicle is liable for the tax. If the part is installed by someone else, the installer is secondarily liable for the tax.

The tax does not apply to any of the following items.

Replacement parts or accessories.
Parts or accessories installed to help a person with a disability operate, enter, or exit the vehicle.
Parts or accessories that permit the vehicle to be propelled with a clean-burning fuel.
Parts and accessories if the total cost (including installation) of all parts and accessories does not exceed $1,000.
Exemptions. The luxury tax does not apply to the sale of a passenger vehicle for the following purposes.

For use exclusively in public safety, law enforcement, or public works activities by the federal, state, or local government. Treat an Indian tribal government as a state only if the use is an essential tribal government function.
For use exclusively in providing emergency medical services by any person.
For use by the purchaser exclusively in the business of transporting persons or property for hire or compensation.
For export. The requirements for making a sale of an article for export exempt from the manufacturers tax also applies to these sales.
Resale or substantial non-exempt use. The tax applies to vehicles that were originally exempt from the luxury tax if the purchaser resells the vehicle or makes a substantial non-exempt use of the vehicle within 2 years after the date of purchase.

Credit or refund. A credit or refund (without interest) may be allowable if the price of the vehicle is readjusted by reason of return or repossession of the vehicle or a bona fide discount, rebate, or allowance applied against the price of the vehicle. For information on conditions to allowance that apply to credits and refunds, see Manufacturers Taxes, earlier. Luxury Tax Computation
1. Enter the retail price of the vehicle
2. Enter additions to the retail price
3. Add lines 1 and 2
4. Enter subtractions from the retail price
5. Adjusted sales price. Subtract line 4 from line 3
6. Base amount for 2002 $40,000*
7. Taxable adjusted sales price. Subtract line 6 from line 5. If line 6 is greater than line 5, stop here--the luxury tax does not apply to the vehicle
8. Tax rate for 2002 .03(3%)
9. Luxury tax. Multiply line 7 by the tax rate on line 8
Line 1. The retail price is the total consideration paid in cash, cash equivalents, goods, services, and the wholesale fair market value of any trade-in minus any payoff made by the seller and any cash given back to the customer. For leases, enter the lowest price for which the vehicle is sold by retailers in the ordinary course of business.
Line 2. Additions include the following items if stated separately on the invoice and not included in the retail price.
Preparation charges.
Delivery charges.
Packaging.
Parts or accessories sold on or in connection with the vehicle.
Taxes (except the luxury tax and state sales tax).
Commissions.
Mandatory warranties.
Any other charges not listed above.

Line 4. Subtractions include the following if they are separately stated on the invoice and are included in line 3.
State and local sales taxes.
Title and registration charges.
Optional warranty charges.
Rebates and price adjustments paid.
The value of used components supplied by the purchaser.

* The base amount for an electric vehicle is $60,000. The base amount for a clean-fuel vehicle is $40,000 plus the amount the price of the vehicle increases due to the installation of retrofit parts and components that permit the vehicle to be propelled by a clean-burning fuel.