Thursday, Feb. 7, 2008

New tax law could help automobile dealers

Buyers can now deduct the value of trade-ins from new vehicle price in paying title tax

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With many analysts expecting 2008 to be another tough year for vehicle sales, Maryland auto dealers are seeking any sales advantage they can get.

Help may come from an unlikely source: an increase in the state excise tax on vehicle titles passed by the General Assembly and signed by Gov. Martin O’Malley (D) late last year. While the new law raised that tax from 5 percent to 6 percent in January, another provision of the law has captured dealers’ interest.

For the first time, auto buyers in Maryland can deduct the value of their trade-ins from the value of the new vehicle in paying the title tax. Previously, the tax did not allow for trade-ins.

This means that a buyer purchasing a vehicle for $20,000 who has a car to trade worth $10,000 pays only $600 in title taxes, not $1,200. Last year, that same buyer would have paid $1,000 in title taxes.

‘‘Obviously, if a buyer doesn’t have a decent trade-in, this won’t help them,” said Peter Kitzmiller, president of the Maryland Automobile Dealers Association.

Even with the trade-in provision, state coffers are expected to gain a net $47.8 million this fiscal year and $94.4 million in fiscal 2009 through the higher vehicle tax, according to a report by the Maryland Department of Legislative Services.

Without the trade-in deduction, those numbers would have been $90.6 million and $177.6 million, respectively, the report says.

As of late last year, Virginia and Washington, D.C., did not allow for the trade-in deduction, while Delaware, Pennsylvania, West Virginia, North Carolina and New Jersey did, according to the report.

About 50 percent of new vehicle purchases and 20 percent of used cars bought involve trade-ins, the report says. The average trade-in value with new cars purchased is $6,300, while the average with used vehicles is $736.

Numerous auto dealers are letting their customers know about the trade-in deduction, Kitzmiller said. ‘‘It’s an education process,” he said. ‘‘One of the challenges is that it is difficult to explain in a 30-second spot.”

The state auto group plans to distribute information about the deduction at the four-day Motor Trend International Auto Show, which starts today in Baltimore, Kitzmiller said.

Revenues from the tax go to the state’s transportation fund, which finances improvements in roads and mass transit.

While some dealers are trying to educate customers about the deduction, others don’t want to remind customers of additional buying costs.

‘‘We’re not really trying to use [the new deduction] as a selling point,” said Tamara C. Darvish, vice president of Darcars Automotive Group of Silver Spring and chairwoman of the Washington Area New Automobile Dealers Association. The group represents dealers in suburban Maryland, Washington, D.C., and Northern Virginia.

‘‘We don’t see much value in doing that.”

U.S. salesfell last year

Last year, U.S. auto sales fell to their lowest level since 1998, with 16.15 million new vehicles sold, according to Santa Monica, Calif., automotive information company Edmunds. That was down 2.5 percent from 2006.

Ford Motor Co. saw the largest decline among the major U.S. automakers at 12 percent. Toyota Motor Corp., which edged out Ford for the second spot behind General Motors Corp., posted a U.S. increase of 2.7 percent, aided by buyers’ desires for vehicles that get better gas mileage.

GM and Chrysler also saw U.S. sales drop last year, while Honda and Nissan joined Toyota with increases in this nation.

In January, U.S. sales are expected to continue to decline from a year ago, Edmunds executives said last week.

‘‘Car sales were remarkably slow in January, probably in part because of dramatic stock market fluctuations that flustered consumers at a time when the housing market and other economic uncertainties were also making headlines and causing stress,” Jesse Toprak, executive director of industry analysis for Edmunds, said in a statement. ‘‘Activity at dealerships began to pick up a bit toward the end of the month, pulling up the average from what would have been a much more significant decline compared with previous periods.”

This report originally appeared in The Business Gazette.