A Bumpy Road to Get Luxury Tax Refund
Christopher E. Zuleski dutifully anted up $523.81 in luxury taxes when he bought his Toyota Land Cruiser last April. Four months later, Zuleski found out that sport utility vehicles like his were exempt from the tax. He’s been battling to get a refund ever since.
And Zuleski is not alone. Land Cruiser buyers from Los Angeles to New York have about a 50-50 chance of getting hit with the luxury tax, industry insiders say.
The reason why--abject confusion--speaks volumes about the complexity of U.S. tax laws. To implement the two-volume, 7,000-page U.S. Tax Code, the Treasury has put out six volumes of regulations.
The rules are complex. But even more complex are the exceptions and caveats to nearly every rule. Indeed, even seemingly straightforward things such as mileage deductions get muddled when you delve into the details. You can deduct 28 cents per mile traveled for business trips, for example, but only 9 cents if you’re going to the doctor. Charity mileage is 12 cents.
The luxury tax, passed in 1990, was originally levied on purchases of expensive cars, boats, planes, furs and jewelry. But the 1993 tax bill eliminated luxury taxes on most items. The lone exception was automobiles with selling prices over $30,000.
On the face of it, the luxury tax seems relatively simple. Auto dealers are supposed to charge an additional sales tax of 10% on the portion of any price exceeding $30,000. In other words, if you paid $40,000 for a car, you’d pay a $1,000 luxury tax (10% of the difference between $40,000 and $30,000). The new tax law indexed the threshold for inflation, so in coming years the tax will be imposed on slightly more costly cars.
But there are exceptions. And that’s where the complexity--and confusion--comes into play.
When passing the law, Congress wanted to hit rich people who bought expensive toys. It didn’t want to penalize professional truckers, handicapped people who paid a great deal for specially equipped cars or car-poolers who buy large, expensive vans to ferry colleagues to work. To exempt these groups, legislators threw in a plethora of rules and definitions.
One of the rules is that trucks and vans that have a gross vehicle weight of more than 6,000 pounds--when loaded to capacity--are exempt. Cars with an unloaded gross vehicle weight over 6,000 pounds are also exempt. The Land Cruiser weighs about 4,000 pounds at the curb. But if you load it up, it can weigh more than 6,500 pounds.
That’s left many dealers grappling with a question: Is this a car or a truck?
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Recognizing the controversy, Toyota Motor Sales U.S.A. sent a memo to Land Cruiser dealers in late July. In the memo, Toyota takes the position that the Land Cruiser falls under the definition of a truck and is exempt from the tax. But it also notes that Toyota’s “views are not binding on the IRS. Any responsibility for collecting the tax from customers is the dealer’s, not Toyota’s.”
James Cota, assistant sales manager at Rogers Toyota in Glendora, says the Land Cruiser is registered as a “wagon” rather than a truck. Therefore, it is subject to the luxury tax. The vehicle is imported, however, and U.S. Customs calls it a truck.
Still, says Cota: “Until the Internal Revenue Service puts in writing that this vehicle is exempt from luxury tax, I am going to collect the tax.”
It’s worth noting that the Land Cruiser isn’t the only vehicle to fall into tax limbo. While it’s clear that Mercedes-Benzes, Ferraris and a host of other expensive cars are subject to the luxury tax, some might question whether it should also be levied on Range Rovers and other costly truck-like vehicles. However, Range Rover dealers are unanimous in their position that their products are sport utility vehicles, and subsequently exempt from the tax.
Toyota dealers are the exception. An informal telephone survey of more than a dozen dealers found Toyota dealers were split, with 80% favoring collecting the tax on sales of the Land Cruiser. However, when pressed, a few dealers changed their position, saying that further investigation revealed their vehicle was exempt.
A spokesman for Toyota Motor Sales U.S.A. maintains there is no question. Land Cruiser dealers should not be collecting the tax.
“The Land Cruiser is not and never has been subject to the luxury tax,” says John Hanson, product news manager at Toyota headquarters in Torrance.
What does the IRS say?
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There is no official IRS answer, a spokeswoman says. Specific issues such as this are generally decided by so-called “private letter rulings,” which give an official IRS position on the fine details of the tax code. Private letter rulings must be requested in writing and they cost several thousand dollars. No one has requested a ruling on the Land Cruiser, she adds.
All of this is little consolation to those inappropriately charged the tax. Getting a refund is virtually impossible, consumers note, because luxury tax refunds must be claimed through the retailer--in this case the Toyota dealer. And many of these dealers, including Zuleski’s, argue that the tax must be paid.
The moral of this story is, ask about the tax before you sign on the dotted line. It may just save you $500 to $1,000. If, instead, you pay the tax and try to get a refund later, you’re likely to find the road to refund is the rockiest road you’ll encounter in your new sport utility vehicle.
