The Arkansas Auto Tax Rip-Off

The Arkansas Auto Tax Rip-Off
Morgan Reynolds — Feb 5, 2007
Printer friendly copy of this article available here.
In the long and glorious history of taxation, some of the state’s plunder outshines its routine thieving, if only for the audacity factor. My wallet was suddenly lightened by an unexpected $300 the other day when I visited those nice young ladies at the local revenooers office.
You see, I was visiting my son and his family near Austin, Texas when I saw a dealer ad for $11,000 off Dodge Rams. Well, let’s go down and look and, sure enough, I bought a bright red 2007 Dodge Ram 1500 Quad Cab pickup (yes, it’s got the Hemi!). But then came registration of the vehicle in Arkansas where I have lived for the last four years, and “settling up” on taxes. It makes no difference in this tale of tax woe where I had purchased the truck – Texas, Arkansas or Timbuktu – as long as I must register it in Arkansas.
The posted MSRP was $33,040 and that was fluffed up by a dealer add-on of some $1,000+ in claimed paint and fabric protection and other nonsense. According to the dealer’s bill of sale, our verbally agreed-upon price devolved from over $34,000 this way: a dealer discount dropped it to a so-called sales price of $28,235 and then the $5,000 customer rebate from Dodge reduced the “net sales price” to $23,235. OK, that was a good deal, a solid $10,000 off and I agreed to pay $23,235 for the truck, plus the familiar TTL the government clips us all for. Heck, I paid $19,200 for a far more modest Ford F150 back in 1998. That amounts to no auto price inflation whatsoever in my 9 years between new vehicles.
So how much was the sales tax? The dealer calculated what to send to Arkansas at six percent of the net sales price of $23,235, or $1,394.10 billed to me. That was the right tax liability if I had still lived in Texas, where the auto sales tax is six percent too and the tax base is the net sales price the customer actually pays. Naturally, I expected the same from Arkansas but, alas, no such luck. In Arkansas the 6% tax applies to the higher “sales price” of $28,235 before the manufacturer’s rebate is applied. That boosted my tax liability up to $1,694.10, a tidy $300.10 jump in revenue for the darlings over at the Arkansas state government. Ka-ching! It warms my heart that the $300.10 they took will buy some nice lunches for the elect in the state capitol. I suppose I should feel grateful that the state did not tax me on the posted sticker price of $34,000+!
What a raw deal! The Arkansas state government forces me to pay sales tax on a price I never paid! And when I and other auto buyers decide to spend some of the money we “saved” through “rebates” on which we already have paid sales taxes, retail merchants collect more sale tax from us to ship over to Little Rock. Two ways of milking the cow goes down creamy smooth for those who live off taxes.
Naïve little me, it turns out that this practice of collecting sales taxes on higher prices than consumers actually pay is widespread. “I don’t think people really realize how all this discount stuff works,” said tax consultant Pat Pelino in 2005 to the Washington Post. Since states want to protect their tax base, she said, “they love to get you coming and going.”
The tax “multiplier” from auto rebates is a practice carried over from the treatment of manufacturers’ coupons on groceries and related items, where consumers often pay full retail price and the associated sales tax, send in a coupon and get a rebate to bring down their “net price” but never recover the higher sales tax they already paid. These itty-bitty rebates only total about $3 billion nationally each year but auto rebates run closer to $30 billion. If only half of auto rebates are taxed at six percent rate, state governments rake off a tidy $900 million annually on phantom retail spending.
“There is no art which one government sooner learns of another,” Adam Smith observed in 1776, “than that of draining money from the pockets of the people.” More to the point is what they say in Albania: fire, water and governments know no mercy.

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