— Dennis Nothstein, Allentown
A: Yes they can, Dennis.
They won't in your case, so long as you go the extra mile, sending them the backup information they've requested — a bill of sale, for example — but by law, the state can charge sales tax not on the actual selling price, but on the fair market value of a motor vehicle.
The state Department of Revenue website puts it this way: "When purchasing or selling used vehicles (including motorcycles) in Pennsylvania, many taxpayers are unaware that sales tax due to the Department of Revenue is a percentage of the fair market value of a vehicle, rather than a percentage of the purchase price." I think that's poorly phrased, because it suggests that the 6 percent sales tax is applied to the fair market or "book" value, and not the actual purchase price, in all cases, and clearly that's not the practice.
I think what it means to say is, the state can charge tax on the book value if the buyer can't show the claimed sale price is genuine. Revenue Department spokeswoman Elizabeth Brassell agreed with my assessment, and said she'd ask officials to review the language to see if any changes would be appropriate.
Anyway, clearly it's in the state's interest to protect itself against fraud, and though your case is legitimate, some warriors happily would stiff Harrisburg on a portion of sales-tax proceeds, particularly with formidable sums like those hitched to vehicle sales at stake. PennDOT and the Revenue Department share the driving duties in trying to prevent this practice through the Motor Vehicles Understated Value Program.
Not that I've ever thought of anything like this, but here's a scenario: Two private parties agree to a price of $10,000 for a car. On the way to the notary, we agree that for "official" purposes, we'll say the price is $6,000. That's a tax saving of $240, which we split, and the buyer pays the seller the missing $4,000 in cash, on the sly. That's not legal, of course, and though the program can't prevent the practice, it's meant to help enforce the collection of the correct amount of sales-tax revenue.
The state also tries to set up roadblocks for incorrect sales-tax remissions through the MV-3 form. If a vehicle purchase price is less than 80 percent of the average fair market value of the car, a notary should require the buyer or seller to fill out an MV-3 explaining the reason for the lowball price. The form states that "an additional audit" of the sale could be done, and that if you fail to reply to a subsequent letter from the state seeking proof of the purchase price, "you will be assessed for the estimated amount of tax due" based on the book value. If the buyer or seller refuses to fill out the relevant sections of the MV-3, the notary is not allowed to complete the transaction.
The state can assess the sales tax based on book value in cases of transactions "not at arm's length" — for example, business owners "selling" a vehicle from one commonly owned business to another.
Vehicles given as gifts, including those between family members, are not subject to sales tax, and the Revenue Department website makes an interesting observation in this regard: "In many instances, taxpayers are incorrectly informed by licensing agents that a minimal purchase price (e.g. $1) must be reported … even if the vehicle is a gift. This is not correct." I always thought this was the case. In fact, the state goes on to explain, the $1 nominal purchase price often triggers an audit. Instead, an "affidavit of gift" form should be filled out.
Revenue Department spokeswoman Maia Warren cautioned that not every instance of underpaid sales tax on vehicle purchases represents a case of attempted tax fraud. Honest mistakes are made, she said. But it would be naive to doubt that in some cases of lowball pricing, warriors are trying to avoid full-tax potholes.
Whatever the cause, vehicle sales-tax underpayments are not insignificant. In the last five years, the understated value program has pumped an average of $1.9 million annually into the state's gas tank, and more than $20 million has been realized since its inception in 2000, Warren said.
About 35,000 of the letters you received go out each year, Dennis. Brassell said computer searches are applied to PennDOT vehicle-purchase records in search of transactions with wide disparities between book value and price paid. Officials review the transactions culled by the computer, and from those determine who gets the "Dear Sir/Madam" letters seeking copies of a bill of sale or other specified evidence. Only about 20 percent of the notices result in additional tax payments to the state, Brassell said, so clearly, the majority of lowball purchases are "clean."
My sense is that most car sales are conducted honestly, even down to the taxes paid, but there's also no doubt that some folks try to detour the impact of full tax payment. And surely, not everyone gets caught. Any devious warrior with half a computer-control module knows to conduct the illicit part of the transaction in cash, outside the glare of the state's computer-system headlights.
If the state collects nearly $2 million per year in mostly honest underpayments, you have to wonder how much is lost to the intentional kind.
Road Warrior appears Mondays and Fridays, and the Warrior blogs at mcall.com. Email questions about roadways, traffic and transportation, with your name and the municipality where you live, to hartzell@mcall.com, or write to Road Warrior, Box 1260, Allentown, PA 18105-1260.
