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Chaos for Car Dealers in New Jersey

2 min readBy: Gerald Prante

Today is the final day of a 6 percent general sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. in New Jersey, and while a 1 percentage point taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. increase on small items may not sound like much, 1 percent of a car’s final sale price can be significant, which is why car dealers in New Jersey are scrambling to reach deals before Saturday. But when is a car deal final appears to be the question many dealers are facing as confusion reigns over changing tax laws in the Garden State. From the Star-Ledger:

With just days before the state sales tax goes up, confused car dealers are calling their accountants and reaching for the antacid.

Dealers are well aware the sales tax increases to 7 percent from 6 percent on Saturday, but does the new rate apply to customers who have driven their cars off the lots, or merely confirmed a purchase? How do computer systems need to be adjusted to reflect the change?

And it’s not just the sales tax with which dealers must grapple. Also kicking in Saturday is a 0.4 percent add-on for cars that cost more than $45,000 or get less than 19 miles per gallon. The New Jersey Coalition of Automotive Retailers said the charge will apply to nearly half the cars sold in the state.

The budget compromise reached last week in Trenton gave retailers only a week to digest the new laws, and so far their collective message is: Huh? With New Jersey auto dealers responsible for collecting hundreds of millions of dollars each year in sales taxes, the pressure is on to quickly learn the finer points of the new legislation.

“Confusion will reign,” said Jim Appleton, president of the New Jersey Coalition of Automotive Retailers. “Trying to get it right in just three or four days is unreasonable.”

Appleton said his organization is fielding dozens of calls a day from dealers, their controllers and technical support about the whens, hows and whos of the new taxes and charges. (Full Story)

If a tax hike is known to the public to be implemented at a certain point in the future, it merely changes the relative prices between goods across time. This encourages more consumption today and less consumption tomorrow. The magnitude of the losses in economic well-being that results from this distortion between goods across time depends upon the discount rates of consumers (how much they value the present compared to the future), as well as the size of the tax and the amount of available information regarding the tax hike provided to the consumers in advance.

For more on the issue of tax complexity, check out our section on the topic.