Buying a car below "Fair Market Value" in PA

mazda
tribute

#1

Recently, i got the chance to buy a car that a FOAF was intending to get rid of as “scrap.” 2004 Tribute, 102k mi. It had been sitting for several months–bad COP led to melted pre-cat led to blocked main cat, leaving it in “not drivable” condition.

I paid $500 to out-bid the “strictly scrap” haulers on the basis that it sounded (sight unseen) flippable. Turned out, it was, and is running well (likely I’m about $1000 into it at this point.)

Blue book is roughly $5700, and PA made me fill out a form “MV-3” because I bought it at <80% of Blue Book. PA says they can audit, and charge FMV*0.07 tax if they don’t believe me. I saved some receipts, and some of the used parts pulled.

Anyone have experience with buying cars below book? Preferably in PA, but really any US advice is appreciated. What’s the chances of getting hit with a tax liability?


#2

Many, many years ago, I registered my first car–a beautiful 1971 Charger–in my father’s name, in order to save a bit on insurance. A couple of years later, when I was in a better financial situation, I “bought” the car from my father for $1.00.

This way-below-cost-transaction attracted the attention of the treasury officials in my state–NJ. They provided me with a form that I had to fill-out and have my signature notarized. On that form, I simply explained that it was a transaction taking place w/in a family, and after having the form notarized, I sent it in.

Since I have heard nothing further from the treasury officials for the past 40 years, I tend to think that my explanation was accepted by them. While I can’t vouch for The Keystone State, I think that you are probably safe if you can provide a good explanation, and if you provide some documentation for the repairs that you did in order to make it roadworthy.


#3

No experience but they can do the same in Minnesota if they think you paid way less than what you should have and are trying to scam the sales tax system. I think you are in good shape if you can show what you actually paid and the clerk isn’t in a bad mood that day.


#4

not quite the same thing but… in my younger days (and now, to be honest), I did not have much money. I lived in Maryland, which has tough vehicle inspections. I could not afford any car that would pass their inspection, so I used a little known loophole. I would buy my cars in Delaware and tell the dmv that I needed to drive the car home. since the Maryland temp. tags were not valid out of state, they would give me my hard tags and I had to agree to get the car inspected within 6 months or by December 31st, whichever came first. the dmv workers did not like it and you had to insist, but they would give you the tags if you did insist. I managed to stay on the road, legally, for a few yrs without ever getting a car inspected. not something I would do today but at the time I was a single dad and had to do what I had to do to support my son and myself. prob still the law, not sure tho. it worked in the early 90s


#5

When I tranfered the title for a 1955 Chevy truck in Minnesota, I reported that I paid $900 for it, which is true. I had to provide photographic proof that the truck was a “roller” that needed a total restoration.


#6

I live in Washington State. Had the same problem just yesterday. I bought a Chevy Astro from a customer for $1500. The “book” value of the car is approx $3500. When I went to transfer ownership the Department of Licensing wouldn’t accept a sale price of $1500 without a statement from the seller verifying it and explaining why the sales price was so low. I had to have him fill out and sign a form stating the car needs transmission repair or replacement at a cost of $2000. They had a specific form for this, it must happen often. Otherwise the state would have charged me sales tax on the “fair market value” of the car.

I think as long as you document your actions and have receipts there’s nothing they can do.


#7

In the year 2000, I bought a 1995 Galant (my handle here) for $1200. Its transmission was shot, so we sourced a used one for $800 installed and I fixed the brakes and had a 5 year old car with 100K miles. The CT DMV couldn’t care less what I presented as documentation. The taxed me on the “fair market value” based on their books.


#8

@gallant I don’t know anything about CT, but was that sales tax or property tax? It always seems odd to a native Californian that some states, or towns, collect the equivalent of property tax on all the valuable projects you own. By that principle you own a car worth the higher value, even if you paid less, and your taxes are assessed on that. Just a guess based on other NE states. What you paid for it is potentially evidence that the vehicle is worth that much, but they aren’t bound by it. In CA the buyer (in a private sale) would owe sales tax on the sales amount, unless they could show tax evasion, of cours


#9

You did not buy the car below fair market value. You paid market value for a car that was damaged and not running. You need to document the condition of the car at the time of your purchase. You are paying sales tax on the parts your are using to make the car run, which you also need to document.

Once you sell the car, make a receipt for the sale price and keep a copy for yourself. The new owner will have to pay the sales tax at the time he/she registers the car. I don’t think you will have any problems. Just fill out the forms and don’t sweat it.


#10

If you can PROVE what you paid for a vehicle, that’s all they can (sales) tax you on…Ask to speak to a supervisor…


#11

@MarkM; That was sales tax by the CT DMV. The car would also get taxed as property by your city with their mil rate. It was odd. I had a car that I was trying to sell for $4500 with no takers and they were taxing it at $7K and would not budge. I went to the city clerk with the pink slip, insisting to sell the car to the city at a discount; then they agreed to reduce the rate-what a waste of time.
Now I am in CA where at least they acknowledge a car is a necessity not an investment property.


#12

I’ve bought a number of cars on the cheap and I can’t speak for PA but here in OK auto excise taxes are assessed on an assigned value by the state. It doesn’t matter what someone pays for the car or what kind of story is behind it.

If the assigned value on a used car is 7 grand and someone buys that car for 10 bucks because the engine has been blown and scrapped, the excise tax is 20 dollars on the first 1500 in value and 3.25% on the remaining 5500.


#13

I have purchased many vehicles below fair market value and the states that I happened to live in at the time…simply charged me the tax at “fair market” value. I think that’s more than fair. I got the vehicles at a bargain but I never expected the tax to be discounted.


#14

“I have purchased many vehicles below fair market value and the states that I happened to live in at the time…simply charged me the tax at “fair market” value. I think that’s more than fair. I got the vehicles at a bargain but I never expected the tax to be discounted.”

Are you talking about sales tax? If so then how can that possibly be fair? When you go to Best Buy and buy last year’s demo TV for a 30% discount you don’t pay sales tax on the list price of the TV, you pay sales tax on what you actually pay.


#15

Some of the arguments don’t make any sense to me

According to the rationale of some of the regulars here, there shouldn’t be any point to haggle about the price of the new car

If the MSRP is $20000 and I get it knocked down to $16500, I should be taxed on $20000 . . . ?

In reality, I pay tax on $16500, not $20000

Fair is fair, I believe

You can’t . . . or shouldn’t . . . have it both ways, I would think


#16

It doesn’t make sense to me either. The Ford Focus I bought had an MSRP of $20500, I was getting it around $15500. When I saw the fees, I though the dealership is pulling a quick one on me, but then some research revealed that I will be taxed at the MSRP price. In CA with an almost 10% sales tax it really hurts.


#17

I can understand the rationale behind it…all too easy to declare one price, then pay the rest on the sly and avoid sales tax.

I think if I continue to buy and sell cars (I might) the thing to do would be get a business tax id no and avoid sales tax entirely. (If I keep it small I should be able to avoid anti-curbstoning laws…)


#18

In most states…yes, I mean sales tax. I think most states feel they would lose a lot of revenue if they only charged tax on what the buyer or seller claimed as the “sale price.” If I buy a $10,000 vehicle for $6,000…I think it’s only fair to pay tax on $10,000.


#19

My prior comment was directed at used car sale prices.

When it comes to brand new vehicles in OK the excise tax is based on the actual selling price OR the taxable value if different. In other words, if someone buys that new car for 20 grand and the taxable value according to the state is 25 grand then the tax is 3.25% of 25 grand no matter what the buyer paid for the vehicle.


#20

“If I buy a $10,000 vehicle for $6,000…I think it’s only fair to pay tax on $10,000.”

No, that’s not fair at all. Sales tax is just that, a tax levied on the sales price of an item. If green beans cost .99 and you buy a can off the scratch and dent shelf for .49, you pay–you owe–the tax on .49. Because that is the price you paid. Sales tax is not arbitrarily altered for each item purchased to suit the needs of the governing body. You owe and you pay tax on the actual amount of money exchanged. Anything else is ridiculous, and where I am, illegal.

There are myriad other taxes we pay that are based on value, not price. Real estate property tax, personal property tax, excise tax, gasoline tax, etc. But not sales tax.