Recovery of Sales Tax After Vehicle Total Loss
Approximately 12 to 14 percent of all accidents result in a total loss, a number which has been trending upward since 2002. Insurance companies faced with first party claims on policies are responsible for paying the actual cash value or market value of an insured’s vehicle so the insured can replace it with a similar vehicle. In addition, the insurer may also be responsible for reimbursing an insured for other costs associated with purchasing a new vehicle, such as sales tax, title, and vehicle registration fees. Approximately two-thirds of the states require insurance companies to pay for sales tax after an insured replaces a damaged vehicle with a new or used one. However, that doesn’t necessarily mean insurers in those states are going to offer to pay sales tax up front. Nor does it mean insurers in states that don’t require those reimbursements will refuse to pay. Insurers will generally reimburse for those costs on the total loss settlement for an original vehicle, but not a replacement vehicle. For example, if the insured receives $5,000 from the insurer for the old vehicle, and uses that money toward the purchase of a new vehicle costing $20,000, the insurance company would ordinarily pay sales tax on the $5,000, not the $20,000. Frequently, the requirement to pay sales tax after a total loss is discussed within a state’s unfair claim settlement practices laws and/or regulations.
There are two types of claims which can be made following a total loss accident, both of which are discussed in this article: first party claims and third party claims.
First party claims are collision insurance claims made by the vehicle owner/policyholder against his or her own insurance company to recover an insurance payment under the terms of the policy. When and whether a vehicle involved in a collision is considered to be “totaled” for first-party insurance claim purposes is an issue of great angst and confusion for most consumers. While not the subject of this article, a discussion of when a vehicle is considered “totaled” was addressed in a previous article and a chart entitled “Automobile Total Loss Thresholds in All 50 States” can be found on the MLW website.
The amount of the payment depends on the terms of the policy. The payment might also include applicable state fees and sales tax. In most states, the maximum that will be paid for a totaled vehicle will be the amount necessary to replace the vehicle with a comparable used vehicle (plus sales tax, title, and registration fees). This is referred to as the vehicle’s Actual Cash Value (ACV). An exception to this rule would be if the policy provides a Replacement Cost Value (RCV) endorsement as part of the Collision and Comprehensive Coverage.
Whether or not to include sales tax in a first-party claim payment has been closely looked at in recent years. Sixteen states (AZ, CT, CA, CO, IL, KY, MD, NE, NJ, NV, OH, OK, PA, VA, WA and WI) have insurance commissioners/departments which have cited insurers for failing to include or properly calculate tax on their automobile claim payments. A majority of states do provide some guidance as to whether sales tax (possibly including title and registration fees) is to be included in the payment of automobile total loss claims.
However, many other states (DE, DC, ID, LA, MA, MI, MT, NH, NM, NC, NE, TX and WY) remain silent with regard to whether, when, and in what amount sales tax must be paid when settling claims on automobile total losses.
A few states allow for exceptions to the requirement of paying sales tax on the purchase of a replacement vehicle when a vehicle is damaged and considered a total loss. If you are in a collision and your vehicle is deemed a total loss by the insurance company, you may not owe sales tax on your replacement car. In Missouri, for example, an insured may obtain a Sales Tax Credit Affidavit (different states use different names for this document). The insurance company usually provides this affidavit to its insured, who then presents the affidavit to the Department of Motor Vehicles when the replacement vehicle is titled and licensed. The insured will not be charged sales tax on the amount his or her insurance company pays to total out the damaged vehicle. As an example, if the damaged vehicle is worth $10,000 and the replacement vehicle costs $25,000, sales tax may be owed only on the $15,000 difference, rather than the entire $25,000. The insured must present a notarized total loss statement and supporting documentation when applying for title on a replacement vehicle purchased within 180 days of the date of the loss.
These are automobile liability coverage claims made by the owner of a vehicle against a third party tortfeasor (person other than the insured and insurer) or his liability insurance carrier for negligently causing damage to the owner’s vehicle. Where addressed, this type of claim is usually governed and/or addressed by state tort law, and whether sales tax can be recovered depends on the tort and damages laws of the state(s) involved. The third party liability insurance company will be responsible for damages caused by its insured. The extent of those damages depends on the damages law of the state(s) involved as well as possible unfair claims settlement practices laws and/or regulations which may include such third party claims. Quite often, a state will require that the payment of third party claims involving totaled vehicles be governed by the same unfair claims settlement practices laws and/or regulations as are first-party claims.
Alaska, Montana, New Hampshire, Delaware, and Oregon do not have a state sales tax. Hawai’i does not have a sales tax, but it does have an excise tax. However, even states without such a tax may have a symbiotic relationship with a neighboring state which has a sales tax. Oregon, for example, has such a relationship with Washington. Washington has a high sales tax, but no state income tax. Oregon, on the other hand, has a high income tax, but no sales tax. Residents of Vancouver, Washington, can enjoy no income tax in their state and can cross the river and enjoy the absence of a sales tax in Portland. Delaware has no sales tax because they are corporate home to some of the country’s largest companies and charge an 8.7 percent flat corporate income tax, leading to tax collections which are the fourth highest in the country. New Hampshire has no sales tax or income tax, but has high property taxes. Alaska and Montana have no sales tax, but both have a local option tax – a special-purpose tax implemented and levied at the city or county level. Clearly, recovery of sales tax when a vehicle is totaled would not be appropriate if no such tax was paid. However, depending on the state, the recovery of other taxes or charges may be allowed.
Three states provide that you have a specific period of time in which to find a replacement vehicle in order to be able to recover sales tax. Hawaii requires an insurer to reimburse sales tax, excise tax, and ownership fees, provided the replacement vehicle is purchased within 30 days following the total loss of a vehicle. Illinois also provides for reimbursement if a new vehicle is purchased or leased within 30 days. Ohio similarly requires documentation of a new vehicle within 30 days. As a result, in order to know whether to reimburse such taxes, a first-party or third-party insurer must know the date of loss and the date of purchase of a replacement vehicle.
If a vehicle is purchased in a state without sales tax and driven to and involved in an accident in a state with a sales tax, will the recovery of sales tax be allowed? Common sense would say no, but this remains one of the undeveloped areas of law within this issue.
However, if a new vehicle is purchased in a state with a sales tax, the issue becomes muddled and there is relatively little law to guide us.
Excise tax is an indirect tax on specific goods or services promulgated by federal, state, or local governments and are not uniform throughout the United States. Excise taxes are collected by the producer or retailer and not paid directly by the consumer, remaining “hidden” in the price of a product or service, rather than being listed and paid separately.
In other words, a general excise tax is imposed on the business instead of on the customer. Some states charge an excise tax on the purchase of a vehicle, while most do not. The District of Columbia, for example, charges an excise tax on vehicles, ranging from six to eight percent, depending on the gross vehicle weight, while hybrid vehicles enjoy a zero percent excise tax. New Mexico charges a three percent excise tax on motor vehicles while North Dakota charges three and five percent respectively. Oklahoma boasts a 3.25 percent excise tax on “new” vehicles and South Dakota has a four percent motor vehicle excise tax. The reimbursement of excise tax following a total loss is handled differently from state-to-state. However, most states do not allow the recovery of sales tax by the owner of a totaled vehicle, either in first-party or third party situations, because it is a tax paid not by the owner, but by the seller of the vehicle. This is true even though the seller passes on the cost of the excise tax in the price of the vehicle. States which do not allow recovery justify doing so by pointing out that the tax is “hidden” in the cost of the vehicle and cannot be readily identified or confirmed.
The details of when and whether a state requires first party and/or third party claims to compensate a claimant for sales tax that he or she has paid on a vehicle determined to be totaled or on its replacement vehicle have not been uniformly or conveniently developed into a body of rules. However, a good starting point for any legal research or discussion on the subject should begin with the following chart entitled “Recovery of Sales Tax After Vehicle Total Loss in All 50 States” which depicts the relevant law on the subject across all 50 states, which is also provided on the MLW website. The payment of first-party claims which include sales tax necessitates subrogation of those sales tax payments wherever possible.
It should be remembered that the adjustment and/or payment of insurance claims, first-party or third-party, are dependent not only on state law and regulations, but also policy language. No decision regarding the payment of a claim should be made without consulting your policy terms and conditions as well as legal counsel. This chart is simply a shorthand rendition of available (or unavailable) law on the subject, and is not a substitute for coverage and/or claims legal advice.