If You Buy A Car (Okay, Truck) In Texas, Make Sure You Don't Pay The Inventory Tax

Texas levies an inventory tax of .02% on the retail value of all products in a company’s inventory each year, but lots of car dealerships try to sneak the fee over to the consumer. Even worse, they do it year-round. A reader writes in to explain how you can argue your way out of it at the dealership.

I have a complaint about hidden fees that some car dealerships try to get away with.

The state of Texas charges any business an inventory tax in January of each year for products in warehouse at the end of the year. It’s not much, @0.02% of the retail value of the item. Some large national companies ship inventory out of state to other warehouses to avoid paying the Texas inventory taxes.

Several New and Used car dealerships go one step further and try to charge the consumer the Vehicle Inventory Tax on every car sales receipt during the year.

Although the Texas department of transportation office says by definition the “Vehicle Inventory Tax (VIT) – A property tax that dealers pay on their business inventory. This is NOT a tax that is required to be paid by the consumer.” referenced at www.txdot.gov/publications/motor_vehicle/section01.pdf

The finance person at the dealership doesn’t like it but persistence has prevailed. Though they claim to not be able to remove the fee, I have successfully negotiated out of paying this hidden fee at the dealerships by quoting this manual. They usually adjust the sales price down to cover this line item on the retail purchase contract.

We checked the document and it’s there at the end of page 3, fourth item from the bottom. If you’re in Texas, you might want to print this out the next time you go buy a car. We mean truck.

(Thanks to Mike!)

“Motor Vehicle Dealer Manual – Section 1″ [Texas Department of Transportation]
(Photo: A contradiction of terms)

Comments

Edit Your Comment

  1. vr4z06gt says:

    better yet check ebay motors, some ‘dealers’ say they levy the tax, BUT higher .0025%, and EVERYONE has to pay it, illegal on many fronts since you can’t regulate and tax interstate commerce, also they are collecting taxes not being paid to the government, and apparently they are passing on taxes that people don’t have to pay.

  2. TechnoDestructo says:

    Tell them you’ll only negotiate a final, total price.

    If they try to add anything else at the end, leave.

    I’ll probably be getting banned from car dealerships until I die.

  3. vr4z06gt says:

    heres an example of what im talking about.

    [cgi.ebay.com]

    A Vehicle Inventory Tax of 0.002701 will also be charged.

    Towards the bottom of the page in the terms area

  4. ilikemoney says:

    .02%? Really? So, if I have understand this correctly you’re really gonna take the time to dispute what would amount to a $4 tax on a $20,000 purchase?

    Don’t get me wrong, I understand the principal, but some things just aren’t worth the hassle.

  5. DeltaPurser says:

    @ilikemoney: THANK YOU!!! These people are going on like they just discovered the fountain of youth… What a complete waste of time! Worry more about the floormats!

  6. BillyMumphry says:

    Ok I saved $8. The $1200 for rustproofing was necessary though right?… Right?

  7. arch05 says:

    marfa is the bomb

  8. Trick says:

    I wouldn’t haggle very long over a $6.40 bogus charge. I would say remove it and if they didn’t, I would say I’m not buying the car.

    All it takes is a quick removal or my leaving. A dealership would be stupid to lose a $30,000 sale over $6.40!

    After the first “no we can’t remove it” I will only stay long enough to to them forget the sale. If the fee was removed by the time I got up, I would probably still go on with the sale…

    Yes, it is the principle here… Not the equivalent of a Big Mac Value Pack that I have to pay for.

  9. Nytmare says:

    @ilikemoney: If the amount is so piddly, maybe you’d like to explain why dealers mess around with adding it on to begin with.

  10. Chad Cloman says:

    Hate to tell you this, but the consumer pays for all of the taxes levied on a car dealership, one way or another. Even if it’s just via higher prices.

    This is an example of lawmakers not realizing that the source of a company’s income is always the consumer. They seem to believe they can levy a tax on a business and then stipulate that it won’t be passed on to consumers. Duh…

  11. BuriedCaesar says:

    HEY! Not all people in Texas purchase trucks. Some prefer Hummers. Okay, a helluva lot of people do – and it’s annoying.

  12. BStu says:

    @Chad Cloman: There is a difference, though, in the tax being passed on to the consumer directly and indirectly. But requiring the tax to be a cost of business for the dealership, they need to factor it into the sale of the car that the customer is allowed to negotiate. Illegally charging it after the fact just imposes the fee on the customer. All costs of doing business can be passed onto the consumer, but its foolish to think that businesses never decide to take less profit to make a sale. They do it all of the time. That’s an option when the tax is properly paid by the dealership. It isn’t when its falsely charged to a consumer.

  13. alhypo says:

    @TechnoDestructo: Right on!

    Just utter those four simple words they hate: “Out the door cost.”

    If they pretend they can’t remove the “tax” from the price, you might have to help them.

    Simply take the price you want to pay and divide if by 1 plus the decimal tax rate, and that is the price they need to enter in the computer so it will come out right for you. This will work for any fee administer as a percentage of the purchase price.

    Example: You want to pay $500, and there is a 3% tax.

    The price they should enter is:

    500/(1+.03) = 500/1.03 = 485.44

    Now, before I get berated for explaining something so simplistic, I will defend myself by saying that this is something that confuses many people, so back off.

    But I must agree, a .02% tax is hardly worth complaining about.

  14. wav3form says:

    Seeing that most pickup truck buyers are rednecks, they’ll pay anything to have one. Country music compels them to have pickups, ATVs, Harles, etc. Marketing 101 and great for Chevy, Ford and Toyota truck sales.

  15. Echomatrix says:

    Since when is it the governments job to tell a business to suck up a cost of business?

  16. humphrmi says:

    Well…he never done this before. My boss said I can take $100 off of that Truecoat!

  17. Orv says:

    What if they try to make me show my receipt on my way off the lot?

  18. TechnoDestructo says:

    @alhypo:

    No dealer I’ve been to in Arizona understands what “out the door” means. They figure “out the door” is the price of the car minus TTL and whatever fees they can make up.

    I used to withhold judgement on car dealers, since some of the ones I’d talked to in California and Alaska weren’t so bad…even some of the ones who just, on the surface, at least, oozed car salesman sleaze (when it came down to making a deal, though, they didn’t).

    After shopping for a car in Arizona, though, my prejudice is on, full force, almost all the time. I know I can let my guard down a little when they don’t bother the hell out of me the moment I set foot on the lot. Other than those few, though…god, it’s every stereotype plus a bunch more bullshit I’d never expected.

  19. BillyMumphry says:

    @wav3form:

    Right…and everyone in TX also rides horses. Mmm hmm…That’s like saying the South has much more attractive women than the north. Oh, maybe you’re right.

  20. Major-General says:

    Hmm, I like Oklahoma’s solution: a flat $3.50 tax stamp in lieu of the Ad Valorem tax on every new vehicle. Of which 2% goes to the state, 49% goes to the county school district budgets, and 49% goes into the county general fund.

    Remember, it’s for the children, just like most state lotteries.

  21. doctor_cos wants you to remain calm says:

    @humphrmi: hee hee.
    “Let me check with my manager.”
    Isn’t that a phone on your desk? Why do you get up and walk out every time you need to “check”??

  22. DeltaPurser says:

    @doctor_cos: :-)

  23. ClayS says:

    @BillyMumphry:
    No, not the rustproofing, but the $1000+ for the extended warranty is essential! Put the $8 you saved as a down payment. Finance the rest on your credit card. Lot’s of financial geniuses around lately.

  24. sirwired says:

    My favorite dealer add-on truly has to be the “Teflon Paint Protectant”

    Teflon comes in two forms:
    The first is the form we are all familiar with, the kind on frypans. It’s main property is that it doesn’t stick too well to anything including frypans (or cars). To get it on the frypan, they etch it in acid, use a special primer, coat it with Teflon powder, and then bake it in an industrial oven at several hundred degrees. Obviously, this kind of Teflon is not used at the dealership.

    The other form of Teflon is actually called “Zonyl” by DuPont, and it indeed is used as a coatings additive. It does reduce adehesion and enhance UV resistance. However, when you just mix it up with car wax, it certainly doesn’t stop the car was from simply wearing off over time, as car wax always does.

    Certainly not worth the $400 my last dealer tried to sell it to me for. I went so far as to call it an “insult to my intelligence”.

    SirWired

  25. mgomega says:

    Okay, here’s the truth: companies don’t pay taxes; their customers pay it for them. Regardless of what it’s called or how it’s passed along, the added expense of taxes always gets passed along to the consumer in rising costs. Every company has a bottom line where they can sell a product and still make a decent profit. We’re not talking “gouging the customer to make huge profits”, I mean a lowest price at which a particular service or product can be sold while still allowing a company to remain viable and competitive. When new taxes are imposed on the company, taking those taxes out of the company’s cut of the sale will invariably force a company out of business (or to do layoffs, selloffs, relocate, etc. – all the bad stuff we hate companies for doing). In order to remain in the marketplace without sacrificing the company itself (ie. your job), these new costs get passed along to the consumer as a modest price increase. Lower taxes = lower prices.

  26. GearheadGeek says:

    @mgomega: Well for one thing, this is not a new “cost”, it’s been around in Texas for years. For another, the issue here (on this very small amount) is that the dealership is trying to tack it on as an extra AFTER the fact, after a price has been negotiated, and pretend that it’s a tax required for the buyer to DIRECTLY pay. So, they’ve already built it into their price (you can be sure of that) AND they are pretending it’s an extra, mandatory item for the consumer to pay on top of his negotiated price.

    I also think you’re a bit optimistic about the lower taxes= lower prices thing. I am sure that RISING taxes would lead to a rise in prices in a hurry. I’m less convinced that businesses would be quick to pass along savings they’d realize from decreased taxation, however.

  27. bostonmike says:

    “This is an example of lawmakers not realizing that the source of a company’s income is always the consumer.”

    Yes, because company profits never vary. After all, companies only take in money from consumers, and only pay it out to the government. They never take in money from other businesses, investments, sales of real estate, or stock offerings. They never pay out money to salaries, dividends, profits, cost of goods sold, or other business expenses.

    It must be nice to live in such a simple economy.

  28. dualityshift says:

    @nytmare: If the amount is so piddly, maybe you’d like to explain why dealers mess around with adding it on to begin with.

    Purely a numbers game. Since most dealerships try to use the business model that the service department’s revenues payout at least 90% of the overhead costs. In the 80’s, sometimes that number was as high as 150%. The car sale profit is supposed to represent the dealer’s profit.

    If I am a dealer, and I add that 0.02% onto EACH and EVERY sale I conclude, over time that REALLY adds up. Over 10 years, your 0.02% can add up to a milion or more profit dollars.

  29. StevieD says:

    href=”#c4605613″>mgomega:

    Okay, here’s the truth: companies don’t pay taxes; their customers pay it for them. Regardless of what it’s called or how it’s passed along, the added expense of taxes always gets passed along to the consumer in rising costs. Every company has a bottom line where they can sell a product and still make a decent profit. We’re not talking “gouging the customer to make huge profits”, I mean a lowest price at which a particular service or product can be sold while still allowing a company to remain viable and competitive. When new taxes are imposed on the company, taking those taxes out of the company’s cut of the sale will invariably force a company out of business (or to do layoffs, selloffs, relocate, etc. – all the bad stuff we hate companies for doing). In order to remain in the marketplace without sacrificing the company itself (ie. your job), these new costs get passed along to the consumer as a modest price increase. Lower taxes = lower prices.

    href=”#c4605613″>mgomega:

    Absolutely correct. For example the city raised my annual business license fee by $10 per employee. Not a problem. My prices have been adjusted to cover the rising taxes. A penny here and penny there, I don’t absorb the tax, the consumer pays the tax.

  30. vastrightwing says:

    @StevieD: Hey! you took my thunder! It’s true, businesses can’t pay anything: they aren’t making transactions, people are!

    It’s annoying how government likes to tax “business” it’s a scam! All they’re doing is raising the cost of doing business. They love to fool us, but we also like to be fooled I guess.

  31. Sudonum says:

    Yes, consumers pay all of a businesses overhead, from taxes to utilities to salaries. But as others have pointed out this is an additional surcharge that car dealers are trying to charge a customer for that should be paid out of their margin, not by tacking another line item on to an invoice. How is this any different from a hotel charging and additional “resort fee” or “energy surcharge”? These are items that should be included price of the vehicle or the room. Not passed on to the consumer as an additional line item charge.

    And FWIW, most businesses in most states pay an inventory tax of some kind. Yet you don’t see an additional .02% tax on your receipt from the hardware store do you? No, it’s covered in the cost of the item(s).

  32. WayneB says:

    I agree with BStu. This is not a tax the consumer owes, it’s a tax on the dealer, just one of the many costs a business has. The dealer shouldn’t be adding it after the negotiated selling price. The dealer should factor it like the rest of their expenses into their cost basis and adjust their minimum selling price accordingly.

    When businesses attempt to recover their tax liability by passing it directly to the customer as a line item on the invoice, I think they should not be allowed to describe it on the invoice as a tax. That implies it is a tax imposed on the customer that they are required to collect.

    Also, I’d question when the vehicle entered the dealer’s inventory. If the car arrived on the lot last week and you’re taking it off their hands today, then the dealer did not pay a tax for it in January, as it was not in the inventory at the end of last year; nor will they have to pay a tax next January, as it will not be in inventory at the end of this year.

  33. Oracle989 says:

    Just remember, always buy that clear coat they sell you to keep off the rust! The tax is probably for your benefit too!

  34. Trai_Dep says:

    What gets me about Texas baffoons is that they’ll gladly spend $300/car – thousands per year, surely – to avoid paying a $20 fee to the gov’t. Err, THEIR goverment, packed with Republicans and presided by King Chimp himself.

    Yeah – when can we give Texas back to Mexico? Seems the only contributions they’ve made to the republic recently are Enron, Exxon, Silverado and widespread mortgage fraud. Oh, and Iraq (thanks!!)

  35. Trai_Dep says:

    @Chad Cloman: “the source of a company’s income is always the consumer.”

    And the source of companies’ revenue is always a consumer. So let’s not tax corporations OR people? Fund government with unicorns and pixies?

    Might want to rethink that, preferably after taking an Econ 101 course or, y’know, reading a book?

    Or are you suggesting dissolving ALL corporations? That’s pretty radical. I LIKE it, but, it’s pretty radical…

  36. TechnoDestructo says:

    @mgomega:

    I don’t think there are many people here who don’t understand that. The issue here is forthrightness. This is no different from hotel surcharges and bank fees for non-services. It’s a matter of trying to lower the advertised price by not including your cost of doing business in that price, in an effort to attract customers who are comparing your prices to your competitors, and then hope that they’ll just pay the extra, non-advertised costs rather than take their business elsewhere once they get to you.

    It’s dishonest and sleazy.

  37. Trai_Dep says:

    Let me retry this.

    If we shouldn’t tax businesses since the extra expense is passed onto consumers, likewise we shouldn’t tax individuals since the extra expense is passed onto businesses, in the form of higher wages needed to attract workers at a “real” wage.

    Therefore, we should fund our multi-trillion dollar city, state and federal governments by holding bake sales. While living in caves guarded by scimitars and large-gauge flintlocks. Yup, THAT’S a sophisticated economic analysis.

  38. jshiflet says:

    Alright now, enough with the Texas stereotyping and bashing. I’ve lived here my whole life and my first 2 cars were trucks. HOWEVER, I just traded my Chevy Silverado for a Nissan Altima because with gas prices headed where they are, I need something with better gas mileage.

    I was lucky enough to not have to pay the inventory tax. I actually jacked up my original deal and wound up not being able to afford it (I wanted a Murano). So I went back to the dealership and renegotiated for an Altima. Luckily, I got a better deal out of this mess than I would have if I had originally gone in looking for an Altima!

    I love finding businesses that really try to help the consumer out as much as possible!

  39. mgomega says:

    @ Technodestructo

    Excellent point; I hadn’t considered that angle on it.

    @ Trai_Dep

    Yes, let’s NOT tax corporations or people. Let’s tax CONSUMPTION. Keep what you earn, businesses and individuals alike, and tax the end consumer only once. As it stands, the iron ore refiner is taxed, the trucking firm that delivers the ore to the mill is taxed, the mill is taxed, the next trucking firm to take the steel to the factory is taxed, the factory is taxed, the trucking firm that takes the finished car to the dealership is taxed, the dealership is taxed, and, finally, the consumer is taxed on his income before he ever buys the car and taxed again when he does.

    Take out all of that and just charge a tax on the final transaction, the car purchase made by the end consumer (flat tax or fair tax, pick your favorite), and it becomes a whole lot cheaper to produce and purchase a car. And yes, in a free market (ie. no government subsidies, fixing, funding, oversight, etc.) prices DO go down, because someone, somewhere will want to be the first to offer the product that much cheaper, and someone else will want to be the first to beat that lower price.

  40. huadpe says:

    @StevieD: As an economist, that’s only sort of true. Any tax will have SOME portion passed on to the consumer. The proportion that is passed on depends on the relative elasticity* of supply and demand. If demand is highly elastic, the business will have to eat most of the cost. In the competitive model, demand is perfectly inelastic and all costs are passed on to the consumer. The competitive model isn’t always what you’re facing.

    *Elasticity is the change in demand or supply given a change in price. So if a price increase of 5% causes demand to drop by 10%, the demand curve has an elasticity of 2. Perfectly inelastic means that the demand curve is a flat line to that business. (If you raised prices at all above what everyone else is charging, you would get no sales.

  41. DrJimmy says:

    YO Trai D, not everyone here in Texas voted for that idiot Dubya.

    And I drive a full-size Chevy Tahoe, not a pickup. Life is full of contradictions.

  42. Trai_Dep says:

    @mgomega: “And yes, in a free market (ie. no government subsidies, fixing, funding, oversight, etc.) prices DO go down, because…”

    Stop. You’re killing me. I’m drowning in tears of laughter here.

    Nice little qualification, “assuming we’re disinterested economic actors operating in a Classic Liberal economic environment, then…”

    These hair-brained schemes are always predicated on this fantastical assumption, which is why, when the rubber hits the road – implementation in the real world – these schemes collapse.

    There’s a role for these thought experiments, but economists are also smart enough to recognize their limitations. Something your talk-radio guru isn’t.

    Regards flat taxes, they hose working families so that Paris Hilton gets a monumentally huge tax cut. Doesn’t seem fair to them, does it?

  43. aduzik says:

    At first I thought I was reading the story wrong and that it was a non-trivial 2% tax. Who would get worked up over what amounts to $6 on a $30,000 purchase? Apparently there are people who do.

  44. BStu says:

    @aduzik: Fine, give me $6. Its not much, right. So give it to me.

    You don’t want to? Well, why are you so upset over such a trivial amount? Geez. Its only $6.

  45. DeltaPurser says:

    It’s called “opportunity cost”, daahrlings… Haggling for 20 minutes over $5 when you could be making $25/hr working is a waste of time.

  46. tmiked says:

    You guys are off by an order of magnitude.
    The tax is charged as “$21.04 per $10,000 sale price”
    So $40 on a $20k car. Just another scam.

    The ‘doc fees’ are voluntary, but most dealers will lie and say they are ‘state required’.