Blog Island: The DMV unfairly taxes used-car buyers
Despite recent improvements such as more staff, shorter wait times and the long-awaited acceptance of credit cards, the DMV is still the government agency most state residents love to hate.
Let's not even talk about the long-awaited $11 million update to its computer system, for which taxpayers have paid a $1.50 fee on most transactions since 2007, raising $1.9 million a year. The new system has remained mostly offline as the company hired to install the system has gone through changes in ownership and struggled with design issues for the centralized-database system.
Here's another gripe: the DMV won't give private-party car buyers a break.
I ran into this registering a new-to-me car last week. The central quandary: When someone buys a car from a registered dealer, new or used, the division uses the sale price to calculate the sales tax it will charge to get the car registered. But if it's a private-party sale, the DMV uses a third-party auto valuation service to assess value.
On one level, that seems fair. A seller can write out a bill of sale for any amount, and in states where that's the figure used to calculate sales tax, it's easy for the seller and buyer to agree to write down something lower than the actual sale price, as a little buyer perk. It's the kind of small tax fraud that can add up for state coffers, and the state clearly needs every penny it can get.
So the DMV uses the National Automobile Dealers Association Guide, or NADA. Not as well known as Kelley Blue Book, NADA returns values that, after a quick and unscientific test I made of a few different makes and models, appear to be within 15 percent of the Kelley values — often higher, but in the same ball park.
Here's the catch: NADA, unlike Kelley, doesn't list a whole category of sale values, the ones that cover those for private-party transactions.
This is a big deal because on Kelley — and in the real world — pricing for used cars comes in three tiers. Lowest are trade-in values. Then come private party values, and at the top of the pricing structure, dealership prices. The difference between each category often amounts to thousands of dollars.
But NADA lists only trade-in values and "clean retail" values, which in all the examples I looked at, are the equivalent of Kelley's "dealership" prices. There are no middle private-party values listed.
Why is this unfair? It's basic risk assessment. Kelley acknowledges that when you buy a car from a guy off craigslist, you gamble. You pay less, sure, but you don't get a warranty from a dealership, all visible problems fixed, or a guarantee that the car's been looked over by a mechanic.
A buyer might try to mitigate the risk by, say, paying a mechanic to give the vehicle a once-over. That brings peace of mind but adds to the private-party purchase costs.
But the state doesn't care about any of that. Thus a car that I just bought for $6,300 — a great deal for the 2006 Mazda Tribute, but in the ballpark for what Kelley lists as the "fair condition" private-party value for the make, model and miles — was assessed at $10,200 by NADA.
That's an almost $4,000 increase — 62 percent more. And, by the way, it's totally unrealistic. A search of craigslist, where I found the very nice veteran who sold me the Tribute, and cars.com shows that the Kelley Blue Book private-party prices reflect the market, not NADA.
Nevertheless, Rhode Island made me pay sales tax on the NADA value, and it was a shock. Add in the 2.35-percent service fee the DMV makes you pay for using a credit card — really? — and I coughed up $840 once I'd paid for the new plates and assorted other extra charges. That is more than 13 percent of the sale price. It was also more than I had in my bank account at the time, so I was cravenly grateful to be able to whack it on my MasterCard, despite that ridiculous 2.35 percent fee.
There's an appeal process, but only for high mileage or a mechanic's estimate of work needed. And you have to get your appeal in within 30 days to have a chance of being heard.
NADA is also the valuation, by the way, that your municipality will use to calculate the yearly auto tax you owe — blatantly unfair, since only a dealer could ask for this much money, and anyone selling a car will have to use private-party values or, worse, trade it in, in which case they'll get even less. So the NADA clean retail values in no way reflect what anyone's car is actually worth. We're all paying local taxes on phantom car values.
With a new baby due any day, I don't think I'll be availing myself of what would doubtless be a pointless appeal process. But I'll say this: Just when you think Rhode Island can't squeeze another penny out of you, it winks at you and goes right ahead.