Volkswagen and Audi diesel car owners affected by the proposed settlement on diesel car emissions may want to consider how Connecticut sales tax applies as they decide whether to take the buyback, keep their car, or trade-in their car to a dealership, warns Department of Revenue Services Commissioner Kevin Sullivan.

A proposed settlement between Volkswagen/Audi, the U.S. Department of Environmental Protection and other regulators is in response to software installed in certain Volkswagen and Audi diesel cars that gave false readings to pass emissions testing. The court is expected to approve the agreement by the end of the year.

Said Sullivan, “It is important for consumers to get all the facts and be aware of the tax implications before making a decision.”

Owners of 2009 through 2015 TDI 2.0-liter diesel Volkswagen or Audi cars will have two choices under the settlement once it is approved:

1 - Cash for the “buyback” of the car (or early termination of the lease), or

2 - Keep the car and have modifications done to the emissions software, plus receive cash. 

If the owner chooses to take the buyback payment and use it to purchase another car, Connecticut sales and use taxes will be due on the purchase price of the car, including the buyback amount. There is no trade-in credit.

“This is not a typical ‘trade-in’ under Connecticut law where a motor vehicle dealership accepts a vehicle from a customer as a trade-in and applies a credit toward the price of another vehicle. Instead, there is one transaction in which the customer is being paid for his sale of the car back to VW, and then a second transaction where the customer uses that payment to purchase another vehicle from a dealership,” said Sullivan.

“When a car is traded-in, sales and use tax is applied on the difference between the taxable sales price of the vehicle being purchased from the dealership and the amount allowed by the dealership on the car being traded in,” Sullivan added. “This trade-in reduces the sales tax amount owed on the car being purchased.”

“If the owner chooses to keep the car and have the modifications made to the emissions software, there are no sales tax implications for the owner of the car,” Sullivan added.

The FTC has consumer information on the VW settlement: What does the record VW settlement mean for you?, and Early VW buyback offers could cost you.