The IRS says No.
IRS Tax Tip 2013-12, February 12, 2013
Most types of income are taxable, but some are not. Income can include money, property or services that you receive. Here are some examples of income that are usually not taxable:
- Child support payments;
- Gifts, bequests and inheritances;
- Welfare benefits;
- Damage awards for physical injury or sickness;
- Cash rebates from a dealer or manufacturer for an item you buy; and
- Reimbursements for qualified adoption expenses.
When it comes to cash-back rebates, many car buyers are surprised to learn that most states do tax them.
This seems unfair, but most states view cash rebates as a form of payment from the manufacturer and conclude that it does not affect the purchase price of the car.
So what this means is if you purchase a car for $25,000 and there is a $3,000 cash-back rebate, you will be taxed on the full $25,000 before the rebate is subtracted. In a state like California which has 10% sales tax, that's an additional $300!
It's good to keep this in mind so you're not surprised when you see all the final numbers. It's not uncommon for car buyers to accuse dealers of fraud when this happens, but it's a legitimate tax. Thankfully, there are some states that don't tax cash rebates.
States That Do Not Tax Cash Rebates
- Alaska
- Arizona
- Delaware
- Iowa
- Kansas
- Kentucky
- Louisiana
- Massachusetts
- Minnesota
- Missouri
- Montana
- Nebraska
- New Hampshire
- Oklahoma
- Oregon
- Pennsylvania
- Rhode Island
- Texas
- Utah
- Vermont
- Wyoming
