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No Refund of Sales, Use and U-Drive-It Tax for Sales of “Lemons”

08.05.2009

In Daimler Chrysler Corporation v. Department of Revenue, Order No. K-20345 (KBTA Jul. 16, 2009), the Kentucky Board of Tax Appeals (“Board”) held that the Kentucky Department of Revenue (“Department”) properly denied refunds of sales, use and U-Drive It tax to Daimler Chrysler Corporation (“Chrysler”) for reimbursement of same to purchasers of its vehicles under KRS 367.842, popularly known as the “Lemon Law.” 

Chrysler sold and leased vehicles to certain purchasers. These vehicles were later returned to Chrysler pursuant to KRS 367.842, which allows a purchaser who purchased a “lemon” vehicle, measured by the failure of the manufacturer to fix the vehicle to conform to the warranty within a specified time period, to be refunded the “full purchase price” of the vehicle. The full purchase price of the vehicle includes “the amount paid for the motor vehicle, finance charge, all sales tax, license fee, registration fee, and any similar governmental charges, plus all collateral charges, less a reasonable allowance for the buyer’s use of the vehicle.”

In exchange for a release of claims by the purchasers, Chrysler reimbursed the “full purchase price” of the “lemon” vehicles, which included sales, use and U-Drive It tax. Chrysler then sought a refund of these taxes from the Department on the basis that same was paid to the Department by the purchasers which Chrysler reimbursed.

The Board held that the Department properly denied Chrysler’s refund claims. The Board stated that KRS 134.580, a general refund statute, only allows refunds to taxpayers for “overpayment of tax and any payment where no tax was due,” and held that Chrysler was not the taxpayer nor did it assert that taxes were not due or overpaid.

KRS 138.460(10) provides that, “where a manufacturer refunds the retail purchase price or replaces a new motor vehicle for the purchaser within ninety (90) days because of malfunction or defect, the purchaser shall be entitled to a refund of the amount of motor vehicle usage tax received by the department as a result of the first titling or registration….” KRS 138.460(11) provides that “when a dealer or manufacturer refunds the retail purchase price or replaces a motor vehicle for the purchaser as a result of formal arbitration or litigation, or in the case of a manufacturer, because ordered to do so by a dispute resolution system…the purchaser shall be entitled to a refund of the amount of motor vehicle usage tax received by the department as a result of the titling or registration.”

The Board held that: (1) Chrysler entered into refund agreements with purchasers after ninety (90) days from the original sale; (2) such agreements were not “ordered” or a result of formal arbitration or litigation; and (3) Chrysler did not refund the full purchase price (e.g., no deduction for purchaser’s use). The Board also rejected Chrysler’s argument that it should be considered the “purchaser” within the meaning of KRS 138.460 because it “repurchased” the vehicle when it was returned.

With regard to the U-Drive It tax, the Board held that KRS 134.580 allows for an appeal of assessed tax against the agency administering the tax. Since the U-Drive It tax is paid to the Department of Transportation, the Board held that the Department lacked authority to refund it in the event that a refund would be due.

If you have questions about this topic or any other legal issue, please contact any member of the firm's State and Local Tax Team.

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