Many states base their sales tax on gross sales less any discount. Trade-in allowances are not discounts, so companies cannot deduct them from the sales price for sales tax purposes. Suppose Jit Eap had decided to trade in his old car for a new one with a list price of $32,000. He will pay cash of $20,000 plus sales tax. If he had not traded in a car, the dealer would have offered a discount of 15% of the list price. The sales tax is 7%.
How much of the $12,000 price reduction should be called a discount? How much a trade-in? Mr. Eap wants to pay as little sales tax as legally possible.