There were important changes in the Taxpayer Relief Act of 1997 for the luxury tax on vehicles that have not been widely publicized.

Phaseout clarified for parts and accessories.

Effective for sales after August 5, 1997, a technical correction makes it clear that the phaseout of the luxury tax to zero for sales after December 31, 2002 also applies to parts and accessories added to the vehicle.

In other words, the same rate (4% for 2001 and 3% for 2002) applies for both the sale of the vehicle and parts and accessories added to the vehicle.

Increase de minimus limit for after market alterations.

Effective for installations on vehicles sold after August 5, 1997, the luxury tax will only apply to after-market installation of parts and accessories to a luxury vehicle within six months after the vehicles' purchase if the aggregate price of the parts, accessories and installation charges during the period exceeds $1,000. Previously the tax applied if the aggregate price exceeded $200.

Amount exempt from tax increased for electric vehicles.

Effective for sales after August 5, 1997, the luxury tax will only apply to the sale of a vehicle produced by an original equipment manufacturer that is designed to be propelled primarily by electricity (a "purpose built passenger vehicle") to the extent the retail sales price exceeds 150% of the threshold amount for other vehicles. For 2002, the threshold amount for passenger vehicles is $40,000, so the threshold amount for a purpose built passenger vehicle is $60,000.

Threshold increased for clean fuel modification.

Effective for installations after August 5, 1997, the threshold amount for application of the luxury tax (again, $40,000 for 2002) is increased by the value of the components installed. For example, on October 1, 2002, Jim Carr purchased a passenger automobile to which $5,000 of retrofit parts and components were added to make it a clean-burning vehicle. The purchase price of the vehicle was $50,000. Jim must pay a luxury tax of 3% X ($50,000 - ($40,000 + $5,000)), or $150.

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