Great Moments in Taxation

A few weeks ago, my wife's car was totaled when a guy in a large van fell asleep and slammed into her car when she was sitting at a red light.  Since he admitted culpability, his insurance company quickly came up with a settlement amount for the totaled car based on blue book values and such. 

Here is the interesting part -- since the insurance company is technically buying the wrecked hulk from us, Arizona treats the payoff as a taxable transaction, and charges its full automotive sales tax rate on the settlement.  It's incredible to me that having my car wrecked is considered by the state of Arizona to be a taxable event, and that the tax is owed in this case by the victim.  I am glad my house didn't burn down, the state might have bankrupted me!

This all seems odd to me, since if I had sued the driver to make us whole, rather than accepted the insurance settlement, any amount I won in court would not be taxable.  My guess (and hope) is that they are only taxing me on the scrap value of the hulk, not the entire transaction, but I have to do more checking.

Note before commenting that laws and rules on this are highly variable by state.


  1. neo-libertarian:

    Actually, a lawsuit award might be taxable if you failed to convert it back into a car or like property.

    The government is simply a tax machine.

  2. CRC:

    If you drive a car, I’ll tax the street;
    If you try to sit, I’ll tax your seat;
    If you get too cold, I’ll tax the heat;
    If you take a walk, I'll tax your feet.

  3. Rich Hanna:

    Funny that - in massachusetts they do the opposite. After calculating the settlement, they add the sales tax on top, so that, in theory, you could buy the exact same car and have the sales tax covered.

  4. Mesa Econoguy:

    That’s correct, and my wife’s car was totaled by an illegal (who spoke no English whatsoever), who was issued a ticket, and allowed to basically disappear to recommit the same crime.

    So, not only did this illegal person get off scot free, we were forced to pay 1) additional insurance premium (effectively for both cars, since the other party was completely uninsured), and 2) sales tax on a new car.

    Plus, how do you sue an illegal?

    Very “odd” indeed…

    Perhaps that’s why they’re called “illegal aliens.”

  5. Mesa Econoguy:

    [tipping hat, excellent lyrics CRC, Taxman, Revolver, The Beatles]

  6. la petite chou chou:

    But if he was illegal, how did he get insurance? I didn't think you could unless you were legal....

  7. Bearster:

    If we accept that the government has a legitemate right to tax us, then I think everything after that is just a matter of particulars...