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.
