Why You Don't Want to Win a Car as a Prize: Understanding the Scam
One of the local radio stations started hyping the fact that they're giving away a Hummer H3 in a few weeks. Every time I see this, I get the urge to tell everyone I can about how bad of an idea it is to enter these contests.
I know what you're thinking. "Why on earth wouldn't I want to win a $30,000 car? After all, even if it's not the car that I want, I can sell it and get my dream car."
See, that's the problem. If you dig out your magnifying glass and read through the terms and conditions and sit down with your accountant, you'll find that winning one of these isn't so simple. In almost every case, the following things are true.
- You get to pay the government taxes on the full price of the car. In this case, about $10,000. Oh crap. I guess I do have to sell it to pay the taxes.
- Not so fast. Many of these contests actually make you agree not to sell the car for at least a year. In large part this is to avoid the PR problem of talking about how happy you were to win the car only to have the local news follow up and report that you actually aren't that happy and you sold it.
- You now get to insure a $30,000 car. And, since many of the cars given away in these contests are highly desirable, they're high on the theft risk charts at your insurance company and you get to pay through the nose for the priviledge of driving your new boat anchor.
- By the time you can sell it, it's now depreciated at least $5000 or more.
Unlike contests where actual cash is given away, you can't just take part of the prize to pay everyone who needs a cut. Win the lottery and you just deposit the whole works and write Uncle Sam and Uncle Minnesota for their cut and move on with the rest. Win a big, expensive object instead and you get to bear the extra burdens yourself for at least an entire tax year before you can get at the value.
You gotta love how companies will do something that looks generous and you get screwed over. A lot like many of those TV shows that do major house renovations and the homeowner (selected because they were in dire straits) gets to pay for the increase in property taxes, etc. Or people who buy cellphones or satellite dishes as gifts and leave the recipient with a monthly bill. Thanks but no thanks.
May 28th, 2006 at 1:32 pm
Hey. I stumple upon your site every now and then and enjoy reading some of your posts. I just read the Apple HTPC blog and found it interesting. Anyway, why I'm writing is because I found it frustrating to navigate to your startpage, why not add a link or link your illustration at the top? Just a thought! Cheers!
April 16th, 2007 at 12:22 pm
You make a compelling argument; however, I think each person must examine their own circumstance. I am in the market to buy a new car in the $25K to $35K range. I can afford to pay the income tax if I won a car, and I would indeed gladly settle for the make and model won. Quite honestly, for the $15K to $25K savings (accounting for the income tax), I would be very happy to drive a $30K car that I didn’t pick out. As for the difference in insurance cost, property tax cost, etcetera, I don’t think it would be material compared to the costs of the car I would have chosen to purchase myself. In my personal circumstance, I wouldn’t look that gift-horse in the mouth. Best regards, and keep up the good work.
April 16th, 2007 at 12:59 pm
Sure, there are always exceptions to these rules of thumb. However, yours is pretty much an outlying case for cars as prizes. I'd be willing to be substantial amounts of money that 99% of people entering or interested in entering such contests wouldn't be in such a situation.
I always assume that people who can recognize themselves as being able to break these kinds of rules usually will just do so and know what they're doing.
However, SO many people end up *completely* screwed when they win the lottery or a car that I want to get the word out for exactly how this stuff works and make sure people know that they'll be on the hook for $10,000 if they win that H3 in the contest.
May 29th, 2007 at 10:32 am
Aside from actually being smart enough to read the rules and understand the contest (not very easy with a radio or tv contest) it would pay to find a car contest that at least offer a near-value cash alternative. This way, your worst case still puts you ahead after taxes and you can apply the cash to a car you actually WANT
Imagine the shocker of winning a high dollar exotic car and having to sell or refinance your house to cover the taxes because you couldn't sell the car under the agreement! Yikes.
June 3rd, 2007 at 4:35 pm
I recently stumbled across a newspaper car contest, and noticed there are no rules and regulations posted. The vehicle was a Cadillac CTS, a 2007 model, a $42,000 car. I estimate the kid that won that will have no idea of the $13,000 tax he will have to pay on that vehicle, incluing TTL an possible dealer fees.
June 4th, 2007 at 9:38 pm
What are you people talking about. Sales tax on a $42,000 car at 7% tax is around $3000.
June 5th, 2007 at 6:30 am
When you win a car, it's not the sales tax we're talking about. In the United States, that prize car is treated as *income* and goes on your income taxes. So, the taxes are more like the $13,000 we're talking about.
That's the whole point. If you make $40,000 a year and win a $42,000 car, you actually owe more money to the IRS on the car that year than on your salary. However, you frequently can't sell the car to get the money to pay the taxes.
June 13th, 2007 at 8:33 am
Your post inspired me to write an article for the About Contests website about how to reduce the burden of taxes on car wins. Thanks for the idea! The blog post about the article (where I've linked to this post) can be found here: http://contests.about.com/b/a/000042.htm
July 17th, 2007 at 8:18 am
I personally know two people who won vehicles and it was indeed a nightmare for exactly the reasons noted in the article. One person kept their casino win and paid the taxes. The other won a SUV in a fishing contest and sold it but really didn't see much profit.
October 3rd, 2007 at 9:04 am
While your argument is valid, calling it a 'scam' is inflammatory and inaccurate. The organizations and companies that offer these prizes don't benefit from you getting screwed on taxes. They aren't in cahoots with the government, rubbing their hands together gleefully as they wait for their victim.
Bottom line, in the US when you get a windfall, the government has the right to take what they think is their cut. Doesn't seem fair? Well, a lot of people think income tax is the scam.
January 6th, 2008 at 1:36 pm
"Organizations and companies that offer these prizes don't benefit?" What are you talking about? They benefit from the publicity and interest in the product/service they were trying to attract attention to.
February 17th, 2008 at 1:49 am
Calling it a scam shows your lack of math skills.
Assuming one is even in the market to obtain a new car, it's lots cheaper to get a $30K car by paying one third its cost in taxes, than, to buy it full price (PLUS the cost of interest, if financed).
February 17th, 2008 at 5:37 am
Please read ALL of my posting, which included a dialog that I've heard dozens of times about car contests: namely the "I don't want a XYZ car, but I'll just sell it and get the one I want" belief. Given how many people seem to believe that that's possible and how often that's not true, there's a bait and switch going on. I don't believe it's malicious in it's intent, but it's still a bait and switch.
And, while we're defining terms, Mark, your argument would have more credibility if it wasn't framed by an ad hominem attack. Have enough respect for your fellow humans to criticize their ideas, not them as people, their character or their skills.
You point out a very specific set of circumstances (and qualify them by saying one should "assume" a set of criteria) wherein the math works out and you actually get a car that you want. My whole point is that those circumstances represent the exception rather than the rule.
Basically, if you can see the math clearly enough to be pissed at me, you probably can work it out well enough for yourself. Other people, however, are completely in the dark about the way these contests work.
Was the title inflammatory? Sure. If I wrote it today instead of 2 years ago, would I omit the word "scam" probably. However, I KNOW that this article has informed a lot of people in the last 2 years and I stand by it.
March 1st, 2008 at 12:53 am
J Wynia, I'm not mad at you. I wasn't even addressing you. I responded to a reply above. It doesn't matter which, by now. My biggest mistake was that I focused on specific scenario of hypothetically winning a car that one actually planned to keep! (Imagine that!) I do apologize for my framing my reaction inappropriately, as I did. BTW, a huge scam about win-a-car contests I don't see addressed here is that, from what I've observed from recent searching on major internet search engines: many (if not most of) so-called contests are nothing more than fraudulent ruses designed to collect contact info for future targets of email advertising spams.
March 8th, 2008 at 4:56 pm
Talk about the Apple iphone. Is there something better with most of its features?
June 15th, 2008 at 9:30 pm
Well I actually won a pt cruiser. It was "pimped" out with a playstation, video player, and heavy duty stereo system. Also had blue neon lights under the car and through out the inside. Everything here is true. I paid taxes on the full MSRP plus the ad ons. Kept the car for a year and then re-sold it back to the dealer. Ended up clearing about $8K. All in all it was a fun experience, but it wasn't without hassels. I didn't need or want a car. It all happened by chance. I didn't even enter the contest. I was just an extra.