Is your dealership on the right road for meeting tax obligations?

Are you collecting sales tax?

Failing to collect sales tax can lead to a cash flow disruption and cut into profit margins. A seller who doesn’t collect tax when required is responsible for paying the tax and will also owe penalties and interest.

Collecting sales tax but not remitting it can lead to personal liability and, in severe cases, criminal prosecution.  Plus, owners can be held personally responsible even if they’ve delegated the sales tax function to one of their employees.

Is collection required?

It’s critical to determine when sales tax collection is required. For sales to in-state residents, auto dealers should collect tax unless the buyer provides an exemption certificate. For sales to nonresidents, the dealer should collect tax if the dealer has a location in the nonresident’s state or if the nonresident’s state has an agreement with the dealer’s state to collect each other’s sales tax.

Dealers who sell merchandise to nonresidents over the internet will need to determine whether their sales into a particular state are sufficient to trigger a collection responsibility. Typically, the threshold is $100,000, but rules vary by state.

What’s the tax base?

Once an auto dealer has determined collection is required, the next step is to determine the tax base, and this can get tricky:

  • Are options and accessories installed by the dealership taxable on the vehicle sale or as a separate sale made through the service department?
  • Should sales tax be charged on service contracts, restocking fees and document preparation fees?
  • Are supply charges in the parts and service department subject to sales tax?
  • Are freight costs incurred to obtain parts and passed along to customers subject to sales tax as a sale of tangible personal property?
  • Should sales tax be charged on factory warranties sold along with vehicles?
  • Do trade allowances reduce the purchase price subject to sales tax?
  • Are there special rules to calculate the tax on sales to nonresidents?

Although not an exhaustive list, these questions represent transaction concerns that should be considered and addressed by an auto dealer. The answers to these questions vary from state to state.

Conducting a compliance checkup

Sales and use tax rules are complex, particularly for dealers who sell across state lines. To avoid an unnecessary tax expense, dealers should contact their tax advisor to make sure they’re applying the rules correctly.

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