We recently attended a seminar with the California Department of Tax and Fee Administration in Oakland, California. It turns out that used vehicle dealers make the following business mistakes that may result in a hefty fine and/or become susceptible to an audit. Here are the most common used car dealer mistakes you need to avoid:
Record Keeping
Keep your records for at least 4 years. You are required to keep detailed records that show gross receipts, taxable and non taxable items, total purchase price and parts. A report of sale is not sufficient in the event of an audit. Proper record keeping should include:
- Books of accounts
- Vehicle deal jackets
- Conditional sales contracts
- Repair orders
- Supporting documents
Tax Rate Application
Used car retail dealers have 2 free options for calculating sales tax on sold units. Remember, sales tax is based on the customer’s residence NOT the dealership.
- Use the California DMV vehicle registration calculator to calculate sales tax owed.
- Log on to the Department of California Department of Tax and Fee Administration to search for the updated sales tax in every city CA, dealers can then manually compute sales tax owed.
Consignment Sales
Dealers are responsible for obtaining a seller’s permit and report and paying sales tax on consignment sales. Proceeds must be paid to seller within 20 days of sale.
Bad Debt
Deductions for bad debt may be deducted as a result of repossessed vehicles by the dealer, dealer financed loans or uncollectable open accounts.
*A bad debt deduction cannot be claimed unless the sale was reported and tax paid on the amount claimed on a prior sales and use tax return.
When claiming a repossession loss, you:
- Can claim a deduction only if a there was a net loss
- Can claim a deduction only to the extent that you sustain a net loss of gross receipts upon which you have paid tax (you may not claim a deduction on non taxable items)
- May base the wholesale value of the repossessed vehicle on industry-recognized wholesale price guides
- Cannot use estimated or percentages to calculate the net loss
- Cannot claim a deduction for expenses incurred in attempting to collect on a delinquent account
- Cannot claim a deduction for that portion of a debt that is retained by, or paid to, a third party as compensation for collecting an account
- Must report and pay any amounts that you recovered after claiming a repossession loss. The report must be made on the first tax return following the recovery.
For more information, please refer to Regulation 1642, Bad Debts, or call the CDTFA Customer Service Center.
Discounts
Sales must clearly indicate the discount, taxable amount and tax. If a dealer sells a vehicle at a discount, the amount of the discount is not subject to tax. For example, if you sell a 10,000 vehicle and discount the price by 10% ($1,000), tax is based on the $9,000 selling price. The records related to the sale must clearly show the discounted price, the amount subject to tax, and the amount of tax.
If both a discount and a trade-in are involved in a sale, the records must indicate both the discount value and the amount allowed for the trade-in. Otherwise, the amount of the claimed discount is considered an over allowance, and the total sales price is subject to tax.
