By Joseph Esposito, Joe Bueti, and Eugene Ruvere
Use tax compliance in the automotive industry requires strong internal control policies and procedures, as well as a general understanding of the New York State Sales and Use Tax laws. There exist a number of complex scenarios, which determine whether to apply a Sales and Use Tax. This article will discuss a few of the scenarios that require careful consideration.
If a dealership, at its sole discretion, repairs a customer’s vehicle free of charge, the cost of the part(s) used in the repair is still subject to use tax and payable by the dealer, provided the part(s) were initially purchased for resale. The following represents findings pertaining to this area during a sample review of Repair Orders at several dealerships:
If a dealership performs a repair to a company vehicle, such as a parts van or a service shuttle van, then the cost of the part(s) used in the repair is subject to use tax and payable by the dealer, provided the part(s) were purchased for resale.
Any vehicle held in a dealership’s inventory for resale and is used by the dealer, or provided to an employee for personal use, is subject to a monthly use tax. A monthly use tax is calculated by multiplying the dealership cost of the vehicle by 1% and applying the sales tax rate in effect in the taxing jurisdiction where the dealership is located.
According to Publication 838 of the NY Department of Taxation and Finance, ‘If a vehicle was previously used as a mixed use vehicle but it can be documented that no mixed use occurred with respect to that vehicle in a subsequent month, no use tax will be due for that vehicle for that month.’
This implies that within a 12-month period, a dealer can do a count of actual mixed-use months, versus months when the vehicle was just sitting in inventory. Any previous monthly use tax paid on this vehicle will help to offset the total use tax due on the cost of the vehicle when the mileage or age limit is exceeded.
EXAMPLE: Say a New York State dealer allows salespeople to take vehicles as demos and does not track which vehicle is being used, when it is being used, and how many miles it is driven. During a sales tax audit, the dealership is assessed use tax on any vehicle with over 100 miles driven. If a mixed-use vehicle is in inventory for six months or less, no mileage restriction applies therefore no additional use tax is due. If the vehicle is in inventory for greater than six months, but less than one year and the mileage does not exceed 15,000 miles, then no additional use tax is due. If a mixed-use vehicle’s mileage exceeds 15,000 miles and the vehicle is in inventory for greater than six months, or if the vehicle is in inventory for more than one year, regardless of the mileage, than use tax is due on the total cost of the vehicle at the applicable sales tax rate.
A dealer must maintain adequate records for each mixed-use vehicle to verify the use of the vehicle, including but not limited to:
• stock number and vehicle identification number (VIN) identifying the vehicle;
• name and title of person to whom the vehicle is assigned;
• dates assigned and dates returned;
• mileage at date of assignment and date of return;
• disposition of vehicle;
• whether registration is in the dealer’s name or the vehicle is used with dealer plates;
• whether depreciation or an investment tax credit has been or will be claimed on the vehicle; and
• whether a trade-in allowance has been or will be taken on the vehicle.
It is critical that dealership personnel properly maintain the records for any “mixed use” vehicle, or state and local use tax will be due on the total cost of the vehicle to the dealer, with interest and penalties (if applicable) due from the date of first use by the dealer.
Dealerships purchasing tangible personal property such as computers, office supplies etc. from out-of-state vendors should verify that the vendor charged the correct sales tax on the purchase. Vendors are not always required to collect sales tax from out-of-state customers, based on regulations specific to their state. If the dealership did not pay sales tax on the purchase, then the dealership is required as the end user of the product to remit use tax to New York State with their monthly tax payment.
Dealerships contract with vendors who provide customer leads to the dealerships. According to New York State sales tax regulations, the furnishing of information services of this type is taxable to the dealership. Many vendors, whether within New York State or out-of-state, that sell these services do not collect sales tax on these charges. It is the responsibility of the dealership to pay use tax on this service regardless of whether the vendor charges sales tax. (New York State sales tax audits have focused their efforts on reviewing invoices associated with this area of omission.)
Use tax compliance in the Automotive Industry requires strong internal control policies and procedures, as well as a general understanding of the New York State Sales and Use Tax laws. The risks associated with a sales and use tax audit is too significant to ignore. The potential tax assessment, including penalties and interest associated with a sales and use tax audit, can have a significant financial cost to the dealership.
Dealership accounting personnel should work closely with an industry=specialized CPA firm like Citrin Cooperman to develop a system of checks and balances. Furthermore, it is critical that the accounting department of a dealership undergo adequate training in order to gain a level of proficiency necessary to identify and address a potential use tax issue. Management should also schedule an external review by their CPA firm.