Car dealerships can be a frequent target for California sales tax audits because of their large transaction values and complex rules that affect the business’s sales and use tax liability. Your motor vehicle dealership can benefit from a detailed review of California’s sales tax rules and best practices to lower the future risk of audit, minimize sales tax exposure, and avoid penalties or even criminal liability. Our guide addresses the sales tax consequence for common car dealership transactions in addition to some of the sales tax exemptions that may improve the bottom line of your next sales tax return.
The Different Tax Treatments for Your Dealership’s Vehicle Sales
Car dealerships generally must collect and pay sales tax (i.e., applicable state and district rates) when selling a vehicle to a customer for their personal or business use. For example, the following vehicle sales are taxable:
- Sales of new vehicles
- Used vehicles
- Previously leased or rented vehicles
As part of this obligation, you will likely need a seller’s permit from the California Department of Tax and Fee Administration (CDTFA) to report and pay the sales tax. Car dealers should be mindful of the requirements for reimbursement of sales tax when passing the cost of sales tax to the customer (e.g., itemizing the sales tax portion on the bill or other proof of sale).
California’s New Sales Tax Reporting for Used Car Dealers and Auctioneers
California is currently in the process of transitioning its sales tax reporting and payment process for used vehicles from the CDTFA to the Department of Motor Vehicles (DMV). Effective January 1, 2023, all used car dealers will pay their sales tax to the DMV. However, used car dealers will still file a sales and use tax return with CDTFA using schedule CDTFA-531-MV – also note that California imposed a monthly filing frequency for all used vehicle dealers as of January 1, 2021. This change reflects the reality that the CDTFA often relies on DMV sales data to reconcile your sales tax reporting and identify gaps or other underreporting. You can review CDTFA’s page of FAQs for more information on the new changes affecting used car dealerships.
Used vehicle auctioneers are also subject to the monthly reporting of their sales since January 1, 2021. The CDTFA may also require the submission of an extra schedule on your return that details wholesale transactions under certain circumstances.
Does California Sales Tax Apply to Out-Of-State Car Purchases?
Your car dealership will not generally owe California sales or use tax on a vehicle sold and delivered outside of California so long as the car’s use is also outside the state. In addition to other documents proving out-of-state purchases (e.g., bills of lading, travel expenses, etc.), car dealers should also use the following CDTFA certificates to reflect the nature of the sale:
- CDTFA-447 (Statement that vehicle purchase is not for use inside California)
- CDTFA-448 (Statement of vehicle Delivery Outside California)
Specific Sales and Use Tax Exemptions for California Auto Dealers
Several different vehicle sale scenarios could create an opportunity for an exemption from California sales tax obligations for your car dealership. A few of those exemptions for vehicles sales that may apply to your dealership include:
- Vehicle sales intended for resale (must have a resale certificate from customer and may require additional recordkeeping through a Wholesale Report of Sale)
- Sale of salvage vehicles to licensed dismantler and repair dealers (use resale certificate CDTFA-230-F)
- Vehicle sales to U.S. government agencies
- Vehicle sales to military personnel under qualifying circumstances
- The sale of trucks, trailers, and semi-trucks used exclusively out-of-state for interstate or foreign commerce
- Partial exemption (until December 31, 2023) for sales of zero-emission transit buses to qualifying purchasers (e.g., local governments, transportation districts, and other public agencies that provide transit service)
- Vehicle sales to leasing companies (available resale certificates may apply depending on the classification of the lessor’s vehicles as passenger vehicles or mobile transportation equipment)
How a Car Dealership’s Incentives and Discounts Affect California Sales Tax (or don’t)
Car dealerships often employ a variety of special pricing, discounts, and other incentives to increase their sales and move products. Your dealership should carefully consider the appropriate sales tax application when structuring different deals to ensure accurate sales tax collection and reporting.
- Trade-ins: The trade-in value of a customer’s car does not affect the newly purchased vehicle’s price for California sales tax purposes. (i.e., you don’t deduct the sale price to reflect the trade-in value). For example, you would still collect sales tax on the $10,000 purchase price of a vehicle that a customer paid $8,000 after trading in their old car for $2000.
- Standard discounts: Apply the sales tax rate to the purchase price adjusted to reflect the discount.
- Third-party discounts and rebates: You will generally pay sales tax on amounts received as part of a rebate or other offer from a manufacturer or vendor (e.g., a $2,000 rebate received for a customer’s down payment on a car).
- Dealer-Purchased Incentives: Dealers only pay sales tax on the initial purchase of supplies later given to customers as free incentives (e.g., apparel, car accessories, etc.).
- Factory-Dealer Incentives: Car dealers should collect and pay sales tax on the actual selling price, regardless of any discount on the vehicle’s fair market value when purchased from a manufacturer or other vendor.
California Sales Tax for Other Special Charges Related to a Vehicle Sale
You likely also have other charges tied to the sale of a vehicle. Each charge will have varying California sales tax consequences depending on its nature.
- Cost of modifications for disability (cost of modification attributable to sale price excluded from sales tax)
- Broker fees and commissions (broker fees on behalf of the dealership are taxable)
- Documentation fees (sales tax applies)
- DMV license fees (sales tax only applies to the amount charged in addition to the fees given to the DMV)
- Financing, interest, and insurance charges (no sales tax applies if charges are separated from the vehicle’s purchase price)
- Free tank of gas (no sales tax unless you itemize a charge for the included gasoline)
- Smog certification fees (sales tax only applies to the amount charged in addition to the fees given to the DCA)
When California’s Use Tax May Apply to Your Fleet of Vehicles
Not all vehicles on your lot will be immediately sold to customers. Additionally, you may use vehicles for purposes related to, but separate from, your car dealership’s primary purpose. Depending on the circumstance, you may have an obligation to pay California use tax.
Here are some common uses of vehicles by car dealerships that could have use tax reporting obligations:
- Salesperson vehicles: Reporting depends on the length of the assignment to the salesperson and other applications (e.g., a rental or sale)
- Other employee vehicles: Reporting is like that for salesperson vehicles but with different rates (i.e., 1/40th of purchase price vs. 1/60th of purchase price)
- Non-employee vehicles: Reporting and payment of use tax based on a vehicle’s cost will generally apply to a vehicle assigned to a non-employee.
- Loaner vehicles: The application of use tax when providing a courtesy vehicle to a customer will depend on the nature of the arrangement with the customer and the source of the loaner vehicle.
Contact Us for More Help with Sales Tax Matters for Car Dealerships
Car dealerships can have significant sales tax obligations because of the high purchase price of vehicles in addition to complex sales and use tax rules for other parts of the business. Our sales tax professionals always welcome the opportunity to assist car dealers with their sales tax matters, including consultation on future reporting or audit defense representation for prior years. Remember, the CDTFA can access sale records from the DMV to check your reported sales tax figures. Noticeable discrepancies with DMV data and large exempt sales ratios both present risk of future CDTFA involvement in this highly audited industry.
Call Sales Tax Helper today to schedule a free consultation about California sales tax for motor vehicle dealers.