Texas Auto Dealerships: Common Issues with Your Sales Tax Audit or Appeal
As a car dealership in Texas, sales tax is an important consideration for your operations. In fact, it is one of the most significant taxes that dealerships are required to collect and remit to the state. However, with the complex nature of Texas’ sales tax laws, car dealerships are often the victim of audits and surprise assessments from the Texas Comptroller's office. These audits can be stressful and time-consuming, especially for unprepared and unrepresented dealerships.
In this article, we explain some of the common sales tax issues that car dealerships may face when dealing with an audit from the Texas Comptroller. We will explore the most common mistakes and errors that dealerships make when collecting and reporting sales tax, as well as provide some tips for avoiding these issues. By understanding the most common sales tax issues that dealerships face, we hope to help car dealerships in Texas stay compliant and avoid costly mistakes during an audit.
Key Areas of Texas Motor Vehicle Sales Tax for Your Car Dealership to Consider
Retail Sales of Motor Vehicles in Texas
Every retail sale of motor vehicles is subject to the sales tax in Texas at the motor vehicle sales tax rate of 6.25%. Your dealership is responsible for collecting and remitting that tax from the buyer to the county tax assessor-collector (CTAC) in a span of 30 days from the day of purchase. The Texas motor vehicle sales tax applies to the purchase price (i.e., consideration) of the car, SUV, or truck but generally excludes the following:
- Cash discounts
- Cash or credit refund amounts
- Labor costs for installing or repairing parts on the vehicle
- Any charges related to financing the vehicle purchase (e.g., interest, loan service charges, etc.)
Note on Trade-Ins: Motor vehicle sales tax does not apply to the allowance given to the buyer for a vehicle you accept as a trade-in as part of the sale of the new or used vehicle from your licensed dealership. For example, sales tax would only apply to $15,000 of a motor vehicle purchased for $25,000 when a $10,000 trade-in was also part of the transaction.
Texas Sales Tax on Leases and Rentals of Motor Vehicles
Texas has a motor vehicle rental tax that applies to your dealership’s leasing of cars to customers. The tax applies to the gross receipts from the rental. The applicable rate depends on the term of the lease:
- Short-term rentals have a 10% tax rate (30 days or less).
- Long-term rentals have a 6.25% tax rate (between 31-180 days).
Repair, Maintenance, and Warranty Services Your Auto Dealership Provides
Your car dealership likely provides a variety of repair and maintenance services for vehicles. Texas sales tax usually applies to the cost of parts but not the cost of labor. The Texas Comptroller’s Office requires you to collect sales tax from customers when you itemize (i.e., separate) the charges for parts from the charges for labor when making repair or maintenance services.
Alternatively, you won’t collect sales tax from the customer when you use a lump-sum invoicing method (i.e., you do not separate charges for labor from the charges for parts). Dealerships that use lump-sum invoicing must pay sales tax to their suppliers on the parts they purchase and use for customer repairs.
Warranties and Free Maintenance Agreements: Sales tax does not apply to the cost of parts from a repair service made under a warranty, recall, or through a free maintenance agreement (offered as part of a vehicle purchase). This exclusion from sales tax also applies to goodwill and implied warranty repairs (i.e., those made for free within 7 days of a vehicle sale).
Paying Texas Motor Vehicle Tax on Purchases for Resale
A final concern for auto dealers is the handling of Texas motor vehicle tax on the purchase of vehicles made with the intent of future resale. The issue for your dealership when making inventory purchases is whether you can use a resale certificate or must pay sales tax. Dealers can generally purchase any used vehicle tax-free by using a resale certificate. However, sales tax on the purchase of a new vehicle for resale (i.e., one with a Manufacturer’s certificate of origin) applies if your dealership does not have a franchise for that vehicle’s make. For example, a Toyota dealership would pay Texas motor vehicle tax on the purchase of a new Subaru bought for resale.
Be Aware of the Data That Could Increase Your Dealership’s Risk of a Texas Sales Tax Audit
The Texas Comptroller's office obtains sales data on car dealerships from various sources, including:
- the dealerships' own sales and use tax returns,
- third-party vendors, and
- audits of other entities that do business with dealerships.
These sources provide data on car sales, sales tax collected, and other financial aspects of your transactions. The Comptroller's office uses this information to verify compliance with state tax laws and identify candidates for a sales tax audit.
Common Pitfalls for Texas Car Dealerships During a Sales Tax Audit
For car dealerships, an audit notice from the Texas Comptroller’s Office is often the first step toward a future sales tax assessment against your business. Some of the issues that regularly lead to increased assessments for Texas auto dealers include:
- Not maintaining good records to support your sales tax reporting (e.g., exemption certificates, invoices, etc.)
- Improperly using resale certificates on the purchase of parts and supplies (i.e., consumables) for your dealership’s repair services
- Your sales tax collection and reporting do not align with your invoice methods for your vehicle repair or maintenance services
- Not timely reporting and paying the sales tax when a vehicle purchase occurs
- Buying vehicles with a resale certificate and not paying motor vehicle tax when using those vehicles as part of the business (e.g., given to employees, leased as loaner vehicle, etc.)
Get Help with Texas Sales Tax Audit or Appeal of Your Assessment
Auto dealers facing a Texas sales tax audit, especially those with concerns of exposure, might find value in audit defense help from a sales tax professional. Your dealership has a right to representation from a sales tax professional throughout the audit process. Professional audit defense could help to navigate the demands of the auditor and control the outcome where possible by communicating information that supports your sales tax reporting.
Contact us today about help with a Texas sales tax audit or appeal for your car dealership.