FL Used Car Audits – What is taxable?
Our law firm handles Florida sales and use tax controversies for a wide variety of industries. However, lately we have seen more and more audits involving used car dealers. Now that the Department of Revenue has DMV reports, they apparently are more confident that they have a "weapon" that enables them to identify audit issues to justify selecting audits in the used car industry. But, the issues the DOR has been finding are not limited simply to unreported sales (unremitted sales tax whether collected on the sale or not). This article will go over some of the "bigger" transactions types which have been resulting in audit exhibits assessing tax. The following list of issues are items we have seen picked up and items auditors have been picking up in other audits of used car dealers. At the end of this article are links to more general discussions on used car dealers.
REPAIRS: Repair services are something that auditors generally look to address early on. This is more for larger car dealers who have a separate department to exclusively sell parts and repair work, which should be taxed in almost all cases except warranty work. For used car dealers, repairs on a car in inventory so that it is in selling condition would be exempt from tax whether tangible personal property (TPP) is added or not. So, make sure you are extending your resale certificate for parts to get your car inventory ready to be sold. But, if you are getting new tires and/or batteries, I would suggest just paying the tax to the vendor as it is generally more of a hassle to keep track of the fees if you purchased them exempt and tried to pass those costs on to the purchaser. The fee applies to new or used motor vehicles operated on or off road (and the definition of motor vehicles include automobiles, motorcycles, trucks, trailers, semitrailers, tractor trucks and semitrailer combinations). Be careful if you pay the tax and then list it on your invoice to "recoup" the fee(s) on the ultimate sale. If you are audited, you are likely to have a headache showing you paid the tax on all purchases of tires and batteries. If the auditor is zealous, and you are not registered and reporting for solid waste (Form DR-15SW), you will have a big hassle for a couple dollars in fees for each sale. And, remember that the fee is to be separately stated and included in the amount used for calculating the sales tax due.
SECURITY SERVICES: Security services on the car dealer's lot are taxable in some instances. The installation of some of the security hardware may be considered non-taxable real property improvement, but taxability depends on a lot of factors, such as how permanent the improvement will be to the real property. Simply attaching a camera and attaching wires inside a gutter may not be enough to avoid tax. But, occasional repairs could be taxable. Monitoring and maintenance of security systems are taxable – as a service. This means that a camera that provides a picture of the lot to a website can be considered monitoring and subject to tax. Also note that tax free maintenance, as defined by the DOR, does not include an expansion or upgrade of an existing system but does include the replacement of defective parts. Taxable security services also include guard dogs whether with or without a handler. Please reference rule 12A-1.016, Florida Administrative Code ("F.A.C.") for security systems that are considered TPP and rule 12A-1.051, F.A.C., for security systems that are considered real property.
CONSTRUCTIVE RENT: Another issue often picked up, and not limited to used car dealers, is ad valorem taxes (property taxes) and management services/fees. When a lessee pays the property taxes to or for its landlord, the DOR considers the payment of the taxes to be additional commercial rent and subject to sales tax. In many instances, taxpayers pay a "management" fee to its location's property owner. The DOR has been reviewing these payments to make sure that they are not "disguised" commercial rent. In most instances, the auditor looks to the taxpayer's federal tax returns to see if any rental expense is reported. If so, the auditor typically finds that to be enough to assess tax on the amounts reported on the federal returns. Management fees are not in the definition of commercial rent and, therefore, not subject to tax – unless either the landlord or tenant somehow treats the management fee as rent for book or tax purposes. But, auditor are reviewing the amounts paid to determine if they are actually commercial rent. This is an issue to note when drafting leases and preparing your federal tax returns.
SALES TO NON-FLORIDA RESIDENTS: A large issue that varies in application from dealer to dealer is sales to residents of other states. These types of sales are supposed to be supported by an executed DR-123. These are sales in Florida where the purchaser is going to title the vehicle in another state (ex. Georgia, Alabama, Mississippi). In these instances, the dealer should collect sales tax at the rate applicable in the purchaser's home state up to but not exceeding the Florida rate. It should be noted that the purchaser does not have to remove the vehicle from Florida as long as the vehicle is actually registered in the purchaser's home state within 45 days of the purchase date. Dealers should be aware of the tax treatment of sales to nonresident corporations. Those purchases are subject to tax if an officer (or member of an LLC) is a Florida resident, a Florida resident stockholder owns 10% or more of the nonresident corporation or a partner owns at least 10% of the purchasing nonresident partnership. Sales to nonresident dealers, auction houses or leasing companies are exempt as sales for resale but require a resale certificate and addressed in rule 12A-1.039, F.A.C. Dealers should also refer to rule 12A-1.007, F.A.C., which addresses the taxability of the full sales price of motor vehicles and impacts dealers' inclusion of handling fees, notary fees, dealer prep fees or other fees on forms a dealer might use in writing up a sale but inadvertently leave off the price used to calculate the sales tax due. There is an exception though for separately stated fees or charges requisite to the titling, licensing, registration, transfer of ownership, or recording of the lien. Those items are not included in the sales price and thusly not subject to tax. Also not subject to sales tax are trade-ins deducted from the purchase of a vehicle. A separate sale of a vehicle is not included in this exception even if the proceeds are immediately used by the seller for the purchase of another vehicle. The purchase and trade in must be on the same sales contract for the trade in to be deducted from the sales price for Florida sales tax purposes.
GPS UNITS: The final issue I want to mention is one that is quietly brewing and involves both use and sales tax. The DOR has "quietly" been taking the position that GPS units placed in used cars are exclusively for the benefit of used car dealers and, therefore, the dealer owes use tax on the GPS unit. This is even though the GPS units are included with the used vehicle being sold that already has sales tax charged on the sales price. Yes – the customer gets to keep the GPS unit if the car is paid in full, but the used car dealer can "use" the GPS unit to assist with the repossession if the purchaser fails to pay. Apparently, the DOR has decided that the dollar amounts involved warrant taking this position, which is contrary to the basic principle that items that are resold are purchased tax exempt. There is very little information on this subject with respect to DOR issued positions and guidelines. There are a number of factors that can work against the DOR's position notwithstanding the inconsistency of saying that GPS units, for used car dealers, should be taxed at purchase and then taxed as part of the sale to a customer. This is a topic that will addressed further in the near future as it is a position the DOR is currently not back off of and there are only more audits of used car dealers coming. So, beware used car sales industry.
If you or your clients are under a Florida sales and use tax audit or you are concerned about the pending industry wide audit campaign, then please do not hesitate contacting our law firm for a free initial consultation. Our firm's primary practice area is fighting the Florida Department of Revenue in Florida sales and use tax controversies on behalf of taxpayers. This is simply what we do. So if you have Florida sales and use tax questions, then please call or email us using the contract information at the top of this web page.
About the author: Mr. Parker is a sales and use tax attorney and an associate in the law firm the Law Offices of Moffa, Sutton, & Donnini, P.A., based in the firm's Tampa office. Mr. Parker's practice includes state tax audits and controversies involving sales and use tax and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Parker received his law degree and L.L.M. in Taxation from the University of Florida. To learn more about Mr. Parker, please visit his firm bio.
ADDITIONAL RESOURCES
FLORIDA SALES TAX FRAUD – 12 USED CAR DEALERS ARRESTED, published July 12, 2014, by James Sutton, CPA, Esq.
FL CAR DEALER: WHEN IS A SALE TAX EXEMPT?, published March, 17, 2013, by James Sutton, CPA, Esq.
FL TAX ALERT – USED CAR DEALERS TARGETED!!!!, published January 19, 2013, by James Sutton, CPA, Esq.
FL TAX – VOLUNTARY DISCLOSURE CAN BE THE PERFECT SOLUTION, published October 5, 2012, by Jerry Donnini, Esq.
FL DOR'S GREATEST WEAPON – REVOCATION OF A DEALER'S SALES TAX CERTIFICATE, published August 6, 2012, by Jerry Donnini, Esq.