Car dealers have enough to worry about when selling or repairing a motor vehicle. Presently, having enough staff to run a functional business or sufficient inventory are some of the most pressing issues facing this industry. However, lurking under the surface is another risk – the Florida Department of Revenue. The Florida Department of Revenue has an uncanny ability to start an audit just when it is the most inconvenient time possible. This article will discuss many of the common audit areas car dealers need to focus on to prepare for an eventual Florida sales and use tax audit.
The areas of concern for car dealers depend upon the specific business model. New car dealers sell new and pre-owned motor vehicles along with service warranties and repair work. Buy here pay here independent dealers have some similar but also vastly different concerns. Then you will have other car dealers that are somewhere in the middle.
One area of concern to car dealers is collecting the proper amount of sales tax on the sale of a new or pre-owned motor vehicle. The state sales tax rate of six percent (6%) is easy enough to apply. What can be problematic entails the application of the county rate. The county rate applicable to the transaction is not necessarily the rate of where the car dealer is located; rather, the county rate will be at the county rate for where the customer is titling and registering the motor vehicle in Florida. This small nuance can really add up over a period of three years, which is a typical audit period length, as YOU the car dealer could be liable for not collecting the proper amount of sales tax on the transaction. Moreover, the county sales tax rate is limited to the first $5,000.00 of the sales price of the motor vehicle. Amounts above $5,000.00 relating to the purchase of the motor vehicle are not subject to the county sales tax but will remain subject to the state sales tax rate.
Slightly different from a motor vehicle sale is the sales tax treatment of the sale of a service warranty. As a very general rule, if the underlying service warranty work is subject to sales tax, then the sale of the service warranty is subject to sales tax, barring any type of an exemption. The sale of a service warranty in Florida is subject to Florida sales tax irrespective of the residency of the purchaser. The sales tax rate is the full state and county sales tax rate even if the sales price is over $5,000.00. Very generally speaking, the parts used to effectuate a repair under a service warranty are exempt from tax. A complete understanding of service warranties and the sales and use tax implications would be required in an entirely separate article.
In some instances, a purchaser from another state will buy a motor vehicle in Florida. When that happens and the purchaser takes delivery of the motor vehicle in Florida, the purchaser is entitled to pay their home state sales tax rate up to the Florida sales tax rate. Thus, if the purchaser’s home state sales tax rate is two percent (2%), then the purchaser will only pay that amount of sales tax at the time of purchase to the selling car dealer. On the other hand, if the purchaser’s home state sales tax rate is ten percent (10%), then the purchaser will be capped at the normal Florida sales tax rate. It is important to make a few points on this. First, the sales tax collected is Florida sales tax, which should be fully and timely remitted to the Florida Department of Revenue. Second, the purchaser must be a resident of another U.S. state to qualify for the above partial exemption. Third, the car dealer must have the purchaser fill out at the time of sale Form DR-123, Partial Exemption for Motor Vehicle Sold to Resident of Another State. The form must be notarized. Fourth, and when filling out the DR-123, the car dealer should use the most recent Tax Information Publication to charge the correct amount of sales tax on the transaction. If the car dealer fails on any of these points, (s)he could be liable for the Florida sales tax on the transaction, plus interest and possibly penalties.
There could be instances where the customer does not take possession of the motor vehicle in Florida but has the motor vehicle shipped. Whether the dealer ships the motor vehicle himself or hires a third party to ship, there are certain documentational steps the dealer must take to protect himself and not have to charge Florida sales tax on the transaction. Should the dealer ship the motor vehicle himself, the dealer will need to have the purchaser sign a “Certificate for Acceptance of Delivery of Aircraft, Boat, Mobile Home, Motor Vehicle, or Other Vehicle Outside Florida.” If the car dealer is shipping via a third party, the bill of lading should identify the motor vehicle as well as the delivery address being outside of Florida. Identifying the motor vehicle should include the VIN but it should also include the make and model of the vehicle as well and match the purchase contract.
Some car dealers, such as “Buy Here, Pay Here” car dealers, will finance the motor vehicle for their customer. When this happens, the car dealer is likely also financing the sales tax on the motor vehicle for the customer. If a customer defaults on the payment obligation, the car dealer could repossess the motor vehicle. When that happens, the car dealer will want to get back from the Florida Department of Revenue the sales tax paid on the sale. The dealer may take a credit on the sales tax return or apply for a credit based on the total tax bearing to the total unpaid balance exclusive of finance and other nontaxable charges. The credit or refund must be claimed within twelve (12) months following when the property was repossessed. The completed calculation of the credit must be done on Form DR-95B, Schedule of Tax Credits Claimed on Repossessed Tangible Personal Property. The calculation for the credit is not intuitive whatsoever. Initially, you start with the amount of tax that was paid. You then list the amount of the purchase price less the trade in amount. Next, you will itemize the amount of the purchase price less the trade-in and cash down payment. From there, you must state the number of total payments due under the finance contract. Then, the amount of the purchase price less trade-in and cash down payment is divided by the number of payments due under the financing agreement. This is the prorated payment amount. The amount of tax paid is divided by the amount of the purchase price less trade-in to get to the rate factor. You will then need to list the number of total payments remaining with certain adjustments. The prorated payment amount is then multiplied by the rate factor and the number of total payments remaining to eventually yield the amount of the credit or refund.
Now that we have spoken on the sales side of things, we can briefly discuss tax on purchases by the car dealer. Some of the most common areas will be fixed assets, general purchases, and inventory converted to the dealer’s own use. The specifics of these areas will be dictated by the nature of the car dealer’s business. Car dealers should ensure Florida sales or use tax is paid as needed when needed. If not, the Florida Department of Revenue would be more than happy to assist you with that.
In sum, car dealers have a lot to worry about with the Florida Department of Revenue. Knowing the areas where the Florida Department of Revenue could attack you is the first step. The next step is for the car dealer to determine a game plan for addressing these issues so (s)he is not held on the hook for paying an assessment out of their bottom line.
About the author: David Brennan is partner with Moffa, Sutton, & Donnini, P.A. His primary practice area is multistate tax controversy. David received a B.S. in Accounting and Finance, with a minor in Computer Science, from Florida State University. He worked as an accountant for a CPA firm before attending law school at Regent University. He received his Juris Doctor in 2013 and was licensed to practice law in Florida in the same year. In 2015, David earned his Masters of Laws in Taxation from Boston University. While working for the Florida Department of Revenue as a Senior Attorney, David focused on various sales and use tax issues, including that of motor vehicles. You can read his BIO HERE.
At the Law Office of Moffa, Sutton, & Donnini, PA, our primary practice area is Florida taxes, with a very heavy emphasis in Florida sales and use tax. We have defended Florida businesses against the Florida Department of Revenue since 1991 and have over 100 years of cumulative sales tax experience within our firm. Our partners are both CPAs/Accountants and Attorneys, so we understand both the accounting side of the situation as well as the legal side. We represent taxpayers and business owners from the entire state of Florida. Contact us for a FREE INITIAL CONSULTATION to confidentially discuss how we can help put this nightmare behind you.
AUTHORITY
Section 212.02, F.S. - Definitions.
Section 212.05, F.S. - Sales, storage, use tax.
Rule 12A-1.007, F.A.C. – Aircraft, Boats, Mobile Homes, and Motor Vehicles.
Rule 12A-1.105, F.A.C. – Service Warranties.
Rule 12A-15.0035, F.A.C. – Aircraft, Boats, Motor Vehicles, and Mobile Homes.
ADDITIONAL RESOURCES
2021 FLORIDA SALES TAX RATES FOR NONRESIDENT CAR PURCHASES, published January 14, 2021, by David J. Brennan, Jr., Esq.
FLORIDA SALES TAX GUIDE FOR TOW TRUCKS, published April 10, 2020, by David J. Brennan, Jr., Esq.
FLORIDA SALES TAX: LEASED CARS, published May 22, 2019, by David J. Brennan, Jr., Esq.
FLORIDA SALES & USE TAX APPORTIONMENT HANDBOOK, published March 28, 2019, by David J. Brennan, Jr., Esq.
FLORIDA SALES TAX INFORMAL WRITTEN PROTEST, published November 17, 2018, by James Sutton, C.P.A., Esq.
FLORIDA SALES TAX - VOLUNTARY DISCLOSURE PROGRAM, published April 9, 2018, by Jeanette Moffa, Esq.