Indiana Sales Tax Reminders for Buy Here – Pay Here Dealers
Note: This article originally appeared in The Showroom.
There are some unique Indiana sales tax rules and regulations that apply to Buy Here – Pay Here (BHPH) dealers. It is important that dealers understand the difference between a vehicle return and a vehicle repossession, as well as the impact a related finance company (RFC) can have on the dealer’s ability to recover sales tax related to bad debt charge-off.
Returns vs. Repossessions
In March 2017, the Indiana Department of Revenue (INDOR) made revisions to Information Bulletin (IB) #28S. This bulletin addresses various sales tax issues related to the sales of motor vehicles and trailers. Included in the bulletin is a discussion of repossessed vehicles and customer-returned vehicles. The bulletin states that transactions classified as repossessions are subject to sales tax, and any sales tax collected and remitted by the retail merchant will not be refunded.
According to the bulletin, “[t]he term repossessed vehicle includes all vehicles in all scenarios in which the retail merchant or its agent repossesses the vehicle, regardless of purchase terms between the purchaser and the retail merchant.” In this scenario, the retail merchant must collect and remit the sales tax on the sale of the vehicle on its sales tax return for the month of sale. In the case of a BHPH dealer who sells its receivables to a RFC, the RFC would then be entitled to file a separate claim for refund based on the amount of any receivable remaining after the liquidation of the repossessed vehicle (bad debt deduction).
Conversely, transactions that result in customer-returned vehicles may qualify for a refund of sales tax to the dealer (or the dealer may exclude those transactions in its monthly sales tax return, if the return occurs in the same month as the original sale). In order for a transaction to qualify as a customer return, it must meet the following three criteria (as stated in IB #28S):
- The vehicle is returned within the number of days allowed for a return pursuant to the retail merchant’s publicly stated return policy or specified in the written contract entered into between the purchaser and retail merchant, not to exceed 90 days.
- The vehicle is returned pursuant to explicit, written terms of the parties’ contractual agreement or the retail merchant’s publicly stated return policy.
- The purchaser of the vehicle is refunded the entire purchase price, including any sales tax (i.e., the amount actually collected by the retail merchant from the purchaser of the vehicle).
The first issue that arises from these criteria is the requirement for a return policy to be publicly stated. Unfortunately, the IB does not include language on what constitutes a publicly stated policy.
The second issue is that the entire purchase price collected by the retailer must be returned to the purchaser. In the case of a BHPH dealer, this would refer to any down payment received as well as any other payments received after the original sale. Since most dealers do not refund all of these payments, this requirement would seem to eliminate the possibility of having customer-return transactions. However, the bulletin allows the retailer to impose and retain an administrative fee that will not disqualify them from using customer-return treatment, as long as it is included in the written contract and it is described as a one-time fee. Fees, including administrative fees, calculated on a per diem basis are considered to be a vehicle rental, and therefore are subject to sales tax.
Advice to Dealers
A number of dealerships are treating deals as customer returns and are not remitting sales tax on these transactions. These dealers may not be aware of the tests the state uses to identify what qualifies as a return as opposed to a repossession. If the state determines that return transactions should have been treated as repossessions, the unpaid sales tax along with penalties and interest could be staggering.
Dealers should adopt a return policy and then abide by it. This policy should either be incorporated into the dealer’s sales contracts or conspicuously displayed on signage in the sales area. The policy should include the number of days the dealership is willing to accept a return (i.e., not to exceed 90 days) and should also state the amount and types of administrative fees that will be charged on returned vehicles. Again, the IB does not provide detailed guidance, so dealers should use their discretion on how large a sign should be, what it should say, or where exactly it should be displayed.
Related Finance Company Issues
For those dealers who utilize a RFC structure, be aware that in Indiana the dealership should not be claiming bad debt deductions related to receivables charged-off by the RFC. The RFC has a limited opportunity to submit refund claims and recover some of the sales tax paid on those transactions. In computing the amount of refund the IDOR will allow, the discount taken by the RFC along with the related amortization of that discount must be factored in. These calculations and the supporting information can be somewhat tricky and tedious to put together. We can assist with this process.
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