Record Keeping for Motor Vehicle Dealers

Records

You must keep adequate records that support the amount of tax that is due. You may be required to present the records to the CDTFA in an audit. Failure to maintain accurate records could result in negligence or intent to evade tax and may result in penalties.

Records should be kept for at least four years unless the CDTFA gives written authorization to destroy them sooner. If you are being audited, retain all records for the audit period until the audit is completed to support any differences that may arise from the audit.

Under the Sales and Use Tax Law, you are required to keep adequate records that show:

• Your gross receipts from sales or leases of vehicles and other tangible personal property, whether you regard the receipts as taxable or nontaxable.
• All deductions allowed by law and claimed on your sales and use tax returns.
• The total purchase price of all tangible personal property purchased for sale, use, or lease.

These records must include:

• The normal books of account.
• All bills, receipts, invoices, repair orders, contracts, or other documents of original entry that support the entries in the books of account.
• All schedules of working papers used in connection with the preparation of tax returns.

Sales Documents - New Vehicle Dealers

Most new vehicle dealers have detailed records that reflect their daily operations. These records are prescribed by the major automobile manufacturers.

You will generally have a stock book listing all vehicles delivered into your inventory from the manufacturer. Typically you will use different sales journals such as new car retail, new car fleet, new car commercial, etc. to track your different types of sales transactions. Your basic sales document is the motor vehicle contract and sales agreement, usually containing four copies for the deal jacket, customer, financing company, and your own files.

You will also have report of sale books obtained from the DMV for all new vehicle sales. These forms must be maintained in numerical sequence including copies returned to the DMV or voided.

Sales Documents - Used Vehicle Dealers

Your inventory will come from a variety of sources including trade-ins on sales of other vehicles, retail auctions, or from other new and used car dealers. You will generally use car envelopes and inventory books to track your sales.

You should assign an inventory number to vehicles with car envelopes prepared for each unit. Details of each purchase and sale should be placed on the proper lines on the printed face of the envelope. All documents of purchase, reconditioning, and sale are then inserted in the envelope.

If you use an inventory book as a combination purchase and sales journal, you should enter the details of the source of purchase, date, description, and cost of each vehicle reflecting each purchase. The date of sale, name of customer, and selling price are recorded at the time of sale. When using this method, it is not uncommon to purchase a vehicle in one period and sell it in a later period. You should be sure to reconcile all purchases and sales each period to make sure sales are reported in the appropriate period.

You will also have report of sales books obtained from the DMV. These forms must be maintained in numerical sequence including copies returned to the DMV or voided.

Special Taxing Jurisdictions

As a vehicle dealer, you must generally report and pay sales or use tax at the statewide tax rate (currently 7.25%) plus any applicable district taxes.

Many cities, counties, communities, etc., impose additional sales tax amounts to fund local public services. Whether or not you must report and pay the additional district taxes will depend on the location where a vehicle is registered. If you are unsure of the applicable tax rate at any location you may visit Know Your Sales and Use Tax Rate webpage to lookup the correct rate to charge. Additional resources may also be found in the resource section of this guide.

Sales Made on State-Designated Fairgrounds

Effective July 1, 2018, if you are a retailer who makes sales of tangible personal property that take place on the real property of a California state-designated fair ("state-designated fairground"), you must separately state the amount of those sales on your Sales and Use Tax return.

Sales that take place on state-designated fairgrounds include over-the-counter sales on the fairgrounds and also may include sales in which the property is shipped or delivered to or from the fairground. The separately reported amount will be used for funding allocation purposes only. There is no additional tax or fee due on these sales.

For more information on the new reporting requirement, please see Tax Guide for Reporting Requirements on State-Designated Fairgrounds.

Resale Certificates

When making sales for resale, you must obtain a resale certificate from your customer in a timely manner.

Property purchased by issuing a resale certificate must be described either by an itemized list of the particular property to be purchased for resale, or by a general description of the kind of property to be purchased for resale.

Your sales of salvage vehicles are taxable retail sales unless the sale is to a licensed dismantler, repair dealer, or qualified scrap metal processor and you obtain a form CDTFA-230-F, California Resale Certificate, Sales by Auto Auctions and Auto Dismantlers to support the sale. You can easily verify seller's permit numbers on our website. You can also search for a dealer's license online, or check the current status of businesses licensed by the DMV using their Occupational License Status.

You should retain all resale certificates with your records for not less than four years. For more information, please see Regulation 1668, Sales for Resale

Bad Debts

You may be able to take a bad debt deduction for losses resulting from repossessions of vehicles as well as uncollectible accounts. Deductions can be claimed once they are written off for income tax purposes.

When claiming a repossession loss, you:

• Can claim a deduction only to the extent that you sustain a net loss of gross receipts upon which you have paid tax.
• May base the wholesale value of the repossessed vehicle on industry-recognized wholesale pricing guides.
• Cannot use estimated or unsupported figures or percentages to calculate the repossession loss.
• Cannot claim a deduction for expenses incurred in attempting to collect an account or for that portion of a debt that is retained by, or paid to, a third party as compensation for collecting an account.
• Must report and pay any amounts that you recovered after claiming a repossession loss on the first tax return following the recovery.

Note: You cannot claim a deduction for nontaxable charges such as installation or repair labor performed in connection with the sale of a vehicle.

Below is an example of how to compute the allowable bad debt deduction using the pro rata method:

*sales tax rates can and do change, be sure to use the same rate charged at the time the sale occurred.

Step Two:  Compute the Taxable Percentage of Loss

This is done by dividing the total amount subject to tax (line c) by the total sales price (line h).

12,230 ÷ 13,387 = 91.36%

Step Three: Compute the Allowable Deduction

This is done by multiplying the taxable percentage of loss (step Two) by the repossession loss per records (step One).

91.36% × 3,537 = $3,231.40

For more information, please refer to Regulation 1642, Bad Debts.

Required Documentation for Vehicles Delivered Out of California

You are urged to get statements notarized and maintain all documentation in your files for all sales claimed as sales in interstate or foreign commerce.

Suggested documentation includes:

• Evidence of the purchaser's out-of-state address, such as utility bills or property tax bills.
• If delivery is made by common carrier, customs broker, or forwarding agent, documents supporting the delivery or shipment (for example bills of lading).
• If delivery is made by you or your employee:
  • Expense claims that include fuel or hotel receipts, and
  • A statement signed by the delivery person and the purchaser certifying delivery of the vehicle to an out-of-state location. You may use a CDTFA-448, Statement of Delivery Outside California

If you know that a purchaser is a California resident and they state the vehicle is being purchased for use outside the state, it is important to obtain a CDTFA-447, Statement Pursuant to Section 6247 of the California Sales and Use Tax Law certifying their statement. If you do not get the certification, the vehicle will be considered purchased for use in this state and you must report and pay tax on the sale.

Even if you are not required to report and pay tax on vehicles delivered outside California, the buyer may owe use tax. See publication 52, Vehicles and Vessels: How to Request a Use Tax Clearance for DMV registration for more information on this topic.

Consignment Sales

You are responsible for obtaining a seller's permit and reporting and paying the sales tax on the retail selling price of consignment sales.

When you have possession or control of the item you are selling, and can transfer ownership or use of the item to the buyer without further action on the part of the owner, you are considered the retailer of the item.

For example, your store accepts pipes and accessories to sell on consignment. You agree to sell the products, but will not pay for the product unless it sells. Your agreement authorizes you to sell the products and transfer ownership to the buyer. You are considered the retailer of the accessories you sell in this way and must pay sales tax based on your retail selling price.

For more information, please see publication 114, Consignment Sales.

Car Buyer's Bill of Rights

You must offer an optional contract cancellation option on used vehicles purchased for less than $40,000, sold for personal use.

This option gives the buyer a right to cancel a purchase and receive a full refund, including amounts charged for sales tax, under specific conditions that must be shown on a separate agreement.

The charge for this option cannot exceed the amount defined by law, based on the cash price of the vehicle, and is not taxable. The price defined by law is in the table below:

*Cash price excludes document preparation fees, tax imposed on the sale, pollution control certification fees, prior credit or lease balance on trade-ins, service contract charges, surface protection charges, debt cancellation agreement charges, contract cancellation option agreement charges, registration, transfer, titling, license, and California tire fees.

Buyers must provide you with the following upon cancellation of a contract:

• A signed statement indicating that the buyer chooses to cancel the purchase of the vehicle.
• Any restocking fee specified in the contract cancellation option, less the cost the buyer pays for the contract cancellation agreement.
• All documents originally provided to the buyer from the seller, including the vehicle purchase contract and the original contract cancellation option agreement.
• All original vehicle title and registration documents.

The vehicle must be returned in the condition in which it was sold, except for normal wear and tear, and must not exceed the maximum mileage stated in the agreement. For more detailed information, please refer to Regulation 1655, Returns, Defects and Replacements or contact the DMV.

Contract Cancellation Option

Required documentation on cancellation option agreements includes:

• The names of the seller and buyer, a description of the vehicle purchased, and the VIN number.
• The time period in which the buyer may cancel the purchase and return the vehicle. This cannot be before the dealer's close of business on the second day after the day the vehicle is delivered to the customer.
• The maximum number of miles the vehicle may be driven before it is returned under the agreement. This may not be less than 250 miles.
• The buyer must pay any restocking fees if they cancel the purchase.
• The specific requirements for returning the vehicle for refund.

You may charge a restocking fee based on the cash price of the vehicle as shown in the table below. This fee is not taxable.