It’s April, and Spring is finally in the air. The flowers are starting to bloom, and the weather is getting warmer. The start of Spring also typically marks the tail end of tax season (I say typically because the past year has been anything but typical, and the IRS announced the individual federal income tax filing deadline was automatically extended until May 17). Maybe it is because taxes are on everyone’s mind, as during this time, we start to receive a number of calls on the Hotline about customers attempting to assert various sales tax exemptions. While a certain amount of these claims may have some validity, many of them do not, and your dealership personnel should scrutinize each claim rather than simply taking the customer at his or her word. Remember, as the seller of the vehicle, the dealer is ultimately responsible for remitting proper sales tax to the California Department of Tax and Fee Administration (CDTFA). This article will review and attempt to dispel some of the more common sales tax exemption myths that we regularly come across.
Myth #1—Charitable, Religious, and Non-Profit Organizations
When it comes to sales tax exemption myths, this is one of the more frequent calls we receive on the Hotline. The typical call starts with the dealer explaining that there is a member of a local church or non-profit organization looking to purchase a vehicle and claiming that their organization is exempt from paying sales tax on the purchase. The member even has an “official” letter from a state agency as “proof” of this exemption.
Please be careful to closely scrutinize any documentation provided because, as the CDTFA Publication 18, Nonprofit Organizations states, “[a]lthough many nonprofit and religious organizations are exempt from federal and state income tax, there is no similar broad exemption from California sales and use tax. In other words, nonprofit and religious organizations, in general, are treated just like other California sellers and buyers for sales and use tax purposes.” (Emphasis added). Many times, after bringing this to their attention, dealers will further examine the document to find that it states the organization is exempt from state franchise or income tax. Moreover, the documentation does not mention that the organization is exempt from paying sales tax. Because there is no general exemption for non-profit organizations for paying sales tax, in the off chance that the documentation does reference sales tax, it may behoove dealership personnel to reach out to the issuing state agency and/or the CDTFA to confirm its validity/authenticity.
Myth #2—Military Members
Although this is an easy answer, from time to time, dealership personnel get confused when a military member comes into the store and insists that s/he does not have to pay sales tax on a vehicle because s/he is in the military and from a different state. The CDTFA Audit Manual section 0611.40 instructs: “Sales of vehicles in California to military personnel are subject to sales tax regardless of the service member’s place of residence.” Moreover, Sales and Use Tax Regulation 1566(c) states: “A dealer (or manufacturer or dismantler) who is licensed or certificated pursuant to the California Vehicle Code must report and pay sales tax to the Board with respect to the sale of a vehicle in California to a member of the armed services regardless of the service member’s place of residence.” If even more authority is necessary, Sales and Use Tax Annotations, section 325.0680 states that “[t]here is no basis for exemption from sales tax of sales to servicemen to take delivery of an automobile in California but drive it from California on a driveaway permit and registers it in another state. When the vehicle is delivered to the purchaser in this state the sale is completed insofar as the sales tax is concerned.” This means that if you deliver a vehicle in California to a military member, the transaction is subject to sales tax.
The military member may be confusing a sales tax exemption for the Nonresident Military (NRM) Exemption, which involves the vehicle license fee (VLF) for the vehicle. Specifically, a NRM service member on active duty in California and their spouse qualifies for an exemption from VLF on any vehicle if it is registered in the name of the service member, their spouse, or both and the vehicle is not operated for hire (i.e., taxi, Uber, Lyft, etc.). You can read up on the NRM exemption in Chapter 12.105 of the Vehicle Industry Registration Procedures Manual.
Myth #3— People with Disabilities
Occasionally, dealers have asked whether a person with a disability is entitled to a sales tax exemption. The typical situation is when an individual has “Disabled Person License Plates” and claims that they are entitled to a complete sales tax exemption on their vehicle purchase. While not an unreasonable claim, generally, a person with a disability is not entitled to any sales tax exemption for the lease or purchase of an “unmodified” vehicle. However, sales tax does not apply to the sale, installation, use, or other consumption of items and materials that are used to modify a vehicle for a disability. This means that parts and labor to modify a vehicle so that the person can operate it (i.e., hand controls) and the parts and labor that are necessary for a vehicle to be used to transport the person (i.e., a wheelchair lift) are not taxable. [Revenue & Taxation Code § 6369.4; 18 CCR § 1591.3(b)].
Myth #4—Disabled Veteran
This one is kind of a combination of the last two myths we discussed but does come up from time to time. (For those who want to look it up, a “disabled veteran” is actually a defined term in Vehicle Code § 295.7). Selling a vehicle to a disabled veteran in and of itself does not qualify the sale for a tax exemption, and any amount that person is paying out of their own pocket is generally taxable (with the exception perhaps to any modifications made to the vehicle as discussed in the section above).
However, any amount paid toward the purchase price of the vehicle by the Veterans Administration directly to the dealer may be exempted from sales tax, as this would fall under a sale to the U.S. government and its instrumentalities per Regulation 1614. CDTFA Audit Manual section 0610.10 explains that “the documentation furnished by the Veterans Administration parallels that of purchases by the U.S. Government. The seller should retain a Government Purchase Order or other documentation supporting direct payment to the seller by the United States.” According to 38 U.S.C. § 3902, the VA can currently provide up to $18,900 towards the purchase price of an automobile for a disabled veteran. Although rare, these types of transactions do happen, and the veteran generally comes in with instructional information from the VA regarding the transaction. Should questions arise, we highly recommend reaching out directly to the VA for further information before completing the deal.
Myth #5—California State and Local Government Agencies
This myth seems to cause much angst and confusion with dealers when selling a vehicle to a state or local California agency, as the agency is sometimes quite insistent that it is exempt from paying sales tax. However, the CDTFA makes it clear that “sales to State of California agencies and state political subdivisions—counties, cities, and special districts (such as irrigation, fire, and school districts)—are generally taxable. This holds true even if the purchase is made using federal funds.” [CDTFA Publication 102, Sales to the United States Government]. Accordingly, California state and local government agencies are generally not exempt from paying sales tax unless a specific exemption applies to the individual sale. This is not to be confused with the sale of a vehicle to the United States Government (or a corporation owned by the United States government), as these sales are generally exempt from sales tax.
If you have any questions regarding this topic, or any other situation that may arise in your sales or service departments, hotline clients are invited to contact us at (800) 785-2880 (then press “4” for hotline) or [email protected].