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What’s Hot on the Hotline?—Non-Franchise Dealers Attempting to Purchase New Vehicles

Robert Ebin /

Inevitably, many of you will be faced with the situation where another dealer who does not have your franchise wants to purchase a new vehicle from you and insists s/he does not have to pay sales tax because s/he can provide you with a resale certificate. This is typically because the dealer principal wants to, for example, drive a BMW as her demo but owns a Honda store. In fact, we have received several calls recently on the hotline about non-franchise dealers attempting to purchase new vehicles. Although not the most riveting of topics, it is an important one, and one with many potential pitfalls if not handled properly.

The Law

In California, it is unlawful (absent a few exceptions discussed below) for a dealer to “advertise for sale, sell or purchase for resale any new vehicle of a line-make for which the dealer does not hold a franchise.” [Vehicle Code § 11713.1(f)(1)]. This means not only that the selling dealer is in violation of the Vehicle Code, but the purchasing dealer as well. Accordingly, this law prevents the non-franchise dealer down the street from acquiring a new vehicle from your competitor and selling it as new but also prevents you from purchasing a non-franchise vehicle and selling it as new.

Potential Consequences

Breaking this rule can lead to a multitude of potential negative consequences.  First, and perhaps foremost, it is a violation of the Vehicle Code, and thus is a violation of your dealer license.

However, this practice can also draw the ire of the California Department of Tax and Fee Administration (CDTFA) auditors, who are well-versed on the language of Vehicle Code § 11713.1(f).  The CDTFA audit manual specifically states:

“Vehicle Code section 11713.1(f)(1) prohibits a dealer from purchasing a new motor vehicle for resale in a line — make for which the dealer does not hold a franchise. This violation of the dealer’s license would be cause to disallow acceptance of a resale certificate in good faith.” [CDTFA Audit Manual, Chapter 6: Vehicle, Vessel, and Aircraft Dealers, section 0609.20].

Accordingly, this practice may result in the selling dealer being charged full sales tax plus interest and penalties on such a transaction.

Also, remember that government enforcement agencies tend to communicate with each other.  Information gathered, for example, from a CDTFA auditor is often shared with the DMV and vice versa, leading not only a large sales tax liability, but also potential discipline from the DMV for multiple Vehicle Code violations (i.e., selling a new vehicle to a non-franchised dealer for resale and failure to make a required sales tax payment).

What is more, intentionally selling new vehicles for resale to a non-franchised dealer likely will result in a breach of your franchise agreement.  And, as we all know, factories take their brands, authorized retail networks, and product allocation very seriously.

The moral of this story is that you should not accept resale certificates from non-franchised dealers for new vehicles (absent one of exceptions/situations discussed below), and generally, if a non-franchised California dealer wants to buy a new vehicle from you, sales tax should be collected.

Exceptions to Vehicle Code § 11713.1(f)(1)

There are exceptions to the general rule for certain special transactions and vehicle types. These exceptions are listed in Vehicle Code section 11713.1(f)(2) and include (as well as a few others) commercial vehicles with a GVWR over 10,000 pounds, new vehicles purchased for export outside of the United States without being registered, off-highway vehicles, and new vehicles that will be substantially altered or modified by a converter prior to sale.

A quick additional note on selling a new vehicle to a converter (or “upfitter”) that will be substantially altered or modified prior to sale, as this exception tends to come up more often than others. Vehicle Code section 267 defines a “converter” as “a person other than a vehicle manufacturer, who, prior to the retail sale of a new vehicle” either “assembles, installs, or affixes a body, cab, or special equipment to the vehicle chassis” or “substantially adds to, subtracts from, or modifies the vehicle.” The selling dealer must submit an Application for Registration of New Vehicle (REG 397) along with a bill of sale and Statement of Facts (REG 256) explaining that the vehicle was new when sold to the converter.

Sale of New Vehicle to Dealer with the Same Franchise

Remember, Vehicle Code section 11713.1(f)(1) does not restrict the sale of a new vehicle to another dealer with the same franchise (i.e., a dealer trade). When performing a dealer trade, the selling dealer must submit a Notice of Transfer and Release of Liability, a REG 138, but is not required to report the transaction on a Wholesale Report of Sale.

Sale of Used Vehicle to a Non-Franchise Dealer

Also, remember that the code section does not restrict the sale of a used vehicle for resale to a non-franchise dealer. Sales tax does not apply in these types of transactions when the used vehicle is purchased by a licensed dealer for resale in the regular course of business, and the seller has used a Wholesale Report of Sale (REG 396) to report the transaction. [See also CDTFA Publication 103].

Questions?

We know that these times are hard, and everyone everywhere has been affected by this global pandemic. We are all in this together, and this too shall pass. Hotline clients are invited to contact us at (800) 785-2880 (then press “4” for hotline) or [email protected]. We are here to answer any questions you may have. 

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