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What’s Hot on the Hotline? Refunds

Robert Ebin /
hand holding image of money bag

Recently, we have been receiving a lot of calls on the Hotline concerning the subject of refunds.  Although we have written articles on this before, it appears that now is a good time to revisit the topic.  Accordingly, this article will be all about refunds, and will specifically touch on 1) whether a refund is required, and 2) whether the refund is paid to the customer or lender.

Refundable or Not?

The first part of this article centers on two questions asked frequently:  whether a deposit is refundable and whether a downpayment is refundable?

Is a deposit refundable?

It depends on the circumstances under which the deposit was taken. The first thing to note is that under Vehicle Code section 11713(p), a dealer cannot take “a purchase deposit relative to the sale of a vehicle, unless the vehicle is present at the premises of the dealer or available to the dealer directly from the manufacturer or distributor of the vehicle at the time the dealer accepts the deposit.”

The situation we have been seeing lately due to vehicle inventory shortages is a buyer wants to put a deposit on a new vehicle on its way from the factory in order to “reserve” it.  Whether that deposit is refundable depends on the nature of the transaction and the terms of the deposit agreement. 

  • Retail Installment Sale Contract:  If the parties contemplate that the buyer will finance the vehicle by entering into a conditional sale contract, either through the dealer or through a customer-arranged lender, the deposit is 100% refundable if the sale contract is not executed.  [Civil Code §§ 2982.7, 2982.9].
  • Lease Agreement: If a deposit is made in contemplation of a vehicle lease transaction, the deposit is also 100% refundable in the event the lease contract is not executed.  [Civil Code § 2986.13]. 
  • Business/Commercial Transaction:  If the customer is a business and the vehicle will be purchased for business or commercial purposes, the parties can agree to a non-refundable deposit.  Any deposit agreement should be in writing and should be drafted by competent counsel.
  • Cash Deal:  If the customer will be paying for the deal in cash (i.e., there is no financing), the parties may also agree to a non-refundable deposit. Again, remember that any deposit agreement should be in writing a drafted by knowledgeable counsel.

Is a Downpayment Refundable?

When the dealer invokes the Seller’s Right to Cancel?

Generally, yes, the customer’s downpayment is fully refundable if the deal was unwound because the dealer could not obtain financing. Assuming the dealer timely sent a 10-day letter, the Seller’s Right to Cancel section of the LAW 553 Retail Installment Sale Contract will apply. Paragraph b of the section specifically states:

Seller shall give you written notice (or in any other manner in which actual notice is given to you) within 10 days of the date this contract is signed if Seller elects to cancel. Upon receipt of such notice, you must immediately return the vehicle to Seller in the same condition as when sold, reasonable rear and tear excepted. Seller must give back to you all consideration received by Seller, including any trade-in vehicle. [Emphasis added.]

Note that many lease agreements still do not have pre-printed “Right to Cancel” language, and dealers must generally insert such language into the blank box of the lease.

Remember, if the vehicle was damaged before it was returned to the dealership, a good argument can be made that the dealer can retain a portion of the downpayment to repair the damage at the dealer’s actual cost (i.e., without any markup for the repairs).  The dealer must retain evidence of both the damage and the cost of repairs, which would likely include photos of the damage along with copies of the repair order(s) and any invoices or receipts. On the contrary, the dealer must not retain a portion of the downpayment for usage of the vehicle and/or normal mileage added to the vehicle. This is because the Seller’s Right to Cancel language allows for “reasonable wear and tear” to the vehicle during the time it is in the customer’s possession.

When the deal is unwound due to buyer’s remorse?

If the transaction is unwound due to buyer’s remorse, the dealer is not obligated to refund the downpayment. This is because in California there is “No Cooling Off” (as stated by the language on the face of the LAW 553 Retail Installment Sale Contract as well as the “No Cooling Off” signs in your sales department). Accordingly, if the dealer agrees to allow the customer to return the vehicle in this situation, the dealer can decide whether or not to retain all or a portion of the downpayment. 

With that said, should you elect to retain the downpayment, you should be aware of potential sales tax implications.  If your dealership profits at all from the transaction, full sales tax will be due. Sales and Use Tax Regulation 1655 informs that in order to receive a sales tax refund, the full sales price plus tax must be refunded to the customer, and the customer cannot be required to purchase something else at a higher price than the amount charged for the returned item. 

The regulation also suggests that collecting a rehandling/restocking fee would prevent the dealer from obtaining a sales tax refund on the transaction:

The amount withheld as rehandling and restocking costs may not include compensation for increased overhead costs because of the return, for refinishing or restoring the property to salable condition where the necessity therefore is occasioned by customer usage, or for any expense prior to the “sale” (i.e., transfer of title, lease, or possession under a conditional sale contract).

As discussed above, there likely would be an exception for vehicle damage if the dealer retains only the portion of the downpayment necessary to repair the damage at the dealer’s cost.

In short, if a dealer agrees to unwind a deal due to buyer’s remorse, the dealer can elect to retain all or part of the customer’s downpayment.  However, if the dealer chooses to do so (aside from the actual cost to repair vehicle damage), the dealer should retain enough money to cover the full sales tax, since the transaction will likely not be eligible for a sales tax credit.

Should the Refund Go to the Lender or the Customer?

In this next section of the article, there is not so much a question in these situations of whether a refund should be provided (it should), but rather whether the refund should go to the lender or the customer.  Of course, all these scenarios assume that the deal was financed (the refund should always go to the customer on a cash deal).

If an optional service, maintenance, or other contract is cancelled?

Under California law, if the vehicle purchase was financed, refunds for canceled service contracts, which include maintenance, tire and wheel, glass replacement, key replacement, and dent and ding contracts, may be made to the purchaser, the lender, or both. [Civil Code § 1794.41].

However, some of you are probably thinking that we usually send the refund directly to the lender for these products.  This is because the LAW 553 Retail Installment Sale Contract has language that provides a security interest in favor of the lender for any refund for these items, which in practice means the refund goes to the lender. Here is the specific pertinent language on the 553:

2c. Security Interest

You give us a security interest in…All proceeds from insurance, maintenance, service or other contracts we finance for you. This includes refunds of premiums or charges from the contract.

2e. What happens to returned insurance, maintenance, service or other contract charges. If we get a refund of insurance, maintenance, service, or other contract charges, you agree that we may subtract the refund from what you owe.

Many lease agreements have similar language that provides for refunds for canceled optional products being credited to the lessee’s account.

For an overpayment of license and registration fees?

Overpayment of license and registration fees must be refunded directly to the customer, whether or not the customer has requested a refund.  [Vehicle Code § 11713.4]. 

As an aside, it is generally not a good idea, and we recommend against, trying to collect undercharged license/registration fees from customers.  Although the DMV may allow for such practice, this could draw the ire of a customer, who in turn may seek out an attorney.  Remember, after all, as the dealer, you prepared the contract and can fall susceptible to the argument that you “should have got it right in the first place.”

For an electronic filing fee?

If the dealer is unable to complete the transaction electronically, the electronic filing fee needs to be returned immediately to the customer. [Vehicle Code § 4456.5(a)(2)].

For an overcharge of tire fees or sales tax?

Any excess sales tax and tire fee amount collected should be refunded directly to the customer. [See State Board of Equalization News Release “Overcharged Tax on an Auto Purchase? Get Your Refund” 9-15-14].

For an overcharge of a trade-in payoff?

Any overcharge should be refunded to the customer.  The language in the Trade-In Payoff Agreement box on the 553 states in pertinent part: “If the actual payoff amount is less than the amount shown as the Prior Credit or Lease Balance in Trade-In Vehicle(s), Seller will refund to you [customer] any overage Seller receives from your prior lienholder or lessor.” [emphasis added].

Note that many lease agreements do not have this payoff adjustment language, and dealers usually opt to insert similar language into the lease agreement’s blank box.


If you have any questions regarding this, 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

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