I again wanted to send well-wishes to all our KPA clients, and I hope everyone is staying safe during these tough times. Based on multiple news reports, it seems like automobile sales are starting to rebound after a hard April, and hopefully, this upward trend is a sliver of light at the end of the tunnel. Recently, the Hotline has been receiving several sales tax questions, and anecdotally, where there are more sales tax questions, there inevitably are more sales. Given this question trend, let’s dive in a little deeper into some misconceptions that have come up during these sales tax calls. For a discussion of sales tax exemptions, please refer to our 2018 article titled, “What’s Hot on the Hotline? Sales Tax Exemptions.”
Q: If I have an out-of-state customer from Arizona, do we collect Arizona sales tax if the vehicle is being delivered in Arizona?
A: This question may seem quite odd to some of you, but you would be surprised how frequently it comes up. I believe that this question innocently arises because dealers know that there is a California sales tax exemption if delivery of a vehicle is taken out of state. For starters, the question has a bit of a misnomer in it. First, it would be improper to collect sales tax for the customer’s home state because the sale did not occur in that state. Sales tax generally applies to the sale of merchandise in the state. Additionally, I doubt that you have a seller’s permit in the customer’s home state, or any way to remit such sales tax.
What most dealers are likely thinking when this question comes to mind is use tax. Use tax applies to the use of an item in the state and generally applies where the customer did not pay sales tax at the time of purchase of that item. Use tax is typically owed when the customer attempts to register the vehicle in his/her home state and where the customer did not pay California sales tax upon purchase. In certain situations, such as where a lienholder is involved in the transaction, it may behoove the dealer to assist the customer in registering the vehicle in the home state because of, among other things, obligations the dealer owes to the lender per the lender agreement. However, navigating the titling and registration waters in another state can be treacherous, and dealers should strongly consider looking into using a third-party company who performs national titling and registration services for assistance. And remember, never give the vehicle’s MSO or title to an out-of-state customer when there is a lienholder involved.
Q: Does a person who is disabled/handicapped have a general sales tax exemption?
A: No, a person with a disability does not enjoy a blanket sales tax exemption for the purchase or lease of a vehicle. However, sales tax does not apply to the sale, installation, use, or consumption of items and materials that are used to modify a vehicle for physically handicapped persons. These modifications would generally include those that allow a physically handicapped person to drive a vehicle (i.e., hand controls), and those that are necessary to allow a vehicle to transport a physically handicapped person (i.e., a wheelchair lift). In other words, sales tax does not apply to the gross receipts attributable to the modification of a vehicle to enable the vehicle to be driven or to transport a physically handicapped person. [18 CCR § 1591.3].
So, if a person with a physical disability purchases or leases an unmodified vehicle, there is no exemption, and normal sales tax is due. However, if the vehicle is modified, the costs associated with such modification is exempt from sales tax. For a retail sale, these costs can be documented on line 1.A.3. on the most current version of the LAW-553-CA-ARB Retail Installment Sale Contract.
Q: Is there a general sales tax exemption for active duty military members?
A: No. Sales and Use Tax Annotation section 325.0680 from the CDTFA states:
“Servicemen. There 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.”
Accordingly, when an active duty military customer is taking delivery of the vehicle in California, normal sales tax is still due.
Although this is a simple answer, I have noticed that many dealers confuse it with the exemption regarding the vehicle license fee (VLF) and non-resident military (NRM) customers. Recall, an NRM active duty service member stationed in California is exempt from paying VLF provided that 1) the vehicle is registered to the NRM service member, their spouse, or both; and 2) the vehicle is not operated for hire. In order to obtain the exemption, the NRM service member or their spouse must also fill out a REG 5045. For a complete list of all requirements for the VLF exemptions, please refer to DMV VIRP Manual 12.105.
Q: What about an exemption for a disabled veteran?
A: Like the answer to many questions in this field, the answer to this question is: “It depends.” Although this question is quite rare (I believe I have only encountered it once before), there may be a partial sales tax exemption for a disabled veteran if the Veterans Administration (VA) pays for a portion of the vehicle. The portion of the vehicle paid for by the VA (the VA has to make this payment directly) would not be subject to sales tax so long as the VA is the actual purchaser on the sale contract. This is because the VA is exempt from sales tax pursuant to Sales and Use Tax Regulation 1614. The specific procedure for this rare occurrence is laid out in 38 U.S.C. § 3902. Undoubtedly, the VA would also provide you with instructional/advisory material prior to such a transaction.
Remember, that the sales tax exemption for vehicle modification (discussed above) may also apply in this situation.
Q: Do nonprofits (charities) or religious organizations have a sales tax exemption?
A: While nonprofits and religious organizations may qualify for certain income tax exemptions, there is no general sales tax exemption for these types of entities. Accordingly, they are treated like any other California buyer for the purpose of sales tax. [CDTFA Publication Nonprofit Organizations, p. 5].
This question arises more frequently than one would imagine, and many times dealers have been faced with the situation where a religious organization or charity provides a letter from the CDTFA indicating an “exemption.” Upon closer scrutiny, however, you will find that such a letter is likely referring to income tax, and not sales tax. The only time that such an organization may possibly have a sales tax exemption is if they provide documentation from the CDTFA clearly indicating a “sales tax exemption,” and frankly, I have never personally seen one of these letters.
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.