Tax Guide for Used Vehicle Dealers

Helping your business succeed is important to the Board of Equalization. Taxes you collect and pay to the state help fund state and local services and programs important to you and your community. We recognize that understanding tax issues related to your industry can be time-consuming and complicated, and want to help you get the information you need so you can focus on starting and growing your business.

To help you better understand the tax obligations specific to used car dealerships, we have created this guide detailing the tax issues and information important to your business.

If you have a repair or service center, you may also want to see our Auto Repair Garages guide.

How to Use This Guide

Each section of this guide contains information relevant to your business. The Getting Started section provides key resources related to registration, filing returns, account maintenance, and other important information you need.

The Industry Topics section cover the most common topics in an at-a-glance format that can be expanded to provide more extensive information if you need it.

Lastly, the Resources section provides links to a wealth of information, including web-based seminars, forms and publications, statutory and regulatory information, and access to live help from our customer service representatives.

Please note that the information included is general in nature and is not intended to replace any law or regulation.

If You Need Help

If at any time you need assistance with topics included in this guide – or with other topics we may have not covered – feel free to contact us by telephone or email. Contact information and hours of operation are available in the Resource section.

If you have suggestions for improving this guide, please contact us by email.

Getting Started

If you own a business in California, and you expect to be making taxable sales, you must register with us for a seller's permit and file regular sales and use tax returns. You may be required to register for other licenses or accounts using our online registration service and file other returns. Listed below are some tax and fee programs that are often applicable to vehicle dealers.

California Tire Fee Account

You must register with us for a California Tire Fee Account and pay the California Tire Fee if you sell new tires at retail or if you lease or rent vehicles with new tires to your customers.


Online Registration – Register with us for your seller's permit and apply for any of the licenses, permits, or accounts listed above, or add a business location to an existing account.

If you have already registered with us, you will find these tools helpful in maintaining your account.

Filing and Payments

Notice of Business Change – Keep your information current by using the links below and notifying us of any business changes.

Industry Topics

General Information

Sales and Use Taxes in General

In California, all sales are taxable unless the law provides a specific exemption. In most cases, taxable sales are of tangible personal property, which the law defines as an item that can be seen, weighed, felt, or touched.

Use tax is a companion to California's sales tax, and is due whenever you purchase taxable items without payment of California sales tax from an out-of-state vendor for use in California. You also owe use tax on items that you remove from your inventory and use in California when you did not pay tax when you purchased the items. Examples of taxable uses include oil, grease, gasoline, and parts that are used for company vehicles or service department vehicles. The cost of such items must be reported on your sales and use tax return under line 2, “Purchases Subject to Use Tax.”

Seller's Permit

As a used motor vehicle dealer, you must obtain a seller's permit, and report and pay tax on your vehicle sales. Registering for a seller's permit is free, although in some cases a security deposit may be required.

If you have multiple locations, you must register each location with us. You can register with the Board of Equalization (BOE) for a seller's permit or consolidated seller’s permits using our online registration service.

Be sure to let us know about any changes to your business, or to your mailing or email address so that we can keep your records up-to-date and inform you of important changes in law, tax rates, or procedure. You can easily update your account information by contacting our Customer Service Center or any one of our field offices throughout the state. Contact information is available in the Resources section of this guide.

Sales of Vehicles

The majority of your vehicle sales will involve purchases made by individuals who will use the vehicle in California for personal or business use. Generally, these sales are taxable.

You are required to report and pay sales tax on your retail sales of tangible personal property; however, you may pass the cost of the sales tax onto your customer, provided it is agreed to as part of the sale. For more information, please refer to Regulation 1700, Reimbursement for Sales Tax

Sales for Resale

If you sell or trade a used vehicle to another dealer for resale, you are not required to report tax on the sale. You should complete a Wholesale Report of Sale to report sales of used vehicles between dealers, wholesale transactions to out-of-state dealers, scrap metal processors, and dismantlers.

Vehicles Purchased for Use Outside California

You generally do not have to report and pay tax on a vehicle that is sold and delivered for use outside California.

You must show evidence that the vehicle was delivered to the purchaser outside California (for example by an employee or common carrier) and that the purchaser did not take possession of the vehicle in California. See, “Required Documentation for Vehicles Delivered Outside of California” under recordkeeping for requirements.

Repossessed Vehicles

If you transfer a repossessed vehicle to a third party who assumes the unpaid contract or sell it to a new customer, you must report and pay sales tax based on the total sales price.

Consignment Sales

If you sell a vehicle on consignment for another person, the transfer and sale are considered to be made by you, and you must report and pay sales tax on the sale.

Special Taxing Jurisdictions

As a vehicle dealer, you must generally report and pay sales or use tax at the statewide tax rate (currently 7.5%) 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” to lookup the correct rate to charge. Additional resources may also be found in the resource section of this guide.

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* of vehicle Maximum amount dealer can charge for cancellation option agreement
Up to and including $5,000 $75
$5,000.01 up to and including $10,000 $150
$10,000.01 up to and including $30,000 $250
$30,000.01 but less than $40,000 1% of the purchase price

*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. See “Contract Cancellation Option” for recordkeeping requirements.

For more detailed information, please refer to Regulation 1655, Returns, Defects and Replacements or contact the DMV at

Specific Exemptions

Military Personnel

Sales of vehicles you make to a member of the military who is on active duty may not be subject to sales tax.

Please refer to Regulation 1610, Vehicles, Vessels, and Aircraft, or publication 52, Vehicles and Vessels: How to Request a Use Tax Clearance for DMV Registration.

For more information regarding special exemptions related to vehicle sales refer to publication 34, Motor Vehicle Dealers.

Special Charges Related to Motor Vehicle Sales

License Fees

Sales tax does not apply to license fees that you collect and remit to the DMV, unless you collect an amount in excess of the fee required by the DMV. Excess amounts collected are taxable.

Documentation Fees

Charges for preparation of documents you make in connection with a sale are taxable.

Financing, Interest and Insurance Charges

When you sell a vehicle on credit, you should show the sales price separate from charges for insurance, interest, financing, or for carrying the contract. When you do not separate out these charges they are taxable.

Smog Certifications

The fees determined by the Department of Consumer Affairs (DCA) for smog certification are not taxable. Amounts charged in excess of the DCA fee are taxable. Other charges, such as inspection charges are taxable if done for a vehicle you plan to sell.

Broker’s Fees and Commissions

If you use a broker acting on your behalf, commissions paid to the broker are taxable. If the broker is acting on behalf of the customer, the broker fee is not taxable.

Dealer — Free Full Tank of Gas

When you sell a vehicle with a full tank of gas, and do not itemize a charge for the gasoline, you are not liable for reporting the tax on the gas and may purchase the gas with a resale certificate. If you make a separate charge for the gas, you are liable for the tax. You must keep adequate records to support gas purchases made using a resale certificate.

Trade-ins and Discounts


If you accept a trade-in on the sale of a vehicle, you must still report the total selling price of the vehicle in your gross receipts. You cannot deduct the allowance for the trade-in.

For example, you sell a car for $20,000 and accept a trade-in for a credit of $4,000. You must report and pay tax on the $20,000 selling price.

If you allow a trade-in value higher than the fair market value of the vehicle, you cannot treat the excess as a discount or otherwise deduct the additional amount. If you allow less than the fair market value, the BOE will presume the allowance agreed upon is the fair market value.


When you offer a customer a discount, you are only required to report tax on the total selling price of the vehicle.

For example, you sell a $20,000 car and offer a 10 percent discount. Your tax is based on the $18,000 selling price.

The sales records should clearly show the discount, the taxable amount, and the tax reported and paid. If you offer a discount and take a trade-in on the same sale, the records must clearly show the amount of each allowance. Otherwise, the discount may be considered an over allowance and the total sales price will be taxable.

Vehicles Used for Other Than Resale

If you purchase a vehicle for resale or lease, without paying tax, and use if for other than demonstration and display, you generally owe use tax for such use based on either the vehicle's cost or its fair rental value.

Vehicles Assigned to Salespersons

A salesperson specifically refers to employees who directly participate in negotiating sales. The following information assumes you purchased the vehicle in question with a resale certificate. Vehicles can be assigned, rented or sold to the salesperson.

If you assign a vehicle for 12 months or less, you must report and pay use tax on the vehicle’s fair rental value, calculated at 1/60th of the purchase price for each month used.If you assign the vehicle for longer than 12 months, you must pay and report use tax based on your cost for the vehicle.

If you do not know how long the vehicle will be used, you can report and pay tax based on the fair rental value for the first 12 months at 1/60th of the purchase price; on the 13th month you must pay use tax based on the cost of the vehicle minus the tax previously reported.

If you rent a vehicle to a salesperson, you must report and pay use tax on the rental receipts.
If you sell a vehicle to a salesperson, you must report and pay use tax based on the amount paid by the salesperson.

Vehicles Assigned to Other Employees

When you assign vehicles to employees other than salespersons, it is presumed it is for business purposes or personal use unless you can clearly establish otherwise.

If a vehicle is assigned for 12 months or less, you must report and pay use tax on the fair rental value, computed at 1/40th of the purchase price for each month the vehicle is in use.

If you assign the vehicle for longer than 12 month, you must report and pay use tax on the cost of the vehicle.

If you do not know how long the vehicle will be used, you can report based on the fair rental value for the first 12 months at 1/40th of the purchase price; on the 13th month you must pay use tax based on the cost of the vehicle minus the tax previously reported.

Vehicles Assigned to Non-employees

If you assign a vehicle to a person other than an employee or officer of the dealership, you generally will pay and report use tax based on the cost of the vehicle.

The vehicle is not presumed to be held for resale. However, if such loans are 30 days or less, the tax you must report and pay may be based on the fair rental value.

Tire Sales

If you sell new tires with your vehicles, you must register with our Environmental Fees Division and collect the California Tire Fee on every new tire sold.

The fee of $1.75 per tire is not taxable. You may keep one and a half percent of the fees you collect as reimbursement for your related costs. If you charge any amount higher than the $1.75 per tire, you are required to report tax on the excess amount. For more information, see publication 91, California Tire Fee.


You must keep adequate records that support the amount of tax that is due. You may be required to present the records to the BOE 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 BOE 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 you 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.

Types of Records

Generally, you should use car envelopes and inventory books for recordkeeping. In all instances, the Department of Motor Vehicles (DMV) issues a Used Vehicle Report of Sale Book to certificated used car dealers.

Car Envelopes

You should assign an inventory number to resale 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.

You may receive cars from trade-ins on sales of used vehicles, purchases of used cars from individuals, other new and used car dealers, or wholesale or retail auctions. It is necessary to record the various sources of purchases to accurately account for all vehicles sold. When you purchase used vehicles from an auto auction or dismantler, you are required to provide a BOE-230-F to the party you are purchasing the vehicle from.  Other sources of revenue may include consignment vehicles and sales at auction.

Inventory Books

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.

Vehicle Auctions

When you conduct a wholesale vehicle auction, you must document all sales or transfers on a Vehicle Auction Wholesale Report of Sale. These forms may be computer generated or ordered from the DMV and must include the VIN number of each vehicle, the true mileage, buyer’s name, auction’s name and number, and your name and signature. In addition to this form, you are still responsible to file a Wholesale Report of Sale. When you sell vehicles at auction, you must obtain a timely BOE-230-F to support any sales for resale.

Report of Sale Books (ROS)

The only record common to all used car dealers is the Report of Sale Book. Preparation of the Report of Sale requires paying license or transfer fees. You may submit payment to the DMV on form, FO 247, Transmittal of Registration Applications.

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:

a. Retail sales price $ 12,000
b. Taxable fees (i.e., doc/smog) 230
c. Total amount subject to tax 12,230 (a+b)
d. Sales tax (7.5%) 917 (c×.075)
e. License fees 240
f. Other non-taxables 0
g. Total non-taxable charges 1,157 (d+e+f)
h. Total sales price 13,387 (c+g)
i. Down payment 2,000
j. Balance on contract 11,387 (h-i)
k. Finance charges/accrued interest 3,000
l. Total contract value 14,387 (j+k)
m. Payments received on contract 2,100
n. Balance on date of repossession 12,287 (l-m)
o. Unearned finance charges 2,750
p. Net contract balance 9,537 (n-o)
q. Value of repossession 6,000
r. Repossession loss per records $3,537

*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 BOE-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 BOE-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.

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.

Price of vehicle Maximum restocking fee

$5,000 or less


Between $5,000 and $10,000


$10,000 or more


For more information on contract cancellations, see “Car Buyer’s Bill of Rights”


Need to know more? Follow the links below for more information about the topics covered in this guide, as well as other information you might find helpful:


  • BOE 106, Vehicle/ Vessel Use Tax Clearance Request
  • BOE-230-F, California Resale Certificate, Sales by Auto Auctions and Auto Dismantlers

Related Websites

Other Helpful Resources

  • Sign Up for BOE Updates — Subscribe to our email lists and receive the latest news, newsletters, tax and fee updates, public meeting agendas, and other announcements.
  • Videos and How-To Guides — These resources will help you avoid common mistakes, file your tax returns onlines, and more.
  • Use Tax – What You Should Know — Helpful information and videos about use tax.
  • City and County Tax Rates — A listing of current and historical tax rates.
  • Special Notices — BOE special notices are issued whenever there is a change in law, tax rates, or BOE procedures.
  • BOE Online Services — Learn about the online services BOE offers.
  • Verify a Permit or License — You can use this application to verify a seller's permit, Cigarette and Tobacco product retailer license, eWaste account, or Underground Storage Tank Maintenance Fee Account.
  • BOE Field Offices — A comprehensive listing of all BOE field offices and contact information.
  • Find Your Board Member — You can use this application to quickly identify your elected BOE representative.
  • Get It In Writing! — The Sales and Use Tax Law can be complex, and you are encouraged to put your tax questions in writing.
  • Contact Us — A listing of BOE contacts for your questions and concerns.