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 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.
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 covers the most common topics in an at-a-glance format that can be expanded to provide more extensive information if you need it.
The Recordkeeping section covers the common records used and document requirements.
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 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.
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.
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 sell/lease/rent vehicles (including trailers) 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.
Notice of Business Change – Keep your information current by using the links below and notifying us of any business changes.
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, "Purchases Subject to Use Tax."
As a 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.
When making sales for resale, you must obtain a resale certificate from your customer in a timely manner. See "Resale Certificates" for recordkeeping requirements.
If you sell or trade a used vehicle to another dealer for resale, you are not required to report tax on the sale. You must 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. The Wholesale Report of Sale is a controlled form that can only be obtained from the DMV Occupational Licensing Section.
Generally you are not liable for reporting tax on the gasoline that is in the vehicle at the time of the sale. Therefore you have two options:
However, you generally owe tax on gasoline that you use for:
If the amount of gasoline you purchased with a resale certificate is more than the amount of gasoline sold with vehicles, you must report the difference on your sales and use tax return under "Purchases Subject to Use Tax".
If the amount of gasoline you purchased with a resale certificate is less than the amount of gasoline sold with vehicles, you may claim a deduction for the difference under "Tax-Paid Purchases Resold".
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. Some sales are exempt from tax under the Sales and Use Tax Law. See "Specific Exemptions" below for more details. All exempt sales should be properly documented.
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.
You are entitled to reduce the amount of sales tax that you owe on your vehicle sales by the amount of tax you paid when you purchased your gasoline (MVF) or diesel fuel when you sell the vehicle with fuel.
The sales tax rate for the sale of a vehicle is currently 7.25% plus applicable district taxes; however, the sales tax rate for gasoline is only 2.25% plus applicable district taxes. The sales tax on diesel fuel is 9.00% plus applicable district taxes.
Because the tax rate that applies to sales of gasoline and diesel fuel is different than the tax rate that applies to the sale of a vehicle, and the price you pay at the pump is a tax-included price, you will need to calculate the allowable amount of your deduction.
Most vehicle dealers file a BOE-401-A2 Sales and Use Tax return*. If you file a BOE-401-A2 Sales and Use Tax return, and you need to claim a Cost of Tax-Paid Purchases Resold (TPPR) deduction to recover the sales tax paid on gasoline or diesel, you must compute the allowable deduction and district tax adjustment by following the calculation found in the BOE-401-INST.
*Some retailers file a BOE-401-GS return allowing them to properly recover the correct amount of tax paid on their purchases of gasoline or diesel fuel. For information on claiming your Cost of Tax-Paid Purchases Resold (TPPR) deduction on MVF or diesel on BOE-401-GS refer to the BOE-401-GSIN. Paper returns show the form number in top left hand corner. If you are filing an online return and your return has a Schedule G button, you are filing a BOE-401-GS return. Otherwise you are filing a BOE-401-A2 return.
When you sell vehicles to leasing companies, you need to determine two important factors that affect how tax is reported:
You may accept a resale certificate from a leasing company when they purchase passenger vehicles and the leasing company will report tax based on the rental payments to the lessee. If the lessor purchases both tax paid and resale vehicles, you may obtain a blanket resale certificate and the lessor must indicate on their purchase orders whether each purchase is taxable or for resale.
Leased vehicles must be registered in the name of the lessor only or the lessor and lessee jointly. If the vehicle is registered in the name of the lessee only, the sale should be considered a retail sale subject to sales tax based on the selling price of the vehicle.
Generally, lessors of MTE are considered the users of these vehicles and you should report and pay tax on the sales price of the vehicle to the lessor. However, a lessor may issue a resale certificate if they indicate it is for the limited purpose of reporting tax based on the fair rental value of the MTE.
For more information please see Regulation 1660, Leases of Tangible Personal Property-In General or Regulation 1661, Leases of Mobile Transportation Equipment. See "Resale Certificates" for recordkeeping requirements.
Tax applies to the total selling price of previously leased or rented vehicles regardless of any tax that may have been previously paid on the lease or rental receipts.
If a lessee chooses the purchase option as part of the lease agreement, tax generally applies to the purchase amount.
If you are licensed by the DMV as a lessor-retailer, the following special rules apply to your retail sale of a leased vehicle:
Tax applies to the total selling price of company cars, parts and service department vehicles, tow trucks, and demonstrators as if it were a retail sale.
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.
Some of your sales may qualify as exempt from tax. You should still report these sales on your sales and use tax return as part of your total sales and then take the appropriate deduction. For more information regarding special exemptions related to vehicle sales refer to publication 34, Motor Vehicle Dealers.
You must obtain and keep copies of government purchase orders or remittance advices to support sales claimed as nontaxable sales to the United States Government.
Sales tax does not apply to:
Generally, the following organizations are not considered exempt agencies of the United States and sales to these agencies are subject to tax:
Sales of vehicles to federally owned banks are exempt from sales tax. Sales to other banks or credit unions are generally taxable.
Sales of vehicles you make to a member of the military who is on active duty may not be subject to sales tax.
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.
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.
Dealerships are consumers of free incentives offered to customers. Tax applies to the dealership when they purchase supply items necessary to offer these incentives.
Sometimes a vehicle manufacturer will offer a discount to dealerships on a vehicle that allows you to sell that vehicle at a lower price.
Only the actual selling price of the vehicle must be reported for sales tax purposes. You do not have to include the discount received from the manufacturer in the total taxable selling price of the vehicle.
Sometimes a third party, such as a vendor or the manufacturer will pay you directly or offer rebates to your customer that they pass back to you in the sales transaction.
When you receive rebates from third parties, you must include that amount received as part of the total taxable selling price of the vehicle.
For example, a manufacturer offers a $1,000 rebate to your customer on the purchase of a car. The customer then assigns the rebate to you as part of their down payment on the vehicle. You must report and pay tax on the $1,000 rebate.
For more information on these topics, please refer to Regulation 1671.1, Discount, Coupons, Rebates, and Other Incentives.
There are many common charges associated with vehicle sales. Tax applies differently to each type of charge and may change depending on whether they are listed separately or grouped together.
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.
Charges for preparation of documents you make in connection with a sale are taxable.
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.
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.
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.
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.
Sales tax does not apply to the sales price of the portion of a vehicle that has been modified to accommodate physically handicapped persons when the vehicle is sold to the physically handicapped person. For example, you sell a car to a physically handicapped person for $20,000 and $5,000 is attributable to modifications of the vehicle, sales tax is due on $15,000.
Tax does not apply to the sale or installation of items and materials that:
Sales of tools and materials that are not incorporated into the vehicle are taxable.
If you use items for personal or business use that you purchased without paying tax, you owe use tax measured by its purchase price. Some of the most common items you may owe use tax on are listed below.
You must report and pay use tax on oil and grease used in company cars, service cars, loaner cars, tow trucks, and any vehicles subject to tax under the 1/40th or 1/60th formulas.
You must report and pay tax on the cost of parts and accessories installed on the following vehicles:
You are not required to report or pay use tax on the cost of parts and accessories installed in the following:
When you use oil, grease, or parts and accessories that you remove from inventory without paying tax on, you must report theses on your sales and use tax return under "Purchases Subject to Use Tax".
You may not issue a resale certificate for tools and equipment purchased for use in your business. You must pay tax when you purchase these items.
If you purchase a vehicle for resale or lease, without paying tax, and use it 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.
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.
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.
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.
If you sell new tires with your vehicle, you must register for a California Tire Fee Account to collect and pay the California Tire Fee on every new tire sold. New tire sales include separately sold tires, new tires included with the sale/lease/rental of new or used motor vehicles, recreational vehicles, trailers, construction equipment, or farm equipment.
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:
These records must include:
Most new vehicle dealers have detailed records that reflect their daily operations. These records are prescribed by the major automobile manufacturers.
You will generally have a stock book listing all vehicles delivered into your inventory from the manufacturer. Typically you will use different sales journals such as new car retail, new car fleet, new car commercial, etc. to track your different types of sales transactions. Your basic sales document is the motor vehicle contract and sales agreement, usually containing four copies for the deal jacket, customer, financing company, and your own files.
You will also have report of sale books obtained from the DMV for all new vehicle sales. These forms must be maintained in numerical sequence including copies returned to the DMV or voided.
Your inventory will come from a variety of sources including trade-ins on sales of other vehicles, retail auctions, or from other new and used car dealers. You will generally use car envelopes and inventory books to track your sales.
You should assign an inventory number to 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.
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.
You will also have report of sales books obtained from the DMV. These forms must be maintained in numerical sequence including copies returned to the DMV or voided.
As a vehicle dealer, you must generally report and pay sales or use tax at the statewide tax rate (currently 7.25%) 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.
When making sales for resale, you must obtain a resale certificate from your customer in a timely manner.
Property purchased by issuing a resale certificate must be described either by an itemized list of the particular property to be purchased for resale, or by a general description of the kind of property to be purchased for resale.
Your sales of salvage vehicles are taxable retail sales unless the sale is to a licensed dismantler, repair dealer, or qualified scrap metal processor and you obtain a form BOE-230-F, California Resale Certificate, Sales by Auto Auctions and Auto Dismantlers to support the sale. You can easily verify seller’s permit numbers on our website. You can also search for a dealer’s license online, or check the current status of businesses licensed by the DMV using their Occupational License Status.
You should retain all resale certificates with your records for not less than four years. For more information, please see Regulation 1668, Sales for Resale
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:
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)|
|g.||Total non-taxable charges||1,157||(d+e+f)|
|h.||Total sales price||13,387||(c+g)|
|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.
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:
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.
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
$5,000.01 up to and including $10,000
$10,000.01 up to and including $30,000
$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:
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. For more detailed information, please refer to Regulation 1655, Returns, Defects and Replacements or contact the DMV.
Required documentation on cancellation option agreements includes:
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
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: