In typical last minute shenanigans of the NC General Assembly, a bunch of new taxes were made law with the majority of them effective 1 January 2014. And while the General Assembly was an “equal opportunity tax raiser”, you should know that auto dealers were not left out nor ignored. Specifically, the new tax laws added a 4.75% sales tax onto the retail price of extended warranties/vehicle service contracts. While that seemed simple enough, the Department of Revenue has decided on the who, what and where of how the tax is to be collected and remitted to the State of North Carolina.
We had thought that the dealer would collect the tax and remit but not so quick, sayeth the Department of Revenue. Instead, they took an insurance premium model and are requiring the provider of the warranty/service contract to be the remitter! What makes this process even more aggravating is that they didn’t publish their directives on this until 23 December, 2013. Many warranty/service contract providers didn’t know about this until early January of 2014!!
What then does that mean for a dealer who offers these “back-end” products to their customers? First, the dealer still has to collect the 4.75% state sales tax and any local or transit taxes applicable in their city or county. But instead of sending that money to the Department of Revenue, they will send it to the warranty/service contract company and then they (not the dealer) will remit those taxes to the state and if applicable, the city and county.
Example, ABC Used Cars sells a service contract to a consumer for $1000.00 and this dealership is located in a county with a 1.5% local sales tax. The dealer would collect $47.50 in state taxes and $15.00 in local taxes and then send it to whichever warranty company provides the product. Then it will be left to the warranty company accounting folks to sort it all out.
From the communications we’ve received on this topic, the warranty companies are literally “up in arms” over this mandate that THEY and not the selling dealer are responsible for the accounting for and remitting of these collected taxes. However, it appears at this point it would take an amendment to this new law and since the General Assembly doesn’t re-convene until May of this year, all parties are forced to live with the law as it is written.
So what advice can we provide to any dealer selling warranties/service contracts? Collect the applicable sales tax or taxes from your customer and add the sales tax as a separate line item on your Bill of Sale or Buyer’s Order. Hold onto that money until you receive specific instructions from your warranty company. That’s the best information we can provide you at this moment. We will keep you updated as we become aware of changes.
Happy Tax Season!