Pub. 14 2015-2016 Issue 3

N E W J E R S E Y C O A L I T I O N O F A U T O M O T I V E R E T A I L E R S I S S U E N O . 4 , 2 0 1 5 14 new jersey auto retailer for inventory, as long as they are intended for re-sale. These rules are pretty straight- forward. Less well understood is the “use tax,” and during sales tax audits, State auditors target dealership service departments for failure to pay the use tax when due. The “use tax” applies to situations where a sale occurs that is not taxed, but the item in question became taxable later because of some change in its status or use. The simplest example occurs when you buy something in another state which has no sales tax. New Jersey sales tax is not paid at the time of sale, because the sale did not take place in New Jersey. However, if you take the item back to New Jersey and use it here, the use tax applies, and youmust pay the 7%use tax to the State of New Jersey. The use tax also applies when items are purchased in New Jersey, but the transaction was exempt, most often because the items were purchased for resale, but then the items lose their resale exemption because they are converted to business or personal use. Common examples of Service Department “use tax” issues: • Taxable items purchased by mail-order from an out-of-state vendor. • Service Department consumables, such as cleaning supplies, wax, and other products used in servicing or prepping new or used vehicles. “Consumable” items used in the provision of services are taxable, even if the service is be- ing “sold” in a taxable transaction. For example, according to a recent ruling by the Division of Taxation found that brake line “flush kits” consisted mostly of consumables (a solvent) and that the dealership was required to pay sales tax when purchasing such flush kits, even though the customer was later charged for the flush kit like any other part. • Items of inventory (parts) purchased tax- free with a resale certificate, when the buyer takes these items out of inventory and uses them for business or personal purposes (for example, parts used in a courtesy or good-will repair). • Vehicles taken out of inventory and used as service loaners. Use tax is due on ve- hicles taken out of inventory and used as “courtesy” loaners for repair customers who are not charged for their use (if the customer is charged for their use, they are rental vehicles, and as long as sales tax is charged on each rental, there is no use tax on the vehicle). • Parts used in repairs performed as an accommodation or courtesy repairs per- formed for no charge (no use tax is due, however, for parts used in a warranty repair). In several of the above examples, determin- ing whether the use tax applies depends on whether the dealership was contractually obligated to complete an action, or whether the dealership did so as a courtesy, to build up goodwill. When the use of a vehicle, or a part, is something the dealership is contractually obligated to do, under an obligation arising from a sale on which sales tax was paid, then no use tax is due. The most common example is when a part is used in a warranty repair. The obligation to perform the war- ranty repair stems from the original sale of the vehicle, and sales tax was charged in connection with that sale. Therefore, the part was still used “for resale,” even though there was no charge for the repair. (Note, there should be no sales tax charged to the manufacturer for the same reason, since the obligation to perform the repair arose from a previously taxed transaction). The same analysis applies to a vehicle taken from inventory and registered for “loaner car” use. If the provision of loaner cars to warranty repair customers is mandatory, and arises from the original purchase by the customer, then the use tax does not apply when the vehicle is taken out of inventory. However, if the dealership is under no obli- gation to provide loaner cars, and chooses to do so as a business decision, in order to create goodwill, then this is a “business purpose,” and use tax will apply. Similarly, then, a part used in a repair which the dealership provides to a customer as an accommodation, but which the dealership is not legally required to perform, is subject to the use tax. On the other hand, a part used to perform a “we owe” noted at the time of the purchase, is not subject to the use tax. Patrick Cox is NJ CAR’s Director of Legal & Regula- tory Affairs and can be reached at 609.883.5056, x350 or pcox@njcar.org . COMPLIANCE ISSUE  continued from page 13 Determining whether the use tax applies depends on whether the dealership was contractually obligated to complete an action, or whether the dealership did so as a courtesy, to build up goodwill.