Car dealerships and other motor vehicle retailers can have significant Ohio sales and use tax liabilities when they do not properly manage the tax obligations on their transactions. Even minor noncompliance can result in large tax debts because of the large purchase price of vehicles, repeated many times over a given period. Our guide on Ohio sales tax for the auto industry provides a foundational understanding for dealerships and related businesses who have questions about their potential tax liability. If you or your client’s motor vehicle business has recently received notice of an audit or assessment from the Ohio Department of Revenue, our sales tax professionals are here to help. We discuss what items are subject to tax, possible exemptions that could apply to a business, and offer insights on the challenges that could lead to underpayment of Ohio sales tax.
Why Motor Vehicle Sales Are a Heavily Audited Industry for Ohio Sales and Use Tax
Auto dealers are consistently one of the most heavily targeted industries for sales and use tax audits across the United States. They are easy audit candidates for two reasons. First, motor vehicle sales are generally large, which means a dealer likely has substantial taxable sales in terms of gross proceeds. Second, tax authorities often use third-party vehicle registration data from DMVs to search for auto dealers that may be underreporting sales tax.
How Ohio Sales and Use Tax Applies to Motor Vehicle Sales and Related Transactions
Motor vehicles sales and leases are generally taxable as tangible personal property under the applicable definitions in Ohio Revised Code Section 5739.01. Transactions that provide “guaranteed auto protection” (GAP) within the terms of a lease or purchase agreement are also subject to tax. Beyond these items, determining the taxable sale price of a motor vehicle for the purpose of calculating Ohio sales tax can be complex because of the additional charges the tax code includes in the definition of price, many of which could apply to the sale of a vehicle. For example, Ohio Revised Code Section 5739.01(H)(1)(a) includes the following items within the meaning of price by not allowing a vendor to deduct them from the sales price for sales tax purposes:
- The vendor’s cost of the property sold
- The vendor’s expenses to acquire or maintain the property
- A vendor’s charges for any services to complete the sale
- Delivery charges
- Installation charges
- Trade-in credits on used vehicle purchases
- Consideration received by the vendor from a third party (e.g., supplier rebates, discounts, or credits)
However, Ohio sales tax laws exclude other common aspects of motor vehicle purchases from the definition of price, such as unreimbursed discounts from a third party, interest or financing charges, and any other taxes imposed on the sale. Ohio also excludes from sales tax any discounts from automobile manufacturers given to an employee or employee of a supplier on the purchase of a new motor vehicle from a new motor vehicle dealer in the state. Lastly, price reductions given for trading-in an old motor vehicle when purchasing a new one from a new motor vehicle dealer are also excluded from the sales tax calculation.
The Varying Taxability of Charges Under a Motor Vehicle Lease in Ohio
The lease of a motor vehicle likely includes several different types of charges and separately stated fees. Some of these charges will be subject to Ohio sales tax while others may be excluded from the taxable sales price.
The following charges under a lease are subject to Ohio sales tax:
- Luxury tax amounts
- Acquisition fees
- GAP or reverse equity fees
- Disposition fees upon lease termination
- Property taxes
- Payment fees
- Extension fees
- Rewrite fees
- Federal excise taxes levied on the lessor
- Administration fees
- Maintenance fees
- UCC and title search fees
- Excess wear or mileage fees
- Federal highway use tax levied on the lessor
- Lien fees
The following charges under a lease are not subject to Ohio sales tax:
- Credit life and disability insurance premiums
- Late payment charges
- Collection or repossession fees
- Assumption fees billed to a lessee
- Legal fees for collection proceedings
- Interim interest billed to the lessee
- Motor vehicle registration fees
- Noninsurance fees
- Bad check fees
- ACH debit fees
- Parking ticket fees assessed on the leased vehicle and passed to the lessee
Motor Vehicle-Related Services Subject to Ohio Sales Tax
An auto dealership may also provide several motor vehicle-related services that are also subject to sales tax. Examples of taxable services under Ohio’s tax code that apply to motor vehicles includes the following:
- Services to wash, clean, wax, polish, or paint a motor vehicle
- Repair and maintenance services
- Services to install new parts, add-ons, or upgrades
Navigating Ohio Sales Tax on Nonresident Motor Vehicle Purchases
Another important sales tax wrinkle for motor vehicle dealers in Ohio is the residency of the customer and where they will ultimately use the purchased vehicle. Dealerships do not need to collect Ohio sales tax from nonresidents who purchase a vehicle and certify their intent to immediately remove it from the state for use in another by completing Exemption Form STEC NR (Rev. 3/04). However, dealerships may need to collect Ohio sales tax from certain nonresident customers who purchase a motor vehicle and intend to remove it to the following states listed in ST 2007-04 (Revised March 2023), including Arizona, California, Florida, Indiana, Massachusetts, Michigan, and South Carolina.
Other Ohio Sales Tax Exemptions That Could Apply to an Auto Dealer
In addition to some non-resident purchases, Ohio sales tax may not apply to motor vehicle transactions involving other customers or purposes. For example, the following situations may qualify for a sales tax exemption depending on the buyer or type of vehicle purchased:
- A vehicle bought under a highway transportation for hire exemption
- Vehicles bought primarily for agricultural use (e.g., tractors and trailers but not vehicles a farmer uses that are licensed to operate on highways)
- Vehicles donated to charitable organizations and nonprofits
- Sales to churches
- Sales to U.S. government or Ohio state government agencies and political subdivisions
Most sales tax exemptions have specific requirements that must be met in order for Ohio sales tax to not apply on the transaction. For example, vehicle sales to a church or military group may be exempt from sales tax but purchases by individuals affiliated with these groups are not, such as a clergyman or military person. Auto dealerships must maintain awareness of the details in these transactions and ensure they have sufficient documentation to support the exempt status when facing an audit.
Meet with a Sales Tax Professional if Faced with an Ohio Sales Tax Audit or Assessment
The nuances of Ohio sales and use tax for motor vehicle sales can make an upcoming audit or surprise assessment a painful experience to manage by yourself. We often see dealerships with problems in their sales and use tax reporting related to the following types of issues:
- Not collecting sales tax on all taxable parts of the vehicle purchase price
- Reducing the taxable price of a used vehicle purchased with a trade-in
- Not collecting sales tax from nonresident customers in applicable states
Our sales tax professionals have years of experience addressing sales tax issues for car dealerships and other complex industries. Depending on the stage of your Ohio sales tax concern, our audit defense or appeal services may be able to reduce a tax assessment or navigate another workable solution based on the circumstances.