NC SERVICE CONTRACTS EXEMPT FROM SALES TAX 1/1/17

As of 1/1/17, NC dealers who sell service contracts will no longer have to collect and pay sales tax on those service contracts! See the notice from the Department of Revenue below:

IMPORTANT NOTICE: MOTOR VEHICLE SERVICE CONTRACTS
The changes discussed herein are effective January 1, 2017 for sales made on or after that date, unless noted otherwise. The notice addresses the application of the sales and use tax laws for the following changes:
 The definition of the term “motor vehicle service contract.”
 The expansion of the exemption from sales and use tax to include contracts for one or more components, systems, or accessories of a motor vehicle sold by a motor vehicle dealer or by or on behalf of a motor vehicle service agreement company. Motor Vehicle Service Contract The sales price of or the gross receipts derived from a “motor vehicle service contract” is exempt from sales and use tax. N.C. Gen. Stat. § 105-164.4I(b)(6). The term “motor vehicle service contract” is defined as: A service contract sold by a motor vehicle dealer or by or on behalf of a motor vehicle service agreement company for a motor vehicle or for one or more components, systems, or accessories for a motor vehicle. For purposes of the definition of “motor vehicle service contract,” the term “motor vehicle dealer” has the same meaning as defined in N.C. Gen. Stat. § 20-286 and the term “motor vehicle service agreement company” has the same meaning as defined in N.C. Gen. Stat. § 66-370. N.C. Gen. Stat. § 105-164.3(23a). The definition of the term “service contract,” as amended, is as follows: A contract where the obligor under the contract agrees to maintain, monitor, inspect, or repair digital property or tangible personal property for a period of time or some other defined measure, regardless of whether the property becomes a part of or is applied to real property. The term does not include a single repair, maintenance, or installation service. The term includes a service contract for a pool, fish tank, or similar aquatic feature and a home warranty. Examples include a warranty agreement other than a manufacturer’s warranty or dealer’s warranty provided at no charge to the purchaser, an extended warranty agreement, a maintenance agreement, a repair contract, or a similar agreement or contract. N.C. Gen. Stat. § 105-164.3(38b). The sales price of or the gross receipts derived from “repair, maintenance, or installation services” sold at retail for a motor vehicle continue to be subject to tax at the general 4.75% State, applicable local (2.00% or 2.25%), and applicable transit (0.50%) rates of sales and use tax, no matter that the services are covered under a “motor vehicle service contract.” N.C. Gen. Stat. 105-164.4(a)(16). For the exemption from sales and use tax for a replacement item, a repair part, or repair, maintenance, and installation services to maintain or repair a motor vehicle pursuant to a manufacturer’s warranty or a dealer’s warranty, see N.C. Gen. Stat. § 105-164.13(62a) or review the important notices referenced at the end of this notice under the section “Prior Sales and Use Tax Law Application.”

Service Contracts that Qualify as Motor Vehicle Service Contracts
The failure of a retailer to keep records that establish that a sale is exempt from sales and use tax subjects the retailer to liability for tax due on the sale. The sales price of or the gross receipts derived from the retail sale of a service contract must meet one of the following requirements to be exempt from sales and use tax:
 A service contract sold by a “motor vehicle dealer” for a motor vehicle or for one or more components, systems, or accessories for a motor vehicle.
 A service contract sold by a “motor vehicle service agreement company” for a motor vehicle or for one or more components, systems, or accessories for a motor vehicle.
 A service contract sold on behalf of a “motor vehicle service agreement company” for a motor vehicle or for one or more components, systems, or accessories for a motor vehicle. A “service contract” that meets one of the above requirements and includes one or more of the following is a “motor vehicle service contract.” This list is not all-inclusive.
 A contract indemnifying the motor vehicle service contract holder (purchaser of contract) against loss caused by a motor vehicle failure that is listed in the contract.
 Repair or maintenance of a motor vehicle that is listed in the contract.
 Maintain, monitor, inspect, repair, or replace tires, wheels, or rims on a motor vehicle.
 Maintain, monitor, inspect, or repair chips or cracks in or the replacement of motor vehicle windshields.
 Maintain, monitor, inspect, repair, or replace individual components including the following: engine, transmission, drive axles, battery, alternator, turbo/supercharger, fuel tank, suspension, electrical system components, airbag electronics, air conditioning, seals and gaskets, transfer unit, and amenities (audio system, DVD, internet, Bluetooth/phone, GPS).
 Removal of dents, dings, or creases on a motor vehicle including the process of paintless dent removal without affecting the existing paint or finish and without replacing vehicle body panels, sanding, bonding, or painting.
 Maintain, monitor, inspect, repair, or replace the electrical, emissions, fuel, cooling, steering, or braking system of a motor vehicle.
 Lubrication of a motor vehicle.
 Maintain, monitor, inspect, repair or replace leather or other fabric.
 Maintain, monitor, inspect, repair, or replace paint.
 Maintain, monitor, inspect, repair, or replace a motor vehicle key or key fob. Motor Vehicle Dealer – A person who does any of the following:
 For commission, money, or other thing of value, buys, sells, or exchanges, whether outright or on conditional sale, bailment lease, chattel mortgage, or otherwise, five or more motor vehicles within any 12 consecutive months, regardless of who owns the motor vehicles.
 On behalf of another and for commission, money, or other thing of value, arranges, offers, attempts to solicit, or attempts to negotiate the sale, purchase, or exchange of an interest in five or more motor vehicles within any 12 consecutive months, regardless of who owns the motor vehicles.
 Engages, wholly or in part, in the business of selling new motor vehicles or new or used motor vehicles, or used motor vehicles only, whether or not the motor vehicles are owned by that person, and sells five or more motor vehicles within any 12 consecutive months.
 Offers to sell, displays, or permits the display for sale for any form of compensation five or more motor vehicles within any 12 consecutive months.
 Primarily engages in the leasing or renting of motor vehicles to others and sells or offers to sell those vehicles at retail. N.C. Gen. Stat. § 20-286(11). Motor Vehicle Service Agreement Company – Any person that issues motor vehicle service agreements and that is not a licensed insurer. N.C. Gen. Stat. § 66-370(b)(6). Example: A motor vehicle dealer engaged in business in North Carolina makes a retail sale to a North Carolina customer of a service contract sourced to this State for the powertrain and heating and air conditioning systems of a new motor vehicle. The sales price of the service contract is $3,200.00, in addition to the retail price of the motor vehicle. The service contract is a motor vehicle service contract and the sales price of $3,200.00 is not subject to sales and use tax. Example: A facilitator, other than a motor vehicle dealer for purposes of this example, engaged in business in North Carolina makes a retail sale to a North Carolina customer of a service contract sourced to this State for the steering and braking systems of a new motor vehicle. The service contract is sold on behalf of a motor vehicle service agreement company. The sales price of the service contract is $2,500.00, in addition to the retail price of the new motor vehicle. The service contract is a motor vehicle service contract sold on behalf of a motor vehicle service agreement company; therefore, the sales price of $2,500.00 for the motor vehicle service contract sold at retail is not subject to sales and use tax. Example: A recreational vehicle dealer sells a motor home for a retail price of $100,000.00. In addition, the recreational vehicle dealer sells a service contract for $10,000.00 that includes the repair or replacement of any component of the motor home including the engine, transmission, toilet, or refrigerator. The service contract is a motor vehicle service contract and the sales price of $10,000.00 is not subject to sales and use tax. Motor Vehicle Definition For purposes of the sales and use tax laws discussed herein, the term “motor vehicle” is defined, in part, as “[a] vehicle that is designed primarily for use upon the highways and is either self-propelled or propelled by a self-propelled vehicle.” A motor vehicle includes but is not limited to:
 Private passenger vehicle.
 Motorcycle.
 Recreational vehicle including a motor home, travel trailer, fifth wheel trailer, camping trailer, and truck camper as the terms are defined in N.C. Gen. Stat. § 20-4.01(32b).
 Park model RV as defined in N.C. Gen. Stat. § 105-187.1(4).
 A commercial motor vehicle used to transport passengers or property. The term “motor vehicle” does not include a moped; special mobile equipment; a tow dolly that is exempt from motor vehicle title and registration requirements under N.C. Gen. Stat. §§ 20-51(10) or (11); a farm tractor or other implement of husbandry; a manufactured home, a mobile office, or a mobile classroom; or road construction or road maintenance machinery or equipment. N.C. Gen. Stat. § 105-164.3(23). Application of the Effective Date for the Exemption for Motor Vehicle Service Contracts For purposes of the changes effective January 1, 2017 for sales made on or after that date, the following apply to the sales price of or the gross receipts derived from a service contract provided such are sold by a motor vehicle dealer or by or on behalf of a motor vehicle service agreement company:
 The sales price of or gross receipts derived from the sale of a “motor vehicle service contract” entered into on or after January 1, 2017, is exempt from sales and use tax.
 The sales price of or the gross receipts derived from the renewal of a service contract that meets the definition of “motor vehicle service contract” on or after January 1, 2017 at the time of the renewal, that was exempt from sales and use tax prior to January 1, 2017 as a service contract for a motor vehicle that covered the entire motor vehicle, except for exclusions for normal wear and tear for certain items or regular maintenance items, is exempt from sales and use tax.
 The sales price of or the gross receipts derived from the renewal of a service contract that meets the definition of “motor vehicle service contract” on or after January 1, 2017 at the time of the renewal, that was subject to sales and use tax on or after March 1, 2016 as a service contract for one or more components, systems, or accessories for a motor vehicle, is exempt from sales and use tax.
 The sales price of or the gross receipts derived from the renewal of a service contract that meets the definition of “motor vehicle service contract” on or after January 1, 2017 at the time of the renewal, that was subject to sales and use tax prior to March 1, 2016 as a service contract for a motor vehicle, is exempt from sales and use tax. Prior Sales and Use Tax Law Application For more detailed information concerning the application of the sales and use tax laws to the sales price of or the gross receipts derived from a service contract for a motor vehicle sold on or after March 1, 2016 and prior to January 1, 2017, see the Important Notice: Motor Vehicles (Installation Charges; Repair, Maintenance, and Installation Services; and Service Contracts) issued February 11, 2016 and the Important Notice: Service Contract for One or More Components, Systems, or Accessories for a Motor Vehicle – Taxable issued February 19, 2016. Assistance General questions regarding this notice should be directed to the Taxpayer Assistance and Collection Center at telephone number 1-877-252-3052 (toll-free). To the extent there is any change in the rate or amount of tax, change to a statute or regulation, or new case law subsequent to the date of this notice, the provisions in this important notice may be superseded or voided. To the extent that any provisions in any other notice, directive, technical bulletin, or published guidance issued prior to the date of this notice conflicts with this important notice, the provisions contained in this important notice supersede.

FTC Approves Final Changes to Used Car Rule

November 10, 2016

The Federal Trade Commission has announced final amendments to its Used Car Rule. The FTC has sought public comments on a series of proposed changes to the Rule (formally known as the Used Motor Vehicle Trade Regulation Rule), which requires car dealers to display a window sticker, or “Buyers Guide,” on used cars offered for sale. The Guide discloses whether the dealer is offering to sell a used car “as is” (without a warranty), or with a warranty. If the sale is with a warranty, the Guide discloses the terms and conditions, including the duration of coverage, the percentage of total repair costs the dealer will pay, and the vehicle systems the warranty covers. In states that do not permit “as is” used car sales, dealers must use an alternative Guide that discloses whether the sale is with a warranty or with implied warranties only. In December 2012, the FTC sought public comments on proposed changes to the Buyers Guide as part of its systematic review of all of the agency’s rules and guides. In response to comments received, the agency sought comments on additional proposed changes to the Used Car Rule and invited comments on alternative approaches that public commenters proposed for the vehicle history disclosure and the “As Is” statement.
As announced today, the Commission is revising the Buyers Guide by:

  • changing the description of an “As Is” sale; placing boxes on the face of the Buyers Guide that dealers can check to indicate whether a vehicle is covered by a third-party warranty and whether a service contract may be available;
  • providing a box that dealers can check to indicate that an unexpired manufacturer’s warranty applies;
  • adding air bags and catalytic converters to the Buyers Guide’s list of major defects that may occur in used vehicles;
  • adding a statement that directs consumers to obtain a vehicle history report and to check for open recalls. The statement also instructs consumers to: visit ftc.gov/usedcars for information on how to obtain a vehicle history report; and visit safercar.gov to check for open safety recalls;
  • adding a statement, in Spanish, to the English-language Buyers Guide, advising Spanish-speaking consumers to ask for the Buyers Guide in Spanish if the dealer is conducting the sale in Spanish;
  • and providing a Spanish translation of the statement that dealers may use to obtain a consumer’s acknowledgement of receipt of the Buyers Guide.

The amended Rule permits dealers to use their remaining stock of Buyers Guides for one year after the effective date of the amended Rule. For more information about the Used Car Rule, read Buying a Used Car. For used car dealers, the FTC offers A Dealer’s Guide to the Used Car Rule. “Fillable” versions of the Buyers Guide in English and Spanish are available at FTC.gov. The Commission vote to publish the Notice of Final Rule in the Federal Register was 3-0. The Federal Trade Commission works to promote competition, and protect and educate consumers. You can learn more about consumer topics and file a consumer complaint online or by calling 1-877-FTC-HELP (382-4357).

Like the FTC on Facebook , follow us on Twitter , read our blogs and subscribe to press releases for the latest FTC news and resources.

CONTACT INFORMATION
MEDIA CONTACT: Frank Dorman Office of Public Affairs 202-326-2674
STAFF CONTACT: John C. Hallerud FTC’s Midwest Region 312-960-5634

NEW NC STATUTES

Two bills were signed into law by Gov. McCrory in the last couple weeks. Both are effective immediately.
The first one changes the language regarding dealer tags, to include independent dealers in the provision that previously only allowed franchised dealers general use of a dealer plate. you might want to print this out and have it in the car with you or your family member in case you get pulled over:

ALLOW DEALER PLATES FOR EMPLOYEES OF INDEPENDENT DEALERS AND FAMILY MEMBERS SECTION 13.5. G.S. 20-79(d)(5)f. reads as rewritten: “(d) Restrictions on Use. – A dealer license plate may be displayed only on a motor vehicle that meets all of the following requirements: … (5) Is driven on a highway by a person who meets one of the following descriptions: … f. Is an officer, sales representative, or other employee of a an independent or franchised motor vehicle dealer or is an immediate family member of an officer, sales representative, or other employee of a an independent or franchised motor vehicle dealer.”

The second one addresses record storage and retention, and may need a bit of interpretation by DMV:

AN ACT TO MODIFY THE REQUIREMENTS FOR MOTOR VEHICLE DEALER RECORDS RETENTION, AVAILABILITY FOR INSPECTION BY THE DIVISION OF MOTOR VEHICLES, AND FORMAT. The General Assembly of North Carolina enacts: SECTION 1. G.S. 20-297 reads as rewritten: “§ 20-297. Retention and inspection of certain records. (a) Vehicles. – A dealer must keep a record of all vehicles received by the dealer and all vehicles sold by the dealer. The records must contain the information that the Division requires. requires and be made available for inspection by the Division within a reasonable period of time after being requested by the Division. A dealer may keep satisfy the record-keeping requirements contained in this subsection either by (i) keeping and maintain maintaining written or paper records at the dealership facility where the vehicles were sold or at another established office located site within this State provided that the location and the name of a designated contact agent are provided to the Division and the records can be made available for inspection by the Division within a reasonable period of time after being requested by the Division. Division or (ii) maintaining electronic copies of the records required by this subsection, provided that the Division shall have access to these electronic records from a location within this State. For purposes of this section, the location where dealership written or electronic records are kept and maintained may be owned and operated by a party other than the dealer. (b) Inspection. – The Division may inspect the pertinent books, records, letters, and contracts of a licensee relating to any written complaint made to the Division against the licensee. (c) Records Format. – Any record required to be kept and maintained under this section may be converted to electronic form and retained by a dealer in electronic form without retention of the original or any copies of the record in paper or other nonelectronic form.” SECTION 2. The Department of Transportation, Division of Motor Vehicles, shall adopt rules consistent with the provisions of this act. Rules adopted pursuant to this section shall not be subject to G.S. 150B-19.1(e), 150B-19.1(f), and 150B-21.4.

The CARLAWYER© By Thomas B. Hudson and Nicole Frush Munro

It’s nearly the dog days of summer, but we’re back, passing on what we’ve recently learned about legal developments in the auto sales, finance and lease world. This month, we feature developments from the Consumer Financial Protection Bureau and the Federal Trade Commission, as well as our “Case of the Month.” Remember – we aren’t reporting every recent legal development, only those we think might be particularly important or interesting to industry.

Why do we include items from other states? We want to show you new legal developments and trends. Also, another state’s laws might be a lot like your state’s laws. If attorneys general or plaintiffs’ lawyers are pursuing particular types of claims in other states, those claims might soon appear in your state.

Note that this column does not offer legal advice. Always check with your own lawyer to learn how what we report might apply to you, or if you have questions.

This Month’s CARLAWYER© Compliance Tip

Does your compliance officer (don’t tell us you don’t have one) regularly visit the web sites of the CFPB, the FTC, your state’s Attorney General and your state’s motor vehicle and consumer protection agencies to see what they are up to? That’s a good (and inexpensive) way to head off legal problems before they get started. If that’s not on the schedule, it should be. Better yet, get alerts sent to your compliance officer. You don’t have to “”like” the CFPB or the FTC to follow them on Facebook, twitter, or to subscribe to receive alerts.

Federal Developments

CFPB Targets Payday Lenders, May Hit Dealers and Finance Companies. The CFPB proposed a rule aimed at payday lending. The rule would require lenders to take steps to make sure consumers have the ability to repay their loans, and would cut off repeated debit attempts that rack up fees. These proposed rules would cover payday loans, auto title loans, deposit advance products, and certain high-cost installment and open-end loans. The CFPB’s definition of covered loans is broad enough to encompass some typical auto finance activities, so dealers and finance companies should seriously consider participating in the comment process.

CFPB Announces Auto Financing Aids. On June 9, the CFPB released an “auto loan shopping sheet,” a step-by-step guide, and additional online resources as part of a new “Know Before You Owe” initiative to help consumers shop for auto financing. The Bureau claims that the shopping sheet helps consumers see the total cost of auto financing and make apples-to-apples comparisons among financing products. The “Know Before You Owe” initiative walks consumers through each step of the auto finance process to help them decide how much they can afford to borrow and what options are right for them. The CFPB says its shopping sheet allows consumers to understand the total cost of financing (not just the monthly payment), comparison shop, and watch out for financing features and add-ons that could lead to costly surprises down the road. The Know Before You Owe auto financing initiative can be found at: , and the shopping sheet can be found at:

CFPB Eyes Car Financing. On June 27, the CFPB released a report entitled “Consumer Voices on Automobile Financing,” which examines how consumers navigate the process of financing a vehicle. The report is based on findings from consumer focus group research conducted by the Bureau and consumer complaint data submitted to the Bureau. The Bureau reportedly found that while many consumers extensively research the types of vehicles they want to buy, most do not take as much time to research available financing options. Also, the Bureau’s analysis of the complaint data shows consumers sometimes had difficulty understanding financing features during loan negotiations. (The Bureau insists on erroneously referring to all auto financing transactions as “loans.”) According to the Bureau, the complaint data also highlighted consumer problems with the sales process for extended warranties and other add-ons, and few consumers reported focusing on the total cost of financing when they negotiated their financing contracts.

More CFPB Complaint Data. On June 28, the CFPBreleased its monthly complaint report, which highlights trends in the complaint data the Bureau receives through its Consumer Complaint Database. The monthly report includes complaint data specific to certain companies, overall complaint volume and complaint volume by state, and other trends in the data. Each month, the report spotlights complaints about a particular issue and complaints from a particular geographic location. The June report focuses on complaints related to vehicle financing and leases, installment loans, title loans, and pawn loans, and highlights complaints from consumers residing in Arkansas.

The FTC Ups the Ante. The FTC announced on June 29 that it has approved final amendments to its rules that adjust the maximum civil penalty dollar amounts for violations of specific laws the FTC enforces, as required by the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015. The Act directs agencies to implement a “catch-up” inflation adjustment based on a prescribed formula. The maximum civil penalty amount, effective August 1, has increased from $16,000 to $40,000 for a number of violations.

Case of the Month

Security Interest Perfected More than 30 Days after Debtor Took Possession of Car and within 90 Days of Debtor’s Bankruptcy Filing Avoided as Preferential Transfer: An individual and his company bought a car on December 29, 2014. The individual applied for a certificate of title on January 30, and the title, listing the lienholder, was issued on February 17. The individual and his wife filed a Chapter 7 bankruptcy petition on April 16, and the Chapter 7 trustee filed an adversary proceeding seeking to avoid the lien as a preferential transfer. The federal bankruptcy court granted judgment for the trustee. The court noted that the only element at issue in the case was whether the transfer of a security interest in the car was for or on account of an antecedent debt owed by the individual before the transfer was made. Section 547(e)(2)(A) of the Bankruptcy Code provides that if a transfer is perfected more than 30 days after the transfer takes effect between the transferor and the transferee, the transfer is deemed made at the time the transfer is perfected. The court found that the transfer was not perfected within 30 days of the date the individual signed the retail installment contract and took possession of the car and, therefore, the transfer of the security interest was on account of an antecedent debt. Finally, the court rejected the lienholder’s argument that the “new value” defense applied. That defense provides an exception to the finding of a preferential transfer for a transfer that creates a security interest in property acquired by the debtor for new value if the security interest is perfected on or before 30 days after the debtor receives possession of the property. Because the security interest was perfected, at the earliest, 32 days after the individual took possession of the car, the court found that the defense did not apply. You can bet that the bank that bought the finance contract at issue in this case will be demanding that the dealer make good on the bank’s losses. See In re Resler (Reynard v. Bank of America, N.A.), 2016 Bankr. LEXIS 2187 (Bankr. D. Idaho June 3, 2016).

So there’s this month’s roundup! Stay legal, and we’ll see you next month.


Tom (thudson) and Nikki (nmunro) are partners in the law firm of Hudson Cook, LLP. Tom has written several books and is the publisher of Spot Delivery®, a monthly legal newsletter for auto dealers. He is Editor in Chief of CARLAW®, a monthly report of legal developments for the auto finance and leasing industry. Nikki is a contributing author to the F&I Legal Desk Book and frequently writes for Spot Delivery. For information, visit www.counselorlibrary.com. Copyright CounselorLibrary.com 2016, all rights reserved. Single publication rights only, to the Association. (7/16). HC# 4823-2513-7204.

NC DEALERS: MANDATORY PARTICIPATION IN ELT

If you have not signed up with an ELT vendor, what are you waiting for? I had a BHPH dealer call me this morning and he told me he still doesn’t even have a computer in his dealership. The deadline is Friday!

On June 24, NC DMV issued the following bulletin:

In October 2015, the North Carolina General Assembly ratified Senate Bill 119 under Session Law 2015-264, which requires mandatory participation in the Electronic Lien and Titling Program (ELT) beginning July 1, 2016. This requirement applies to all individuals and lienholders who are normally engaged in the business or practice of financing motor vehicles, and who conduct at least five transactions annually, and requires them to utilize the electronic lien system to record information concerning the perfection and release of a security interest in a vehicle.

The liens will be tracked by the fiscal year beginning July 1, 2016 through June 30, 2017. The lien counter will be reset on July 1, 2017 and the five liens will then go from July 1, 2017 through June 30, 2018.

A “Notification Letter” will be mailed to a lienholder when three recorded liens are on file for the lienholder; this letter will not be vehicle specific. The “Notification Letter” will advise the lienholder who to contact in order to become an electronic lienholder. Also, the “Notification Letter” will advise the lienholder that when five liens have been recorded, title services will be denied until they comply with the electronic lienholder requirements.

So if you have not registered with a vendor, go to www.edealersvcs.com and get registered. You will have a choice of several vendors, we recommend northcarolinaelt.com. You can just go directly to their website to register as well. Don’t delay!!!

Kat