Originally published in NADA Headlines, June 19, 2018
The Chicago Police Department has requested that NADA disseminate the following information:

We are requesting that motor vehicle dealers throughout the nation exercise extraordinary diligence in verifying the identity of customers who attempt to purchase vehicles via the internet and have them shipped to the Chicagoland area (which includes the city of Chicago, its suburbs, and Northern Indiana). We are seeing an epidemic of vehicles being purchased via identity theft and shipped to the Chicago area from around the country. The vehicles are usually valued at $50,000 or more. The transactions usually start via an internet search. Credit applications and other paperwork are either filled out on-line or sent to the dealership via FedEx after they are requested to be sent to an address in the Chicago area (often times a vacant building). The offenders create a phony email account in the victim’s name as well as a fake driver’s license with the victim’s information, and they use Google Voice or other applications whose phone numbers are not traceable. The offenders oftentimes seek to arrange their own transportation for the vehicles to be shipped.

This is an elaborate scheme that can be stopped if dealerships conduct a thorough examination of on-line loan applications and related paperwork and institute a waiting period before shipping the vehicle. This will help protect both the dealership and innocent persons whose identities are being stolen. In every incident that we have investigated, there are several red flags that the dealership should have caught prior to shipping the vehicle. The Chicago Police Department is fielding at least three requests a week to investigate and recover vehicles that were purchased via identity theft and shipped to Chicago from out of state. In most cases, the credit application was initially approved and the vehicle was shipped. Upon further review of the credit application, inconsistencies were identified and the credit was declined. We have recovered vehicles shipped to the Chicago area from several states including Utah, Florida, Texas, Delaware and Pennsylvania.

If you have questions or concerns, contact: Sgt. Keith A. Blair, Commanding Officer, Chicago Major Auto Theft, Investigative Unit, Central Investigations Division – Unit #606, Chicago Police Department, 3151 W. Harrison St., Chicago, IL 60612 or
keith.blair@chicagopolice.org.

NADA Note:  The Federal Trade Commission’s Red Flags Rule requires dealers who offer or maintain consumer credit (including retail installment sale contracts and vehicle leases) and dealers who offer business credit where a reasonably foreseeable risk of identity theft exists to maintain a written Identity Theft Prevention Program that (i) identifies relevant red flags that indicate the possible existence of identity theft, (ii) contains reasonable procedures to detect and respond to those red flags, and (iii) is updated periodically to reflect new identity theft risks.  Information on the full scope of duties is available in NADA’s A Dealer Guide to the FTC Red Flags and Address Discrepancy Rules: Protecting Against Identity Theft.

I bet you’ve heard of the famous equation E=mc². You may know that Albert Einstein is credited as its developer. You may even know that it’s often called the Theory of Relativity. But, like most people, you might not know what all the symbols mean or how to work the equation to achieve the result Einstein promised. Generally speaking, the only people who fully understand the equation, what the symbols represent, and how to perform the calculations are physicists, scientists, and mathematicians—all persons with specialized skills, knowledge, and experience.

By now you’re probably thinking: What does this have to do with my dealership? Probably nothing from a physics standpoint. But maybe everything as it relates to your pay plans and how they are drafted, utilized, and understood. Relatively speaking (get it?), dealership pay plans are frequently just as confusing to the average reasonably intelligent person as Einstein’s famous equation. In fact, often only a very small group of people—the people who draft them—fully understand dealership pay plans. And, like the symbols used by Einstein, pay plans rely on language unique to retail automotive and only those within the industry understand it. 

The Friend Or Neighbor Test

If you think your plans are above reproach, ask a friend or neighbor who has never worked in retail automotive to read yours and then explain exactly how your employees earn compensation and how your dealership calculates commissions. While you’re at it, if your plan uses common terminology such as “gross,” “gross profit,” or “costs,” ask your victim to define those terms.  

It’s likely your friend or neighbor would have a better chance of explaining Einstein’s theory than interpreting the plan as you intended. At this point, it’s helpful to remember that, should your pay plans ever face a legal challenge, you can expect they will be scrutinized by folks with experience similar to your friends and neighbors, who do not know the industry buzz words (or the secret handshake, for that matter).

Confusing Pay Plan + Disgruntled Employees = Lawsuits

Recent lawsuits, several of which were class actions, should serve as a wake-up call to review your pay plans and your methods used to calculate compensation according to those plans. Although the specific factual assertions differ in these lawsuits, they all have the same central theme in common: the dealership did not compensate the plaintiffs as promised in its pay plan and as required by law. 

Among the legal claims asserted were breach of contract, fraud, wage theft, and wage and hour violations. Several cases alleged that the dealership inappropriately added fabricated costs to deals that were not actual costs. In some cases, plaintiffs alleged that the dealership included costs or deductions when computing commissions that the pay plan had not mentioned. Still other cases included allegations that the dealerships agreed to calculate commissions based on “gross profit,” but failed to use the actual gross profit number in the calculation.     

While winning a lawsuit is certainly a significant event, the primary goal should be to avoid a pay plan lawsuit altogether. Lawsuits involve risks, disruption, and legal costs, not to mention the possibility you will have to pay damages. Luckily you can take steps to reduce your risk of ending up in a lawsuit by drafting and following better pay plans. With better pay plans, chances are that the dealerships involved in the cases mentioned above would have achieved their compensation goals while avoiding the legal risks. 

You Don’t Need To Be Einstein To Craft A Good Pay Plan

Pay plans should explain how compensation is earned and what will go into the calculations, using the common, everyday definition of terms and phrases or by defining key terms within the context of the pay plan itself (to the extent possible). You should be careful when using terms that are typical to any industry, such as “gross profit” and “costs” because, just as the symbols used in Einstein’s equation are constants subject to the laws of physics, these terms have specific legal meanings that generally cannot be reinterpreted by a pay plan drafter.

Among other components, plans should include language that no prior or subsequent oral representation contrary to the terms of the plan are enforceable, nor are any changes to the plan that are not in writing and signed by the employee and high level manager (e.g., General Manager).

Once a good plan is in place, your dealership must calculate compensation based on the terms of that plan document as written. The document should include a reservation of rights to change the plan prospectively. If you decide to make any adjustments to the plan, you should continue to compensate employees under the old plan through the date the change is implemented.

For those who believe that they are not at risk because they have been using the same pay plan forever without a legal challenge (i.e., the if-it-ain’t-broke-don’t-fix-it approach), hopefully your exceptional luck will continue. Keep in mind, however, most of the dealerships involved in the cases mentioned above were in your same situation … until they weren’t.

It All Adds Up: A Solid Pay Plan Is Worth The Effort

Pay plans have come a long way from the old days when many resembled ransom notes written on the back of cocktail napkins. There is still work to be done in many cases. A good plan is detailed, thorough and protects both the employee and the dealership. And they should be easy to understand, even by a layman outside of the automotive business. In other words, nobody should need Einstein’s help to figure them out.

For more information, contact the author at TCoffey@fisherphillips.com or 404.240.4222.

By Cynthia Doll & Lisa McGlynn, Fisher Phillips

In a 7-to-2 decision, the Supreme Court ruled today that a baker’s Free Exercise Clause rights under the Constitution were not properly considered by the Colorado Civil Rights Commission when it held that he was legally required to bake and sell a wedding cake for a same-sex couple. However, today’s much anticipated decision in Masterpiece Cakeshop, Inc. v. Colorado Civil Rights Commissiondoes not create any sort of safe harbor for businesses defending against bias claims. Instead, this narrow decision is more of a rebuke to the state commission that expressed impermissible hostility toward the baker’s religious beliefs when ruling on his case, requiring the commission to reconsider its earlier action.

Most importantly, today’s decision certainly does not extend a green light for businesses or employers to freely discriminate against customers, patrons, guests, or employees due to their sexual orientation or any other protected class status. Any business open to the public must recognize that this decision does not grant them the right to treat people differently because of their sexual orientation.

The Background Story Takes The Cake

In July 2012, David Mullins and Charlie Craig got married in Massachusetts and planned a celebration ceremony in their home state of Colorado. At that time, marriage between same-sex couples was not yet legal in Colorado, and the U.S. Supreme Court had not yet extended same-sex marriage rights on a nationwide basis.

Mullins, Craig, and Craig’s mother, Deborah Munn, went to Masterpiece Cakeshop in Lakewood, Colorado, to inquire about purchasing a cake for the celebration. Upon learning that the cake was intended for a same-sex wedding celebration, the owner of the bakery, Jack Phillips, told them that he would not sell them a wedding cake. Instead, he offered to sell them general baked goods not specifically intended for a wedding. 

The following day, Munn called the bakery to further inquire as to why the owner would not sell her son a wedding cake. Phillips replied that it was against his religious beliefs to sell same-sex wedding cakes because he believed marriage should be between a man and a woman. In fact, his bakery had previously refused to sell cakes and cupcakes for other same-sex weddings for the same reason. As Phillips describes it, he believes he can honor God through his artistic work on his cakes and that it would displease God if he created cakes for same-sex weddings.  

The aftermath? Mullins and Craig ultimately received a wedding cake decorated with rainbow layers donated by another store for their celebration ceremony, and protestors soon picketed Masterpiece Cakeshop after the news about the situation spread online. But the story didn’t end there. Mullins and Craig filed a charge of discrimination with the Colorado Civil Rights Commission alleging sexual orientation discrimination in violation of the Colorado Anti-Discrimination Act (CADA). The CADA prohibits businesses which are open to the public from refusing to serve customers based upon a number of protected categories, including sexual orientation.   

An administrative judge ruled in their favor and ordered Masterpiece Cakeshop to do the following: design and sell wedding cakes for same-sex unions; take remedial measures about complying with the CADA, including training staff (many of whom are related to Phillips) about their requirement to sell all available goods to any customer regardless of sexual orientation; and file quarterly reports for two years with the state outlining the steps the business took to comply with the CADA. The Commission approved the judge’s order, and the bakery appealed to the Colorado Court of Appeals. The bakery found no relief there, and, although the Colorado Supreme Court was not interested in stepping into the fray, the U.S. Supreme Court agreed to issue a final ruling on the matter.  

Supreme Court: Decision Below Was No Piece Of Cake 

On appeal to the Supreme Court, the bakery owner made two primary arguments. First, he contended that compelling him to make a cake that celebrates same-sex marriage violates the free speech clause of the First Amendment. Under the “compelled speech” doctrine, the government cannot force citizens to express messages that they deem objectionable or to create art with a specific message. His cakes, he argued, are protected artistic expression because he intends to, and does in fact, communicate through them. Second, he asserted that forcing him to design a cake for a same-sex marriage would contravene the portion of the First Amendment that guarantees the free exercise of religion. Here, he contended, the government targeted him because of his sincerely held religious opposition to same-sex marriage. 

The Supreme Court, in a majority opinion authored by Justice Kennedy and joined by reliably liberal Justices Kagan and Breyer, ruled in favor of the cake shop and found that the Colorado Civil Rights Commission did not handle the “delicate” questions presented in this case “with the religious neutrality that the Constitution requires.” The Court ruled that the Commission improperly demonstrated hostility towards Phillips’ sincerely held religious belief against same-sex marriage, and that this hostility, when combined with the request to make a wedding cake for such an event, was “inconsistent with what the Free Exercise Clause requires.” 

The Court’s conclusion was based upon evidence that the Commission had treated Phillips’ case differently from other similar cases involving bakers refusing to perform work for customers; the Court cited to public statements made by commissioners that expressed hostility towards Phillips’ religious beliefs (comparing them to the defense of slavery and the Holocaust, for example). The Court also noted that Phillips made his decision to refuse to make the wedding cake at a time when both Colorado and the United States had not legalized same-sex marriage, which should have been taken into account by the Commission.

Accordingly, the Court reversed the decision and asked the Commission to take another shot at resolving the conflict. It did not, however, answer questions related to the issue of whether a business owner’s free exercise of religion must yield to an otherwise valid exercise of state power. In fact, it cautioned the Commission that “any decision in favor of the baker would have to be sufficiently constrained, lest all purveyors of goods and services who object to gay marriages for moral and religious reasons in effect be allowed to put up signs saying ‘no goods or services will be sold if they will be used for gay marriages,’ something that would impose a serious stigma on gay persons.”

In sum, the Court noted that “the outcome of cases like this in other circumstances must await further elaboration in the courts, all in the context of recognizing that these disputes must be resolved with tolerance, without undue disrespect to sincere religious beliefs, and without subjecting gay persons to indignities when they seek goods and services in an open market.” 

The Icing On The Cake: What This Means For Businesses

“Our society has come to the recognition that gay persons and gay couples cannot be treated as social outcasts or as inferior in dignity and worth,” the Supreme Court said in today’s majority opinion, and businesses should heed these words when making decisions about the work they perform for their guests and customers. Although the Court acknowledged that religious objections to gay marriage might in some limited cases be considered a legally protected view and even a protected form of expression, “it is a general rule that such objections do not allow business owners and other actors in the economy and in society to deny protected persons equal access to goods and services under a neutral and generally applicable public accommodations law.”

The Court instructed the Colorado Civil Rights Commission to review the case once again and apply the law in a manner consistent with the Constitution’s guarantee that all laws be applied in a manner neutral toward religion. A subsequent decision from the Commission may provide certain employers in that state with a defense allowing them to establish that their product or service is a form of artistic expression that should be protected by the First Amendment.

However, today’s decision should not be read to permit employers to discriminate on the basis of sexual orientation or other protected category, no matter the strength of a business owner’s religious beliefs. If an issue arises which pits your religious beliefs against a law of general application, you should seek counsel on the appropriate course of action—but recognize that today’s decision affords you no safe harbor.

If you have any questions about the implications of this decision, contact your local Fisher Phillips attorney.

This Legal Alert provides an overview of a specific Supreme Court decision. It is not intended to be, and should not be construed as, legal advice for any particular fact situation.

HB 366/HB 487 were voted into law on April 13 and delivered to the Secretary of State on April 14.  There are many provisions in the 378 pages of this law, but here is a brief summary of those things that will affect your sales to customers:

• The waste tire disposal fee is increasing from $1.00 to $2.00 per tire and is now subject to sales tax
• Sales tax must now be charged on the labor as well as parts portion of any repair service
• The sale of extended warranty contracts is now subject to sales tax

The law goes into effect on July 1, 2018.

We have received many questions from dealers regarding this change.  Below, you will find a response to our FAQ from the Department of Revenue that we hope answers most of the questions you may have.

We also recommend that you consult with your CPA to prepare for these and any other changes that will affect your business.

In the meantime, if you have additional questions, please feel free to contact Gay Williams at KADA.  gwilliams@kyada.com or 502-695-3333 and we will work to get the answer.

Q&A Provided by the Kentucky Department of Revenue

“Question 1 – The dealers sell many items similar but different from extended warranties.  The dealer sells GAP insurance, Credit life insurance, Paint protection and VIN etch.  How is sales tax applicable to sale of those items?”

“Question 2 – Where is the money sent for the tax on the items in Question 1?”

July 1, 2018 according to the provisions of KRS 139.200(2)(q), sales tax is imposed upon all retailers at the rate of six percent (6%) of the gross receipts derived from extended warranty services.

Under KRS 139.010(13), “Extended warranty services” means services provided through a service contract agreement between the contract provider and the purchaser where the purchaser agrees to pay compensation for the contract and the provider agrees to repair, replace, support, or maintain tangible personal property or digital property according to the terms of the contract if:

(a) The service contract agreement is sold or purchased on or after July 1, 2018; and

(b) The tangible personal property or digital property for which the service contract agreement is provided is subject to tax under this chapter or under KRS 138.460”.

The sale of extended warranties by automobile dealers on or after July 1, 2018 is subject to the 6% sales tax. The dealers should report the tax collected on the sale of extended warranties on their Sales and Use Tax Return (Form 51A102) for the tax period in which the sale occurs.

There has been no change in the taxability of gap insurance and credit life insurance as it relates to sales tax. The sale of gap insurance and credit life insurance are not subject to sales tax.

Charges for etching identification numbers, paint protection and rustproofing underbodies of automobiles are subject to tax. If provided in conjunction with the sale of the vehicle, the charges for etching identification numbers, paint protection and rustproofing are part of the total consideration paid for the vehicle subject to motor vehicle usage tax and remitted to the local county clerk at the time of titling and/or registration. See KY Regulation 103 KAR 44:060 for further detail on motor vehicle valuation. http://www.lrc.ky.gov/kar/103/044/060.htm

The recent tax law changes do not impact or change the motor vehicle usage tax valuation under current law.

If the etching of identification numbers, paint protection and rustproofing occur after the sale of the vehicle as a stand-alone transaction, the charges are subject to sales tax and should be reported and remitted on the dealer’s Sales and Use Tax Return (Form 51A102).

The motor vehicle usage tax is for deposit into the Road Fund and the sales tax collections referenced are General Fund receipts.

“Question 3 – How does the sales tax apply to vehicle repair services under factory or extended warranty contracts?”

The parts utilized in the repair of tangible personal property under an original/manufacturer’s warranty are not taxable either upon purchase by the repairer or upon their use. Sales tax does not need to be charged for parts utilized in the completion of work performed under a manufacturer’s warranty. The reason is the value of these parts is included in the value of the warranty which is reflected in the original selling price. See KY Regulation 103 KAR 26:060 http://www.lrc.ky.gov/kar/103/028/060.htm.

Prior to July 1, 2018, any separate purchase by the customer of an extended warranty is not subject to sales and use tax at the time of the sale. However, the seller or other party providing the extended warranty service must pay sales or use tax on the cost of tangible personal property used to fulfill the terms of the extended warranty.

Effective July 1, 2018, the sale of extended warranties will be subject to sales tax. With this change the parts utilized in the repair of tangible personal property under an extended warranty are not taxable either upon purchase by the repairer or at the time of use. Because sales tax applies on the front end at the time the extended warranty is sold, the dealer may claim a resale exemption for parts purchased and installed to complete repairs under the extended warranty.

“Question 4- Although not included in your email, another question to consider is, how does the change in the definition of gross receipts to include installation labor impact motor vehicle dealerships when they perform repairs and installation labor on vehicles not covered by an original or extended warranty?

Effective July 1, 2018, when a dealership charges the customer for parts and labor on a vehicle repair job, the associated labor will also be taxable if the parts are taxable.

Also, the Department of Revenue will soon post additional information on a dedicated website for new legislation, TaxAnswers.ky.gov. This platform is now available.