By Scott Herman, CPA
The Indiana Department of Revenue (IDR) has recently made changes to the policy regarding documentation fees. According to the updated Information Bulletin #28S – Sales of Motor Vehicles and Trailers, the IDR clarifies its position that “Documentation fees will be considered to be charges by the seller for services necessary to complete the sale and will be subject to sales tax.” The position is provided in the bulletin:
Fees for services performed after the transfer of a vehicle or trailer are not considered part of the sales price and, therefore, are not subject to sales tax. Transfer of a vehicle or trailer takes place upon physical delivery when the purchaser takes possession and control of the property, even though the title may not have yet been transferred. The dealer must maintain adequate records to show which services pertain to the fees charged and that the services were performed after the transfer of the vehicle or trailer to be exempted from sales tax. Fees charged for services performed prior to the customer taking physical possession of the vehicle or trailer are subject to sales tax.
Historically, separately stated fees labeled as “documentation fees” were presumed to be at least partially excluded from gross retail income because all or part of the fee was considered to be compensation for preparing and submitting documents to the Indiana Bureau of Motor Vehicles on behalf of the purchaser to complete titling and in some cases registration of the vehicle. Such services were considered to be a separately bargained for service that took place after the transfer of possession of the vehicle to the customer. However, the General Assembly added IC 9-14.1- 3-3 effective July 1, 2016, which established a separate “convenience fee” that allowed dealers to charge for performing the services that have historically been excluded from the retail unitary transaction and represented by the documentation fee.
As such, fees that meet the definition of a separately stated “convenience fee” are not subject to sales tax. While dealers may still charge a separate documentation fee in addition to the convenience fee, the services attributable to documentation fees will be considered to be charges by the seller for services necessary to complete the sale per IC 6-2.5-1-5(a)(3) and will be subject to sales tax.
While the IDR kept some of the same language from their prior position, the big change is that documentation fees are presumes to be for services necessary to complete the sale and therefor subject to sales tax. This effectively eliminates the dealer’s ability to fully exclude or partially exclude the documentation fee from sales tax. The bulletin is dated January 2019 but has an effective date of April 2, 2019. Dealers should use this time to update their systems to properly account for this change.
For more information about how these changes may affect you and your dealership business, please feel free to contact Scott Herman at firstname.lastname@example.org.