November 2019 - Greater Cincinnati Automobile Dealers Association

What makes a prospective store a “good fit”

There are many elements to review when considering the acquisition of an additional dealership

Do you ever catch yourself looking at dealerships for sale? Having one dealership, or just one in a certain area, is sort of like having one child. You are already going through the motions and adding another does not add 100% to your efforts.

There are synergies to enjoy through acquiring another dealership. It can even be a hedge against a slowdown in a market or a brand. But when an opportunity is presented, there are many things to consider. Let’s look at a few things to ponder when looking at adding a dealership to your portfolio.

Franchise

Is it similar or complementary to your e,'(i.sting brands? Do you have team members that have knowledge and ex­ perience with the brand? What is  the  current and future consumer  demand for the products they produce?  Do  you want to do business with the clients that buy their product? What is their niche… does it match your current business model? If not, is the seller’s management team, assuming they will stay, capable of generating the  ROI you desire? What additional resources do you have that can take the store to the next level? Keep in mind  that when a customer sees the manufacturer’s sign on your building, it instantly  sends a message  to  their brain that  sets the bar for their expectations . Are you ready to exceed it?

Geography

Can key members of your current team travel to the new store, work several hours, and return on the same day? If not, can your current store stay on track with key people out for several days at a time? Successful, multi-point dealers with stores in different regions often create a “platform” dealership or office to service a group of stores in  a given area. Some practical areas to consolida t1 are accounting, HR, marketing and IT. If it is your second store, you should be thinking along these lines. The return to the bottom line can be significant.

Culture

Every store has a culture, good or bad. What is  the  culture of  this store?  Is it  a fast-paced  metro  or a laid-back  ru­  ral store? Maybe it is the  service  department  that shines by retaining  the  customers.  Or it’s been at  the  same loca­ tion for years at Main & Main with strong community involvement. A perfect scenario is when the culture of the prospective store matches  your  current  culture.  However,  if  the  existing  culture works,  be mindful of  changing  it. If it  is broken,  it  must be fLxed.  Perhaps adding resources  to its  deficiencies  and  harnessing its  strengths will allow it to prosper. The market will reward you for making these changes.

Facility

Are there significant deficiencies that must be addressed before the business plan can be fully executed? Some things are easy to solve temporarily, like renting an adjacent lot for storage until minor facility upgrades are com­ pleted. Major construction or relocation that will enhance value can also be a vacuum of time and capital. Are you ready, willing, and able to take on the task?  Some buyers can delay projects by working with the manufacturer on  a plan to build the business before upgrades are made. Work closely with your  advisor  during the negotiating  stage to map out a plan for implementing the necessary changes after closing.

How Does it Feel?

And finally, does it feel rightJ After you’ve  done  the  walk  through,  digested  the  numbers,  and  discussed  it  with your advisory team, how does it feel? This is the 30,000-foot view combining your intuition, emotions and logic.

Your Team

THE BEST PRACTICE when considering adding a dealership location is to have your bench ready. Start today to have a process to recognize, train up, and retain your best talent. If you don’t reward them, someone else will. Provide opportunities for those that are destined to succeed and keep them

It has been said that success happens when preparedness meets opportuni­ ty. Are you ready?

For more information about how the above may affect you and your dealer­ ship business, please feel free to contact David McNulty at da­ vid.mcnulty@mcmcpa.com or Scott Herman at scott.herman@mcmcpa.com.

Convenience Fees Continue to Confuse Dealers and Regulators

By Eric D. Mulligan*

If you extend credit to consumers, you need to know what is and what isn’t a finance charge.

You also need to know how to disclose finance charges to your customers. Otherwise, you’ll likely face penalties under state and federal consumer credit laws.

A state financial regulator also needs to know what a finance charge is and how a creditor must disclose it. In a recent Indiana case involving a convenience fee, neither the creditor nor the regulator knew what it should have known, and each party paid for its mistake.

Webb Ford, Inc., an Indiana car dealer, charged a $25 convenience fee to each of its credit customers for electronic vehicle titling and registration. Webb Ford offered the electronic titling and registration service to its cash customers for the same fee but did not automatically charge cash customers for the service.

The Indiana Department of Financial Institutions discovered during a routine examination that Webb Ford did not disclose the fee properly in one sale. In that sale, Webb Ford disclosed the fee as part of the amount financed rather than as part of the finance charge. The DFI ordered Webb Ford to identify all contracts with improperly disclosed convenience fees and refund the fees to the affected customers. Webb Ford and the DFI tried to resolve the dispute informally but could not do so. The DFI accused Webb Ford of charging “impermissible additional charges” under the Indiana Uniform Consumer Credit Code and ordered it to make restitution. Webb Ford petitioned for review of the order. An administrative law judge upheld the order, as did a state trial court. Webb Ford next appealed to the Indiana Court of Appeals.

The appellate court reversed the DFI’s order. The appellate court found that the convenience fee was a finance charge, not an “impermissible additional charge.” As the appellate court explained, the IUCCC allows “additional charges” only with the DFI’s approval. The DFI argued that because Webb Ford did not disclose the convenience fee as a finance charge, the fee must be an “additional charge.” The appellate court disagreed.

The appellate court explained that, because Webb Ford required credit customers to use the electronic titling and registration service and pay the fee but allowed cash customers to choose whether to do so, the fee was “incident to the extension of credit” and therefore a finance charge. Furthermore, the IUCCC provides that an “additional charge” is “[i]n addition to” finance charges. The fact that Webb Ford improperly failed to disclose the fee as a finance charge did not change the fee’s nature. As a result, the convenience fee was not an “additional charge,” and while the DFI could penalize Webb Ford for failing to disclose the charge properly, it could not penalize Webb Ford for charging an “additional charge” without permission.

As the DFI noted, the penalty for charging an impermissible additional charge is the same as the penalty for failing to disclose a finance charge: The creditor must refund the additional charge or improperly disclosed finance charge. So why did Webb Ford bother to argue the point? Although the remedies were identical, other consequences were not. According to Webb Ford, a disclosure violation is subject to defenses under the federal Truth in Lending Act, as well as a shorter statute of limitations.

Both sides lost by not knowing the law well enough. If Webb Ford had realized that it must disclose the convenience fee as a finance charge, it would have avoided the case altogether. If the DFI had treated Webb Ford’s violation as a disclosure violation only rather than as an impermissible additional charge, it would have avoided the hassle of an appeal and further proceedings in court.

Webb Ford, Inc. v. Indiana Department of Financial Institutions, 2019 Ind. App. LEXIS 373 (Ind. App. August 19, 2019).

*Eric D. Mulligan is an associate in the Maryland office of Hudson Cook, LLP. He can be reached at 410.865.5402 or by email at emulligan@hudco.com.

Reasonable compensation for S corporation shareholder-employees is important to IRS auditors, lawmakers

IRS fact sheet aids in determining reasonable compensation

By MCM CPAs & Advisors Partner Scott Herman, CPA

The potential for an S corporation to reduce its payroll tax liability by minimizing compensation to its shareholder-employees continues to be a big concern for the IRS and lawmakers.

The immense potential loss of employment taxes is well documented. Additionally, the tax reform has provided an unintended incentive for business owners of S corporations to adjust compensation to gain more benefit from the 20 percent qualified business income deduction. Such companies can expect increased scrutiny from the IRS regarding their compensation of shareholder-employees.

It has become very common in recent IRS audits of automobile dealerships structured as S corporations for auditors to determine whether the corporations have underpaid their shareholder-employees. An S corporation shareholder who performs more than minor services for the corporation will be its employee for tax purposes as well as a shareholder.

In effect, an active S corporation shareholder wears at least two hats: as a shareholder/owner of the corporation, and as an employee of that corporation. This allows for savings on Social Security and Medicare taxes because such taxes need not be paid on distributions of profits from the corporation and its shareholders. Also, lower compensation levels reduce shareholder wages subject to ordinary income tax rates. The reduced compensation levels increase the overall business eligible for the 20 percent qualified business income deduction. Thus, to the extent they pay themselves shareholder distributions instead of employee salary, S corporation shareholder-employees can save big money on payroll and income taxes.

The IRS position is that an S corporation must pay reasonable employee compensation (subject to employment taxes) to a shareholder-employee in return for the services the employee provides before a distribution (not subject to employment taxes) may be given to the shareholder-employee.

To date, there are no specific guidelines for reasonable compensation in the IRS Code or Regulations. IN the absence of IRS-specific guidance on ascertaining when compensation is reasonable or even when compensation is unreasonable, IRS auditors seem to be creating their own standards in the field.

Disputes between the IRS and taxpayers have required courts to regularly determine whether an S corporation has paid reasonable compensation to its shareholders. Courts have consistently held that S corporation shareholders who provide more than minor services to their corporation and receive or are entitled to receive payment are employees whose compensation is subject to federal employment taxes.

Shareholder-employees of S corporations do not need to become compensation experts, but they should know that this is a major hot point in IRS audits. If the IRS finds that the compensation paid to shareholder-employee is unreasonably low, it can reclassify some of or all distributions received as wages. It can also levy sizeable penalties.

To aid in determining reasonable compensation, the IRS published a “Fact Sheet” that summarizes the factors to consider:

  • Training and experience
  • Duties and responsibilities
  • Time and effort devoted to business
  • Dividend history
  • Payments to non-shareholder employees
  • Timing and manner of paying bonuses to key people
  • What comparable businesses pay for similar services
  • Compensation agreements
  • The use of a formula to determine compensation

Thus, as a general rule, it is advisable to have the S corporation pay its shareholder-employees at least some salary, which can be on the low end of the reasonableness scale.

How low can it go and still be considered reasonable? There are no precise guidelines, but unusually low salaries, particularly in conjunction with higher corporate income and distributions, will likely be subject to scrutiny. IRS officials have stated that they make the determination on a case-by-case basis.

If you would like more information on this issue or other dealership matters, please feel free to contact MCM Partner, Scott Herman, CPA at scott.herman@mcmpa.com.

What’s in the fine print?

Hudson Cook examines “valueless warranty case

By Thomas B. Hudson

Last month, we reported that a Pennsylvania Honda dealership reached a settlement that includes restitution for consumers who bought what Pennsylvania Attorney General Josh Shapiro described as a “valueless” warranty product. According to the AG’s press release, consumers paid about $1,000 on average for these warranties, which catered to consumers entering into short-term lease agreements for new vehicles and “had no meaningful value beyond the manufacturer’s warranty that was already included in the advertised purchase price.”

That got me thinking. If the AG’s folks reviewed the warranty documents and picked up this problem, why hadn’t the dealership tumbled to it? Is it possible that no one at the dealership was familiar with the warranty language?

What if all the dealership employees involved in the sale process had been instructed to read these dealership warranties? And what if they had been asked, “Would you buy this product? If so, why? If not, why not? What would be a reasonable price for this product?”

The drill of requiring the dealership employees to actually slog through the text of the documents that describe warranties and other so-called “ancillary products” yields a couple of benefits. First, there’s a real possibility that the employees might identify problems like this one. One or more of them might say something like, “Hold up, now. People with short-term leases don’t get any benefit here.” If the dealership’s management folks listened to those concerns, they might conclude that the dealership’s sales policies needed to be changed to eliminate the possibility that customers were being offered warranties that might be argued to have no value.

Requiring sales folks to know what they are selling by reading these documents could be an effective way of bringing some valuable additional critical judgments to the issue of whether the ancillary products sold by the dealership have value to customers. The process might well identify issues like the ones discussed in this case, and they also might raise questions for dealerships that charge a lot for ancillary products that are of little value to the customers (can you say “etch” protection at $995?).

An extra added benefit is that reading the documents presumably will make the dealership employees more knowledgeable about what they are selling and better able to sell the related products to the dealership’s customers. Never a bad thing.

And there’s one final point. Dealerships are under pressure to up their compliance games but keep expenses down, so they often don’t get their lawyers involved in reviewing their forms, procedures, and operations until trouble arises. That’s not a course of action I’d recommend, but for dealerships that insist on squeezing the compliance penny until Abe yelps, this process has the advantage of not costing anything, at least not unless the dealership asks the lawyers to react to problems identified by the dealership employees.

*Thomas B. Hudson was a founding partner of Hudson Cook, LLP, and is now of counsel in the firm’s Maryland office and the Senior Editor of Spot Delivery. He is a frequent speaker and writer on a variety of consumer credit topics. Tom can be reached at 410.865.5411 or by email at thudson@hudco.com.