The April tax season has come and gone, but the regulatory challenges surrounding a dealership’s financial operations are here to stay. In fact, dealers who want to protect their profits, maximize efficiency and prepare for next year’s tax season should consider checking in for a full regulatory tune-up. By testing your back office and your entire operation for compliance and safety, you can make sure your business is in top shape for years to come.

Is your dealership conducting monthly regulatory check-ups to ensure compliance with the Internal Revenue Service (IRS), state laws, FTC, OSHA & EPA, EEOC, ERISA and the USA Patriot Act, just to name a few? The latest annual wrap-up by the National Automobile Dealers Association’s AutoExec Magazine tallied more than 80 principal federal regulations governing dealer operations, and cautioned that “state laws also apply and are sometimes even stricter.”

IRS and State Laws

The IRS imposes fines for failure to file Form 8300 (reporting cash transactions in excess of $10,000) of up to $10,000 per incident, which could easily exceed $100,000 in total. All employees who play a role in cash transactions that could potentially involve money laundering are required to attend mandatory Form 8300 training, which must be documented. A good general practice for dealerships that want to avoid even the possibility of errors and fines is to institute a strict policy for cash transactions. Dealers should insist that Form 8300 be filled out every time that there is a sizable amount of cash, unless a system is in place to track each customer’s cash payments for a given year.

A good regulatory tune-up can also help in another area of financial difficulty: the issuance of late payment penalties. The late payments of payroll and related taxes, state sales taxes, could lead to tax penalties of up to 25 % of the taxes payable, plus interest. Therefore, a late tax payment of $50,000 could cost your dealership in excess of $20,000. In addition, penalties can be issued for dealers who do not surrender unclaimed monies to the state, including employee payroll checks and tag refund fees. (For more information on unclaimed property, visit www.unclaimed.org.)

Does your payable clerk understand what items on an invoice are taxable or tax exempt? In many states, shop or office supplies not taxed on a vehicle sales invoice or parts or service ticket are subject to sales tax. Therefore, the law requires the payable clerk to differentiate supplies received from a vendor as those for re-sale and those not for re-sale. The regulatory tune-up can make sure your staff is up to date on these important details.

In addition, an internal compliance review of expense documentation, LIFO conformity, demonstrator use logs, third party salesmen incentive monies, tool allowances, and other financial details, may determine other weaknesses that could lead to additional taxes, interest and penalties, without regard to professional fees, to defend your dealership from financial loss.

For example, generally, an employee must treat as compensation, and pay tax on, the fair market value of the personal use of an employer–provided car. Therefore, the dealer must include the personal use on the employees W-2 and must withhold income and FICA taxes on that amount.

Federal Trade Commission (FTC) & USA Patriot Act

Companies under the jurisdiction of the FTC must comply with a comprehensive set of rules relating to customer records and information, along with credit and trade practices. In addition, the USA Patriot Act requires dealers to verify that customers, vendors and employees are not on the government’s terrorist list.

A good regulatory tune-up can prevent significant financial penalties relating to FTC and USA Patriot Act requirements. For instance, failure to comply with FTC Safeguard Rules could lead to fines in excess of $11,000 per day. Dealers must develop, maintain and implement a comprehensive written security program to protect customer information. A good faith effort will not work as a defense against fines. In addition, if a customer’s information is stolen, removed electronically or found in a garbage can outside, what cost would you incur from negative media coverage?

The FTC Disposal Rule requires all automobile dealers to retain customer information on lost or dead deals for 25 months. Failure to comply could result in federal & state fines of $10,000 per occurrence.

False Claim Ads and Deceptive & Unfair Trade Practices

Most dealerships that face litigation do so because of the practices of their F & I departments. The procedures for price, payment and payment packing has led to civil and criminal charges against dealers nationally, and many media outlets have had a field day targeting local dealers. Implementation of “menu” pricing may be the best and quickest way to become compliant. In addition, many dealers have instituted filming of the F & I process to protect the dealership. Filming also provides an incentive to F & I managers to follow the dealerships guidelines, or face possible termination.

In 2002, Sonic Automotive Group was fined $1.7 million in Florida for unfair practices. With fines of this magnitude, it is clear that training, training and more training is imperative. Dealerships should maintain written policies on everything from “spot deliveries” to handling customer complaints. We highly recommend that your law firm shop your dealership to determine compliance.

Other deceptive or unfair trade practices that are prohibited tend to occur as of a result of false or misleading advertising. For instance, Holmes Tuttle Ford of Tucson, Arizona agreed to pay $75,000 to settle a false advertising claim with the state attorney’s office. The fine was imposed due to a promotion that pertained to only two vehicles on the lot, but the ad implied that the deal was for all or most vehicles on the lot.

OSHA & EPA

A regulatory tune-up can also make sure your dealership is safe for employees. Nothing will bring the wrath of OSHA and the EPA down on a dealer quicker than an employee who is seriously injured or, worse, killed due to negligence on the part of the dealer. How waste and other hazardous materials are handled and ultimately disposed of should be the subject of constant training and compliance testing for every single employee working with chemicals.

In fact, when it comes to shop injuries, incentives are often the best deterrent. By proposing a bonus for all shop employees if there are no injuries for a year, a dealership can improve overall safety with a modest investment. The alternative is certainly costly, since the fines of $1,000 per day from OSHA may pale in comparison to a jury verdict for negligence, insurance cost increases and the negative publicity that may ensue.

Equal Employment Opportunity Commission (EEOC)

Atlanta lawyer Gerry Coker, a director for the National Association of Dealer Counsel, noted in Automotive News that the EEOC recently announced stepped-up enforcement against systemic violations of anti-bias laws. Systemic violations involve situations where minorities, including women, are regularly not promoted to management or higher paying jobs.

According to DealersEdge Report, the average cost to settle a discrimination lawsuit in the United States is approximately $297,000, exclusive of legal and other professional costs. The Federal Civil Rights Act bars discrimination on a basis of race, age, color, etc. Procedures must be established that regulate employee promotions, disciplinary actions, and terminations. A regulatory tune-up can check your processes to make sure they are valid and thorough. Otherwise, you could find yourself in court.

To get the regulatory compliance process in gear, dealers should obtain a copy of the Federal Regulatory Compliance Chart from NADA, and then assign the appropriate employees with performing monthly audits of the various areas. In addition, dealers should have their attorneys review key contracts with lenders, computer venders, employee handbooks, retirement plans, and customer test drive procedures. The dealership’s workers compensation and garage liability insurance agent should perform a compliance test of the property’s buildings, including storage of chemicals. On the tax front, dealers should make sure that their CPA or a CPA firm that specializes in dealerships performs a voluntary audit of tax compliance issues. Finally, to keep employee regulation issues in check, dealerships should establish a mechanism for employees to report fraud, abuse or sexual harassment, age or other misconduct via a hotline that reports directly to the dealer’s attorney.

While a thorough regulatory tune-up can make sure your dealership is in good working order today, compliance is an ongoing task that must be taken seriously every day of the year. By making compliance a part of ongoing operations, dealers should see more cars sold and more cars staying sold, along with more profits earned and more profits staying earned.