1 Negative Equity Taxation and Disclosure October 19, 2009
Negative Equity History: State of Ohio – An Increase to Purchase Price • Johns v. Ford Motor Credit Co. (1990), 49 Ohio St. 3d 84. – Case held that including negative equity in the cash price of a newly acquired motor vehicle does not violate RISA as long as the inclusion of negative equity was agreed upon in good faith by the parties. • Ohio Consumer Sales Practices Act – Defines negative equity adjustment as an equal amount which is added to both the purchase price of a motor vehicle and the trade-in allowance for the trade-in vehicle in a transaction. – Negative Equity box acts as Customer Acknowledgment on Buyers Order 2
Negative Equity History: Federal Law – An Additional Amount Financed • Federal law does not allow negative equity to be shown in cash selling price, but should be shown as an additional amount financed. • Federal Reserve Board, Regulation Z (1998, 1999): – Where negative equity is being financed you must separately disclose it in the itemization of the Amount Financed. This is commonly labeled as an amount paid to others, or prior credit balance. 3
Federal Law Continued • Reg. Z recognizes two methods for disclosing negative equity in a RISC when the customer provides a down payment: – Netting Method: Use the cash down to offset the negative equity. Any remaining negative equity must be disclosed in the itemization of amount financed. If the cash down exceeds the negative equity, the remaining cash goes to the down payment line – Non-netting approach: Include the full cash amount in the down payment disclosure, rather than using it to offset negative equity. 4
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Negative Equity Taxation • State and Federal Disclosure methods appear to conflict with each other. • Taxing negative equity amounts to double taxation for the customer. • TILA Issue: is extra interest paid on negative equity tax amount a “hidden finance charge” under TILA leading to a potential usury violation? • Ohio Department of Taxation never clearly addressed negative equity until it investigated a dealer for failure to tax on the amount. 9
Dept. of Taxation Rule • DOT Investigation opened a dialogue between the motor vehicle dealers and DOT regarding taxability of negative equity. • DOT filed its rule August 10, 2009 with an expected effective date of October 26, 2009 • Allows dealers to opt for taxation or non-taxation – If negative equity is included in the total vehicle price paid for the car (whether or not itemized) the amount is taxable. – If negative equity is disclosed as an additional amount to be paid or financed the amount is not taxable. 10
Dept. of Taxation Rule • Ohio law still requires disclosure and consent to the negative equity amount added to the Total Due. • Leases: – Ohio D.O.T.’s position is that negative equity included in a lease is taxable. – Negative equity or a payoff of a previous loan or lease is part of the total amount paid by the lessee, and is part of the price, making it subject to sales tax. 11
Taxable vs. Non-Taxable Option • New Vehicles are not an issue due to tax credit for the trade. – New Vehicle Example • Used Vehicles – Increasing the Cash Price Option • Used Vehicle – Old Buyers Order Example – Adding negative equity to the total due Used Vehicle – Revised Buyers Order Example 12
Retail Buyers Order Changes Attachment #4 • Major Formatting Change • Non-Taxable Approach: – Avoids liability for dealer. – Negative Equity Disclaimer: • “I am aware that the balance owed on my trade-in vehicle or the amount owed on my lease turn-in vehicle exceeds the trade-in allowance from the dealer. As a result, I have requested that the “Total Due” be increased by the difference, $_____________ (known as negative equity).” • Previous Buyers Order: “I have requested that $___________ from my trade-in/lease turn-in be included in the total cash price of the vehicle. – Trade-In Record • Balance Owed and Trade-In Allowance – Trade Allowance and Pay-Off Line placement in Price column • Pay-Off clearly not part of the Tax Base 13
Retail Buyers Order Changes Attachment #4 • “Retail Buyers Order” Title • Deal Number; Customer Number • Additional Trade-In Section • Rebates/Factory Incentives • Other Goods and Services • Integration of Important Agreements • Changes to Back of Buyers Order 14
Miscellaneous Issues • Arbitration Agreement – Challenges to pre-dispute arbitration – Must be used in conjunction with a detailed arbitration agreement – GCADA Arbitration Agreement (Attachment #5) • Use of Buyers Orders with “Cash Price” language in the Negative Equity Disclaimer • Worksheets and/or Initial Buyers Orders • Lease rollovers 15
Buyers Order Information • Sold by ADA Printing: – Contact Doug or Wendy at (440) 808-3547 • Form No. CLEVE-26SM-X • ADA will provide samples for programming • General Questions: – Ellen Mastrangelo or Lou Vitantonio – 440.746.1500 or – ellen@gcada.org or lvitt@gcada.org 16
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