Slater Moffat Associates, an accounting firm with more than 30 years of experience helping businesses reduce their tax liability, recently found a state tax policy that might help auto finance companies. The firm indicated finance companies that have experienced bad debt losses in some cases are entitled to a proportional refund of the sales tax that was remitted at the time of sale — even if that tax was remitted by the dealership.

Especially in high sales tax states like California, Slater Moffat computed that a pool of net charge-offs — $10 million, for example — could yield a refund check of $800,000. If this pool of charge-offs represents a 10-percent lifetime loss rate, the firm explained that situation implies total original amount financed of $100 million. The firm then determined the refund would therefore provide a static pool improvement of 0.8 percent of the amount financed. 

For portfolios with higher net losses, like 20 percent, Slater Moffat calculated that a check could increase to $1.6 million and static pool pickup would double to 1.6 percent. 

“These numbers are meaningful from both an operating cash perspective and in their ability to directly reduce static pool losses, which have an implication for complying with bank covenants and maximizing securitization residuals,” said John Slater, founding partner of the firm.

“Best of all, there is no need for contact with customers and contact with dealers is required only if you do not already have dealer waivers on file,” Slater continued. “Companies do need to deal with the state taxing authorities and get the paperwork right both when originating loans and when submitting the claim for refund.”

In one recent transaction, the firm working closely with its client compiled all of the jurisdictional data for the California State Board of Equalization and secured a sales tax refund of $508,000.

Slater Moffat emphasized that not every state offers this benefit, and the procedure, paperwork and timelines can vary widely by location. 

The firm mentioned that it has established a specialty practice focused on securing sales tax refunds for its clients in the auto finance industry. 

“Our firm works with our clients and the appropriate state sales tax authorities to ensure that the maximum refund is obtained,” Slater said. “The process begins with scoping the engagement to determine the potential refund.  We then review appropriate reports, pull a sampling of files and begin the process of gathering data for submitting the claim for refund.  We work directly with the state sales tax agencies to determine the format best suited for submission of the refund claim. 

“Our experience has shown that the more time we spend with the government agencies to format the refund claim, the faster the refund process moves along,” he continued.

“Sales tax refunds related to bad debts are found money for the auto finance companies willing to invest the time and effort to secure them,” Slater went on to say.

He added that many self-prepared applications get repeatedly rejected by state tax boards because of presentation and data issues, which can greatly strain an organization’s personnel and financial resources.

To learn more about what kind of refund might be possible, contact Slater at (559) 437-0700 or jslater@slatermoffat.com.