Auto Dealerships - Audit Technique Guide - Uncle Fed's Tax*Board

Part 3
Aftersale Financial Products
Chapter 10
Automobile Dealership Aftersale Financial Products
Introduction
The automotive aftermarket contemplates products, tangible and intangible, the consumer may
add to the new vehicle during or after consummation of the sale. This aftermarket is substantial
and includes, but is not limited to, products such as financing, wheels, extended service contracts
and service.
This section focuses on the sale of Automobile Dealership Aftersale Financial Products as they
relate to the sale of new and used vehicles. Products sold primarily include extended service
contracts, credit life insurance and credit accident and health insurance. Though references in this
section concern new vehicles, these products have substantially similar application to used
vehicles. As a "Living Document" we would like to see others extend the discussion set forth in
this Guide to include other aftermarket products.
The products discussed in this section are referred to as "aftersale financial products" to give
clarity to the discussion. "Aftersale" is substituted for "aftermarket." Also, these products are not
referred to as "insurance" products because such characterization denotes a legal conclusion that
may be adverse to Internal Revenue Service interests. Some of the products discussed in this
section are disguised and sold as insurance, but in reality are not insurance. The non-insurance
aspect of these products is a basis of adjustment the Service seeks to establish.
Extended Service Contracts
Motor vehicle dealers sell extended service contracts (also known as mechanical breakdown
contracts or multi-year service warranty contracts) for used cars and as a supplement to the
standard manufacturers’ warranty for new cars. The plans cover repairs for specified components,
and may be purchased for a variety of terms and miles. The minimum term is usually 2 years and
the maximum is usually 7 years. The charge for the plan may be separately stated on the vehicle
sales contract, or there may be a separate contract for the plan.
Regardless of what type of plan is sold, an administrator usually handles administrative functions
and pays claims. In addition, the administrator determines the "cost" of the plan and provides a
cost schedule to the dealers. Based on the cost schedule, dealers establish the selling price of the
service contracts and retain a portion of the price as commission. The commission amount is
usually reported as income in the year the contract is sold. Treatment of the remainder of the
selling price varies depending on what type of plan is sold.
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