Regulatory and tax compliance can be a real burden for dealerships, having to handle multiple monthly filings throughout the year. While taxpayers cannot avoid such compliance responsibilities, the Texas Comptroller does provide some relief when it comes to sales tax compliance, including a little-known benefit known as a prepayment discount which can generate a significant benefit to dealerships.
Texas provides two primary opportunities for taxpayers to reduce their sales tax liability through their compliance. The first, most well-known incentive is a 0.5% “vendor’s discount” on any tax due on a sales tax report as long as the tax return is timely filed. This discount is built into the Texas sales tax return and is automatically included as part of the online filing process, so taxpayers generally receive this discount even if they do not realize it. Late returns are not eligible for the vendor’s discount.
Second, and perhaps more importantly, Texas also offers a lesser-known “prepayment discount” that can result in meaningful savings for taxpayers that remit a significant amount of sales tax. Prepayment discounts are available to all taxpayers, including new and used car dealerships and buy-here pay-here dealerships.
As a general matter, sales tax is due by the 20th day of the month following the month in question. So a September sales tax return is due with payment by October 20th. However, taxpayers who make a “timely prepayment” of the amount of tax due may retain 1.25% of the tax due. To qualify as a timely prepayment, payment must be made by the 15th day of the month for which the tax is due (i.e., September 15th in the above example) and the prepayment must equal (1) at least 90% of the total amount currently due or (2) equal the tax due for the same reporting period of the prior year.
Consider a dealership that sells exactly $4 million of vehicles each month ($48 million annually). On January 15th, the dealership prepays its January sales tax of $250,000 (6.25% * $4,000,000) but gets to retain $3,125. On February 15th, the dealership prepays its February sales tax (and retains $3,125). On February 20th, dealership files its January sales tax return, without any additional payment of tax (since it was prepaid). This process would continue in perpetuity, or at least as long as the taxpayer so desired. After 12 months, the above dealership will generate $37,500 in “prepayment revenue” based on its $250,000 prepayment (i.e., a 15% rate of return).
In summary, if a dealership has available cash to put towards a prepayment of a month of sales tax, it can generate a guaranteed 15% annual return on that amount. If a dealership or business owner has other non-vehicle taxable sales, all of the above rules apply equally, and the savings can be even higher (since the full rate for other sales can be up to 8.25%).
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