The California Department of Tax and Fee Administration (CDTFA) has released an updated version of Publication 34: Motor Vehicle Dealers in March 2025. This guide helps motor vehicle dealers understand and comply with California’s sales and use tax laws for vehicle sales, leases, and use. The March 2025 update incorporates recent legislative changes, including those effective in 2025 and beyond, such as restrictions on bad debt deductions and the ongoing transition for used vehicle dealers to pay sales tax directly to the DMV. This blog post provides a comprehensive overview of the key updates and guidance from the publication to help dealers stay compliant.

Background on Publication 34

Publication 34: Motor Vehicle Dealers covers tax obligations for sales, leases, and use of vehicles, including exemptions, reporting requirements, and special charges. It complements other resources like Publication 25 (Auto Repair Garages and Service Stations) and Publication 73 (Your California Seller’s Permit). The March 2025 edition reflects changes in laws and regulations, with a focus on practical guidance for dealers. Key themes include seller’s permit requirements, tax-exempt sales, recordkeeping, and handling special transactions like Lemon Law buybacks.

Key Updates in the March 2025 Edition

The March 2025 update includes clarifications and new legislative impacts, particularly for 2025 and 2026. Here’s a detailed breakdown of significant sections:

1. Seller’s Permit and Tax Reporting Requirements

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Dealers and Wholesalers: All motor vehicle dealers and wholesalers must hold a seller’s permit and report/pay sales and use tax on returns. Temporary sales in California also require a permit.

Used Motor Vehicle Dealers:

• Effective January 1, 2021, certain used dealers began paying sales tax directly to the DMV.
• Dealers with 300 or fewer sales in 2021 transitioned on January 1, 2023.
• All remaining used dealers must transition by January 1, 2026. DMV will notify dealers in advance.
• Until transitioned, dealers must file returns with CDTFA, including dealer license numbers and detailed transaction info (even if tax was paid to DMV).

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Brokers: Brokers with power to transfer title are retailers and need a permit; true brokers (limited to conveying offers) do not and may collect use tax as a convenience.

Filing and Reporting: No major changes to frequencies, but emphasis on timely returns and using online services for use tax reporting.

2. Direct Sales Tax Payment to the DMV
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• This process simplifies payments for used vehicle dealers by integrating with DMV registration.
• Dealers must include their nine-digit seller’s permit number in the DMV’s electronic Report of Sale (ROS) system for accurate tax allocation.
• Transition timeline: As noted above, full implementation by January 1, 2026, for all used dealers (except exclusive wholesalers).
• Dealers not yet transitioned must report retail sales to CDTFA.

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3. Fuel Tax Rates and Deductions

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Sales Tax Rates for Fuels:

• Gasoline: 2.25% statewide + applicable district taxes.
• Diesel: 9.25% statewide + applicable district taxes.

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Claiming Deductions: Dealers can claim Cost of Tax-Paid Purchases Resold (TPPR) deductions for fuel resold with vehicles. Subtract sales tax paid from the cost before deducting. Electronic filers with fuel-coded accounts automatically adjust for these rates.

Use Tax on Gasoline: Applies to fuel used in company cars, demonstration vehicles, or loaned vehicles (based on purchase price or formulas like 1/40th or 1/60th). Report excess purchases under Purchases Subject to Use Tax; deduct resold amounts under TPPR.

4. Zero-Emission Vehicle (ZEV) Partial Exemption

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The March 2025 update does not include specific new details on ZEV exemptions. However, prior guidance (not revised here) indicates a partial sales and use tax exemption for ZEVs and transit buses through December 31, 2025. Dealers should provide form CDTFA-230-ZEV and a CC4A award letter to claim exemptions. Check CDTFA’s website for ongoing updates, as this aligns with California’s green incentives.

5. Recordkeeping Requirements

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In General: Maintain records for at least four years (longer if audited or disputed), including:

• Gross receipts, deductions, and purchase prices.
• Bills, invoices, repair orders, contracts, and DMV forms (e.g., Report of Sale–Used Vehicle).
• Resale certificates with signatures, purchaser details, permit numbers, and property descriptions.

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For exemptions: Keep government purchase orders, out-of-state delivery statements (CDTFA-448, notarized recommended), or resale certificates.

For leases: Provide lessees with tax receipts including business details, lease info, and tax amounts.

Sales documents: Use motor vehicle contracts, parts invoices, and repair orders. Used dealers must retain car envelopes/jackets and DMV forms in sequence.

Failure to maintain records may result in penalties.

6. Legislative Changes Effective in 2025 or Later

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Bad Debts (Effective January 1, 2025): Per SB 167 (Stats. 2024, ch. 34), affiliated entities (per U.S. Code Title 26, Section 1504) and lenders cannot take bad debt deductions or refunds for worthless accounts written off for income tax purposes. Retailers can still claim deductions if compliant with Regulations 1641 and 1642.

• Deductions for repossessions/net losses: Based on wholesale value adjustments; no deductions for collection expenses.
• Report recoveries on the next return.

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DMV Transition (January 1, 2026): Full shift for used dealers to pay sales tax to DMV, reducing CDTFA reporting burdens post-transition.

Other Updates:

• Exemptions for sales to disabled veterans (partial, with Veterans Administration documentation).
• Lemon Law: Updated restitution/replacement procedures with sales tax refund examples in the appendix.
• Car Buyer’s Bill of Rights: Contract cancellation options for used vehicles under $40,000, with max fees ($75–1% of price) and restocking fees ($75–$500); nontaxable if conditions met.

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7. Other Notable Sections

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Motor Vehicle Sales: Details on taxable/exempt sales (e.g., to military, disabled veterans, foreign consuls, U.S. government), trade-ins (full price taxable), discounts/rebates, and special charges (e.g., doc fees taxable, smog fees nontaxable except excess).

Vehicle Leases and Rentals: Tax on rentals/leases, with MTE (e.g., trucks, buses) taxed on fair rental value or purchase price under certain conditions.

Vehicles Used for Other Purposes: Tax formulas for demonstration/loaner vehicles (1/40th or 1/60th of cost for first 12 months).

Special Taxing Jurisdictions: Tax rates (7.25% statewide + districts) based on registration address; exemptions with documentation (e.g., CDTFA-111).

General Information: Covers bad debts, Lemon Law calculations (appendix examples), courtesy deliveries, modifications for disabilities (tax-exempt), and additional fees (e.g., tire fees, lead-acid battery fees).

Practical Tips for Dealers

To comply with the March 2025 updates:

Verify DMV Transition: Check with DMV for your status; continue CDTFA filings until notified.

Update Record Systems: Ensure all DMV forms, resale certificates, and sales docs are retained; use online verification for dealer licenses.

Handle Bad Debts Carefully: If affiliated/lender, cease deductions post-2024; retailers document per regulations.

Calculate Fuel Deductions Accurately: Use correct rates and subtract tax paid for TPPR claims.

Stay Informed: Review CDTFA’s Tax Guide for Motor Vehicle Dealers and June bulletins for rate changes.

Limitations and Next Steps

This overview is based on the March 2025 publication. For the full text of Publication 34, download from the California Department of Tax and Fee Administration at:

https://cdtfa.ca.gov/formspubs/pub34.pdf

(This is Blog Post #1824)