Sales Tax Audit Defense: Motor Vehicles

Receiving notice of a 2025 Florida sales tax audit can send waves of panic through any business owner. Sales tax is a critical source of revenue for the state, and the Florida Department of Revenue (FDOR) closely monitors compliance. If you’ve found yourself in the crosshairs of an audit, don’t worry—you’re not alone, and there are clear steps you can take to navigate the process.

This guide provides car dealers in Florida with essential information about sales tax audits. By the end, you’ll have the tools and knowledge needed to tackle the audit process with confidence.

Understanding Florida Sales Tax Audits

What Is a Florida Sales Tax Audit?

A sales tax audit is an official review conducted by the FDOR to verify that a business is correctly collecting, reporting, and remitting sales tax. Auditors examine financial records to ensure compliance with Florida tax laws and to identify any discrepancies that could result in additional tax liabilities. The Florida Department of Revenue initiates sales tax audits by issuing a Notice of Intent to Audit Books and Records (DR-840). When you receive this notice, you must act quickly because an auditor has the ability to estimate assessments when taxpayers are nonresponsive. 

Why Are Car Dealers Audited?

Car dealerships often face audits due to the complexity of motor vehicle transactions and tax regulations. Some common triggers include:

• DMV Reports: The Florida Department of Revenue has access to records from the Florida Highway Safety and Motor Vehicles which show all vehicles sold by dealer PIN. This is an easy starting point for a sales tax audit because the tax auditor can compare this report to the auto dealer’s federal income tax return and sales tax return to identify discrepancies.

• Inconsistent Reporting: If your reported sales tax doesn’t align with your revenue or industry averages, it may raise a red flag.

• Industry Risk: The auto industry’s reliance on large transactions and tax exemptions makes it a frequent target.

• Random Selection: Businesses may be chosen randomly as part of routine compliance checks.

• Complaints or Whistleblowers: Reports from customers, employees, or competitors can prompt an audit.

• Noncompliance by Related Parties: If a vendor or partner is audited and found noncompliant, your records may also be reviewed.

Key Sales Tax Obligations for Car Dealers

Taxable Transactions

Car dealers must charge sales tax on the following:

• New and used vehicle sales.

• Lease agreements for vehicles used in Florida.

• Accessories or add-ons installed by the dealer, such as navigation systems or custom features.

• Repairs or maintenance services (if they include taxable parts).

Exemptions to Sales Tax

Certain transactions may be exempt from sales tax, such as:

• Trade-Ins: The value of a trade-in reduces the taxable amount. For example, a vehicle sold for $30,000 with a $10,000 trade-in is taxed on $20,000.

• Out-of-State Purchases: Sales to non-Florida residents who take delivery out of state may qualify for exemption, provided proper documentation is maintained.

• Tax-Exempt Entities: Sales to nonprofit organizations, government agencies, or other tax-exempt entities may qualify for exemption with valid documentation, such as a tax exemption certificate.

Reporting and Remittance

Car dealers are required to:

1. Collect Sales Tax: Based on the total purchase price, including dealer fees, warranties, delivery charges, and other taxable components.

2. File Returns: Use Form DR-15 to report taxable sales and remit taxes monthly or as required by the FDOR.

3. Pay on Time: Florida offers a discount of up to $30 per return for timely filing and payment, incentivizing compliance.

Local Discretionary Surtax

Dealers must collect surtax based on the buyer’s home county. The surtax applies to the first $5,000 of the vehicle’s purchase price and is determined by the buyer’s county of residence. Ensuring accurate surtax collection is critical to avoiding discrepancies during an audit.

Tax Audit Process for Motor Vehicle Dealers

What to Expect During a Motor Vehicle Dealer Sales Tax Audit

1. Notification: The FDOR will send an official audit notice, the Notice of Intent to Audit Books and Records (DR-840), outlining the type of tax being audited, the period under review, and the records required. In most cases, the statute of limitations for a motor vehicle dealer should be three years. 

2. Initial Meeting: Auditors may meet with you to explain the process and gather preliminary information about your operations. This is an opportunity to clarify any unique aspects of your business. The earlier you consult with a state and local tax attorney, the earlier they can intervene in this process to prevent misunderstandings by auditors unfamiliar with the motor vehicle industry.

3. Document Review:  It is critical that you and your sales tax defense lawyer evaluate records before turning over records to the Florida Department of Revenue. This period is important because turning over records showing tax collected not remitted is an admission to a crime! Moreover, you need to understand your own records before explaining them to an auditor. The types of records in particular that an auditor is looking for generally include:

   • Sales tax returns.

   • General ledgers and bank statements.

   • Sales invoices and exemption certificates.

   • Documentation of out-of-state deliveries.

4. Field Visit (if applicable): Auditors may inspect your physical location, review point-of-sale systems, and interview staff to ensure procedures align with tax regulations.

5. Preliminary Findings: The auditor will present initial findings in a Notice of Intent to Make Audit Changes (DR-1215), identifying discrepancies and potential liabilities. This stage often provides an opportunity to address misunderstandings or supply additional documentation. However, this and other notices from the Florida Department of Revenue have deadlines which cannot be overlooked. If you miss a deadline, you may miss your chance to contest an erroneous assessment. 

6. Discussion and Clarification: You can review the findings, dispute errors, and provide clarifications or corrections. However, it is important to act quickly here with your Florida sales tax attorney because auditors will commonly try to skip this step and deny you the opportunity to challenge your assessment during the audit. It is much easier, from their perspective, to issue an assessment and put the burden of future challenges on someone else. 

7. Final Report: A summary of the audit results will be issued, along with instructions for payment if additional taxes are due. Significant issues may also trigger penalties or interest charges. This notice comes in the form of a Notice of Proposed Assessment, or NOPA for short. If you miss the deadline of a Notice of Proposed Assessment, you have sacrificed your right to challenge the assessment. Many clients try to handle the audit themselves, and only upon the conclusion of the audit reach out to a sales tax lawyer for help. These clients sometimes don’t realize they only have a short window to find a sales tax lawyer, hire a sales tax lawyer, get the sales tax lawyer up to speed on the audit, have the sales tax lawyer’s team evaluate your books and records, and have the sales tax lawyer file a formal challenge to the assessment. If that sounds like a lot, that’s because it is! If you contact a Florida tax attorney at this late stage, make sure to do so as soon as possible.  

Common Audit Issues

• Underreported Sales: Failing to report all taxable sales. In instances where the failure to report all taxable sales is intentional (and even in some cases when it was not), the Florida tax auditor can refer the motor vehicle dealer to a criminal investigator. The Florida Department of Revenue Tax Investigators are looking for criminal activity which they can refer to your local State Attorney. Unfortunately, motor vehicle dealers are one of the most heavily targeted for criminal investigations by the Florida DOR. 

• Incorrect Exemptions: Misuse or lack of documentation for tax-exempt transactions, such as missing exemption certificates. The rules concerning motor vehicle exemptions in Florida are technical and require expert recordkeeping. This makes exempt sales an easy target by Florida tax auditors. 

• Use Tax Errors: Failing to pay use tax on untaxed purchases used in Florida, such as office equipment or promotional items. The Florida DOR can easily assess categories of expenses on federal returns and then ask the car dealer to show tax was paid. Do you have the receipt for that coffee you bought at Costco three years ago? If not, expect to pay it now.

• Poor Recordkeeping: Incomplete or disorganized records can lead to unfavorable audit outcomes and hinder your ability to defend against discrepancies. Even if you did everything right throughout an audit period (and that is rare in itself), a car dealer or other motor vehicle dealer can end up paying sales and use tax either on exempt transactions or for a second time on taxable transactions, if the dealer does not have good records. 

Best Practices for Audit Defense

1. Stay Calm and Organized: Respond promptly to the audit notice and gather all requested records in an organized manner to streamline the review process.

2. Engage a Professional: Consult a tax attorney or audit specialist to guide you through the process and ensure accurate representation.

3. Be Transparent: Cooperate with auditors, but only provide information relevant to their requests. Avoid oversharing, which may complicate the audit. This may seem obvious, but do not do anything illegal to try and cover prior mistakes. You cannot create false invoices or alter records. That is a fast track to making a bad situation worse. 

4. Review Findings Carefully: Address any discrepancies identified in the preliminary report with supporting documentation and clear explanations.

5. Appeal if Necessary: If you disagree with the final report, you can challenge it through an informal protest or petition for reconsideration with a Florida Department of Revenue conferee. Protests and Petitions for Reconsideration are handled by General Tax Administration and their Informal Dispute Resolution department. Sales tax cases which cannot be resolved there may then be appealed either in the circuit court or the Division of Administrative Hearings (DOAH).  

Preventing Future Sales Tax Audits

While it’s impossible to avoid audits entirely, you can reduce your risk by:

• Maintaining Accurate Records: Retain invoices, trade-in documents, and exemption certificates for at least three years, as required by Florida law.

• Staying Informed: Regularly review updates to Florida tax laws affecting car dealerships, especially regarding new exemptions or reporting requirements.

• Training Staff: Ensure employees understand sales tax requirements, exemptions, and documentation procedures to prevent errors.

• Conducting Self-Audits: Periodically review your own records and processes to identify and correct discrepancies before they escalate.

• Investing in Technology: Use software to calculate and track sales tax accurately, including local discretionary surtaxes, ensuring seamless compliance.

Conclusion: Proactive Defense is Key

A Florida sales tax audit doesn’t have to be a nightmare. Unfortunately, it easily can be. By understanding the process, maintaining compliance, and seeking professional guidance, car dealers can navigate audits with confidence and minimize potential liabilities.

The auto industry’s complexity demands vigilance and preparation. If you’re facing an audit or want to strengthen your compliance efforts, consult a sales tax lawyer to ensure your dealership remains on solid footing. Preparation is the best defense against the challenges of a sales tax audit.