Creative customer discounts – good for the customer, bad for the dealership.
- The Weekly Spiff!
- Posted by AxioMobile
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By Marilou Vroman, CPA, CFE
They say pay plans motivate behavior. In dealerships, this is often true but unfortunately, the behavior that is motivated could put the store at risk. Specifically, the behavior we are referring to today is the practice of “creative discounting”.
Dealership personnel who are responsible for generating sales will typically be motivated to keep gross as high as possible since their pay is often based on a percentage of gross profit. At times, the pressure on departmental or individual performance is so great, employees may seek alternative methods to creatively discount a sale without adversely impacting gross profit and hence, their pay.
For example, a retail vehicle sale could be discounted without impacting gross by removing other amounts that are typically to be collected at the time the sale. Sales tax is often one of the largest amounts collected, and the tax rate could either be reduced or removed from the sale altogether. We have also seen vehicle sales where dealer fees are being removed to facilitate a discount without touching gross. In both cases, the dealership is at risk. If the dealer collects insufficient sales tax, the dealer ultimately has an obligation to pay any deficiency. As to dealer fees, some states have laws that prohibit dealer fees from being removed from one customer’s transaction when it is charged to other customers.
In fixed operations we’ve observed sales tax, tire and battery waste fees, shop supplies and environmental fee charges removed from sales first before a service advisor or parts counter person considers reducing the selling price of parts or labor to provide a customer a discount. These types of “discounts” create compliance risk and potential for future losses.
We recommend attacking the creative discounting practice from both operations and accounting. Sales journals should be reviewed by select accounting personnel monthly to verify required taxes and fees are collected accurately and consistently. DMS exception reports should also be reviewed by management to ensure any overrides of mandatory fees and taxes are detected and resolved when they occur, rather than detected by a third party – and when it’s too late.