Cash-strapped states are looking for ways to raise revenues and in many cases that means higher taxes on used cars.
South Carolina recently raised the cap on its motor vehicle sales tax to 5 percent of the sales price or $500. It had been $300.
The extra money is supposed to go directly to infrastructure improvements, such as road repairs. The tax has been renamed the infrastructure maintenance fee.
Used-car dealers in the state wanted to take the opportunity to eliminate the cap entirely, said John Brown, executive director of the Carolinas Independent Automobile Dealers Association.
The cap, even with the higher limit, means that somebody buying a $10,000 used car pays as much in sales tax as somebody who buys a $100,000 new car.
“It has an impact on the people who can least afford it,” Brown said.
The change also means South Carolina dealers will have to pay the sales tax as soon as the title changes hands. Before they could pay it on a monthly or quarterly basis.
The state legislature also increased the gas tax, adding to cost to the cost of car ownership.
Brown said the entire package was the largest tax hike in South Carolina history. Gov. Henry McMaster vetoed the bill, but the legislature overrode him.
Oklahoma legislators also passed a sales tax increase that isn’t called that. In this case, it is a decrease of an exemption.
Vehicle buyers in the state had paid an excise tax of 3.25 percent, but were exempt from Oklahoma’s 4.5 percent sales tax. Under the new law, vehicles sales are taxed at 1.25 percent, along with the excise tax.
Rose Morgan, executive director of the Oklahoma Independent Automobile Dealers Association, said her group partnered with Oklahoma Automobile Dealers Association to prevent the change in the tax law. However, that became difficult in the end as the bill was passed out of committee by a 15-13 vote at 11 p.m. on May 23 and the language only became public on May 24, when it passed the full legislature by a vote of 52-47.
Oklahoma has only one legislative body.
The tax change went into effect July 1, but it faces several legal challenges. A state law prevents the legislature from passing revenue increases in the final five days of a session, which is what happened in this case.
Supporters of the change claim it only reduces an exemption rather than creating a new tax and is therefore within the rules.
The Oklahoma Supreme Court rejected one request to block the tax change, but will hear other arguments in the fall.
Morgan said dealers should continue collecting the tax until then.
California recently raised its tax on gasoline and its fees on vehicles to pay for road repairs.
The state offers a good lesson in the challenge dealers face in opposing higher vehicle taxes.
A tripling of the state’s vehicle tax was a major driver of the recall of then-Gov. Gray Davis in 2003.
California residents voted Davis out of office and replaced him with Arnold Schwarzenegger.
The new governor killed the tax hike, but as Larry Laskowski, the executive director of the Independent Automobile Dealers Association of California, explains, consumers still wound up paying more for their cars.
That is because Schwarzenegger raised the gas tax and other fees.
So one way or another, the state gets its money.
The Consumer Finance Protection Bureau created a rule banning mandatory arbitration agreements in contracts used by the entities it oversees, which includes auto creditors and buy-here, pay-here dealers.
The move opens up these firms to class-action lawsuits. The existing agreements specified that consumers must settle disputes via arbitration and were barred from joining class-action suits.
"These clauses allow companies to avoid accountability by blocking group lawsuits and forcing people to go it alone or give up,” said CFPB Director Richard Cordray. “Our new rule will stop companies from sidestepping the courts and ensure that people who are harmed together can take action together."
Supporters of the bill consider it a blow to big banks. Some point to the recent Wells Fargo credit card scandal as reason to ban arbitration.
“We fought for this rule because it provides a valuable check against corporate misconduct and are pleased that the CFPB has adopted it to protect the public interest,” said Massachusetts Attorney General Maura Healey.
However, the rule covers all firm overseen by the CFPB, regardless of size.
"This rule will force small businesses to bear additional costs in defending class-action litigation, particularly meritless suits," said Steve Jordan, CEO of the National Independent Automobile Dealers Association. "Those costs will ultimately be borne by consumers, and in the case of those who are credit-challenged, it could prove to be too much."
Industry insiders have been waiting for this rule since Congress passed the Dodd-Frank Act that created the CFPB. The Act specifically called for a study into the impact of arbitration on consumers.
The CFPB released the findings of that study in 2015 and a rule has been expected ever since.
But many thought that might change with the election of Donald Trump and an anti-regulatory climate in Washington.
The Republicans in Congress can still squelch the rule before it takes effect in three months by invoking its Congressional Review Act authority.
This would kill the rule and bar the CFPB from creating a replacement.
Attorney Michael Benoit said dealers should start contacting their Senators and Congressmen to push for the CRA.
Benoit said affected parties could also take the CFPB to court, arguing that it lacks the authority to interfere in private contractual agreements.
Until the matter is settled one way or another, Benoit recommends continuing with business as usual.
“It’s a little early for dealers and finance companies to take any action other than exploratory actions into what they might do,” he said.
The Consumer Financial Protection Bureau’s ban on mandatory arbitration agreements faces almost immediate opposition from lawmakers in both Houses of Congress.
On July 10, the CFPB unveiled a rule banning mandatory arbitration agreements in contracts used by the entities it oversees, which includes auto creditors and buy-here, pay-here dealers.
By July 20, several Republicans announced they intend to file a Congressional Review Act (CRA) joint resolution of disapproval in the Senate against the arbitration rule. The move came soon after the ruler was formally noticed in the Federal Register and became subject to the CRA.
“Members of Congress previously expressed concerns with the proposed version of the rulemaking – concerns that were not addressed in the final rule,” said Idaho Sen. Mike Crapo in a press release announcing the intention to file.
Crapo is chairman of the Senate Banking Committee. His counterpart in the house, Texas Rep. Jeb Hensarling, also announced that the House Financial Services Committee has introduced a resolution of disapproval to stop the rule.
The House resolution was initially sponsored by Pennsylvania Rep. Keith Rothfus.
“The CFPB’s anti-arbitration rule hurts consumers and it’s another example of the problems caused by this rogue and unaccountable agency,” Rothfus said in a release. “We know that consumers get better results through arbitration than through class action lawsuits.”
The Congressional Review Act permits Congress to overturn an agency rule within 60 legislative days after an agency has submitted the rule to Congress. Once the rule is overturned, another rule cannot replace it.
Some member of Congress have voiced their opposition to repealing the rule. Massachusetts Senator Elizabeth Warren, the architect of the CFPB, took to Twitter to voice her disapproval.
“We must have the CFPB’s back as Wall St's buddies in Congress try to roll back the rules,” she tweeted.
However, the CRA only requires a simple majority vote in both houses, so Warren and other critics can do little to stop the repeal.
The Senate resolution has 23 co-sponsors. The House resolution is cosponsored by all 34 Republican members of the Financial Services Committee
The CRA was only successful once between its creation in 1996 and this year. But it has been used 14 times so far this year.
Many CFPB watchers were surprised Director Richard Cordray went ahead with the rule.
“It was pretty bold of him to go forward,” said Terry O’Loughlin, director of compliance for Reynolds & Reynolds.
Everybody by now has heard how millennials are different than the generations that came before them.
They grew up with cell phones and shelves full of participation trophies. They were both more exposed to the world through social media and more sheltered thanks to their helicopter parents.
So how are dealers supposed to manage today’s employees? Do they need to replace all their desks with foosball tables and all the chairs with beanbags?
Chuck Bonanno, national director of Twenty Group operations for the National Independent Automobile Dealers Association, said millennial employees definitely differ from older employees.
“It’s a different set of values as far as what’s important,” Bonanno said.
He said millennials are very intelligent and connected to the world. But they want more of a work-life balance.
“We need to understand what are the incentives that are going to make them happy, what is the culture that is going to make them happy,” Bonanno said. “It is our future. We can’t fight it.”
Dealers can’t cave on everything, but they need to have some flexibility.
This might mean allowing more telecommuting for non-sales staff. That is something old-school dealers find especially difficult to come to terms with, Bonanno said.
They want to know employees are working, but today’s employee doesn’t like somebody looking over her shoulder.
It’s most important to have transparency for rules such as how employees can use their cell phones at work. Millennials are willing to follow rules, Bonanno said, as long as they understand them.
The interactions between dealers and their young staff need a different approach, as well.
Millennials want constant feedback and coaching rather than training, Bonanno said. And they want re-enforcement along with a paycheck.
They also often value their time more than money. A PwC survey of college graduates finds millennials place flexible working hours ahead of cash bonuses when ranking benefits they want from an employer.
That creates a problem for dealerships used to working 12-hour days and selling a lot of cars on Saturday.
“They’re interested in things we’re not interested in them being interested in,” said Ingram Walters, owner of several dealerships in North Carolina.
“Maybe the way we sell cars is going to change.”
The challenge for dealers is that if they don’t give young employees what they want, other companies will.
Brent Carmichael, a Twenty Group moderator with NCM Associates, said some dealers are finding they need to accept 80 percent from an employee. This means adding more staff than before.
Personnel expenses have gone up a little as they hire more people to do the same job, Carmichael said.
One option many dealers are looking at as a result is investing more in technology rather than people.
Young employees bring opportunities along with challenges.
The most obvious is that they better understand today’s customers.
These customers come to the store with information on all aspects of the process, from vehicle to financing, Walters said. Dealerships will need to set themselves apart by selling an experience as much as a vehicle, Walters said.
“The world of their future is going to be customer service,” he said.
Young employees understand this. They also understand how easily the unsatisfied customers can affect business.
“One voice can impact your business far greater than they ever have before,” said Steve Hall, president of Driversselect in Dallas.
The louder voice of millennials –a combination of attitude, technology and sheer numbers – is the biggest difference from past generations, Hall said.
In the end, much of what millennials want is what older employees have also wanted – more transparency, more work-life balance, etc.
“We’re not going to change it,” Bonanno said. “It’s a shift in society. We’re just going to have to manage.”
More consumers say they are willing to give domestic manufacturers a try and the manufacturers are earning their business with higher quality vehicles.
In a recent Cars.com survey among in-market car shoppers, 25 percent of respondents said would consider buying only from an American manufacturer (compared with 13 percent in 2016), and only 5 percent would consider buying solely from a foreign manufacturer.
"In an era of build-American sentiment, a sizable portion of shoppers still care where their car comes from," said WJoe Wiesenfelder, Cars.com's executive editor.
Of the 25 percent of respondents who consider buying only from American manufacturers, over 50 percent cite support of the local economy and brand loyalty as their primary reasons.
Young people are the most willing to give U.S. manufacturers a chance.
Nearly 30 percent 18-24-year-old respondents would consider buying only from American manufacturers, compared with 21 percent of those who identified themselves as being at least 55 years old.
Part of the relucatance from older buyers might come from past bad expeiences with domestic vehicles. But that is changing.
The domestic manufacturers outperformed import brands for the second year in a row in the J.D. Power Intial Quality Study.
In 2017, domestic brands receive a score of 93 PP100 compared with 99 PP100 for import brands. Last year, domestic brands also had fewer problems (103 PP100) compared with import brands (106 PP100).
In addition, General Motors' Fort Wayne, Ind., plant, which produces the Chevrolet Silverado and GMC Sierra, received the Gold Plant Quality Award for the Americas region.
"The Initial Quality Study continues to demonstrate the critical importance of automakers responding to consumer feedback regarding vehicle quality," said David Sargent, vice president of global automotive at J.D. Power. "Any automaker that stands still will quickly start to fall behind."
Lois Keenan has retired after 43 years with the Virginia Independent Automobile Dealers Association, including 24 years as executive director of the group.
Keenan passed the reins to Leigh Dicks.
Sandra Moss, past president of both the National Independent Automobile Dealers Association and Virginia IADA, praised the work Keenan has done over the years.
“To condense all that Lois has done for and meant to the members of VIADA is a difficult task,” she said. “She has been a leader of the Virginia IADA family for so many years. She handled every issue, every request in her calm lady-like way. She was very adept at handling any situation that might arise.
“Lois has been someone I respected and she will be genuinely missed.”
Keenan said it’s been gratifying to see how members volunteered and stepped up when needed.
“(I’ve enjoyed) seeing our volunteers become confident leaders as they shared their skills to enhance VIADA’s presence,” Keenan said. “I have been blessed being surrounded by those who truly went the extra mile to help VIADA be successful.”
Keenan said one of the biggest challenges was keeping dealers informed of changes in laws and regulations in a timely manner.
“Fortunately we have had knowledgeable employees through the years who had dealership experience, understood the industry lingo, and were qualified to counsel our members,” she said.
Keenan said the growth of technology and regulation were the biggest changes she saw over the years.
Moss said Dicks is a good choice to lead the association.
“I look forward to Leigh Dicks’ leadership,” Moss said.
Dicks has been involved in association management for 27 years and is a Certified Association Executive.
Dicks said she already has ideas for some improvements in the group.
“There are a couple of things when I was hired that I was asked to do – foremost was to improve communications via new technology,” she said.
The association has updated the wiring in its offices to accommodate a new phone system and faster internet access.
Dicks will begin using Constant Contact to send emails to members. This will allow her to keep track of opens and clicks to see what really is of interest to members.
Dicks will also be updating the information in the IADA database so she can begin texting important messages.
Learning a new industry can be challenging, Dicks said. She is doing her homework and also relying on the association’s officers for help.
“They know the industry and can explain the strengths, weaknesses, opportunities and threats they must deal with,” she said.
David Andrews is the incoming president of the National Independent Automobile Dealers Association. Andrews is president of City Auto, with locations in Murfreesboro and Memphis, Tenn., is also chief executive officer of Dealer’s Auto Auction Group. He also owns Pace Financial.
What is your background and how did you get into the automobile business?
I’m a third generation used-car dealer.
I started out working for my dad for a couple of years and I’ve been in business for myself for 45 years. I went in business for myself when I was 20 years old.
We’ve got four independent retail locations and five auction locations. It’s a full-time job. City Auto’s been around since 1986.
I had a business called Andrews Motor Co. – that was the foundation of City Auto. I also was a Ford dealer for 25 years and enjoyed that.
I sold that business in 2005. But I was an independent dealer before I was a Ford dealer.
I got into the auction business by accident.
I made an investment in an auction in November of 2001 as a silent partner. That was Dealers Auto Auction of the South in Mississippi. The business partner had a massive heart attack and called me up and said, ‘I can’t work.’
So then I was in the auction business.
But I always liked the auction business.
In 2004, we bought a second auction in Huntsville, Ala., and we never looked back.
We now have five auctions and we’re still looking.
What kind of model do you have for your dealerships?
We’ve got two different models. We’ve got the model at City Auto, which is like CarMax. We’ve got a big location with a lot of cars.
In Memphis, we keep 1,250 cars and in Murfreesboro, we keep 1,000. Both of those lots are called City Auto. Then we’ve got two other car lots called AutoNext, also in Memphis and Murfreesboro, and they are more like DriveTime.
The Internet has been the biggest change I’ve seen over the years.
If you can’t do business on a smartphone, then you won’t be in business in 10 years.
How can your auction experience help you in leading an association made up of used-car dealers?
I think it’s really simple. It gives you two perspectives into what a dealer needs.
If I were just running an auction business, I wouldn’t know how to run a used-car lot. If I were just running a used-car lot, I wouldn’t know how to run an auction. So it gives you both perspectives.
What are the top issues that you see affecting the used-car business today?
The times are changing and the dealers are going to have to change. People say, ‘Oh, I’ve got a terrible location where I’m at.’ I think, ‘You don’t know what a terrible location is. Come to City Auto where we’re on a dead-end street. You have more traffic at your location on Jan. 1 than we have all year long.’
But we draw people to our business through the Internet.
We do very little TV and no print advertising. We’re all digital. Now, I don’t know where it’s going to be in five years.
But you’re going to have to change with the times.
I’m on an advisory board for Wells Fargo. I did an analysis on what millennials want.
They want the truth, they want transparency and they want it now.
They want to buy a car as fast as you can drive through a Starbucks drive-thru.
If you go to a dealership to buy a car and have to spend eight hours in the dealership, you’ll say you have to go somewhere else to buy a car.
When I talk to my people, I ask them, what are we going to do differently this year?
If they say, we’re going to do the same thing we did last year, I tell them we have to be better than last year.
But it’s hard to get better every year.
It costs money to get better every year. You have to do more training to get better every year.
You don’t want your customers to know more about the car you’re selling than you do.
Also, treat your salespeople like they are part of the family.
Everybody thinks you take care of the customer first. They’ve got it all wrong.
If you take care of your employee first, he’ll take care of your customer.
The used-car industry is seeing more cars coming back from auction due to the leasing boom a few years back. How will this affect independent dealers going forward?
I think it’s going to be great for the car business.
It’s going to depress used car prices and make the price between the new car and used car wider and make those used cars more affordable.
It’s also going to give people a bigger selection.
So we’re going to sell more used cars.
What can NIADA do to help dealers with the increase in regulatory scrutiny?
We try to educate dealers with the Certified Master Dealer program. I’ve got three of my general managers that work for me who have gone through the program.
We also have the National Leadership Conference and Day on the Hill in Washington D.C. each September. Last year we had 200 dealers go up there.
We lobbied Senators and U.S. Representatives against the CFPB.
We also lobbied for the right to sell cars with open recalls on air bags.
Now, with the Day on the Hill, lawmakers know who the NIADA is and what we do. Now they welcome us to get our perspective on different situations.
I think the thing that the government doesn’t realize is when something bad happens, (legislators) pass more laws and regulations.
But we have plenty of laws and regulations if they would just enforce the ones we have.
The NIADA also has lobbyist Sante Esposito, with Federal Advocates, who watches the rules and regulations as they are developed that affects the used car business. So we’re on top of it.
The NIADA also has a PAC fund that gave out about $85,000 in campaign contributions.
We also monitor the state (legislatures). The association does a lot for the used-car business.
UCN:. On the digital side, how is NIADA helping dealers to continue to adapt and get ahead of the curve in digital business?
Andrews: If dealers will show up to our conference in Las Vegas, they’re going to learn everything they want to know about the Internet.
UCN: What would be the most important goal you hope to achieve during your term as NIADA president?
Andrews: We are steadily building a better reputation for the used-car industry. I think it’s at an all-time high. The first (reason is) people are running a better business and doing a better job. But also, if you look around at your communities, independent dealers are involved in so many efforts to help out.
Anything else you’d like to share with our readers?
The NIADA has great leadership under Chief Executive Officer Steve Jordan. I can’t say enough good things about him. He thinks big. We’re moving this association forward. All signs are positive and all lights are green.
I love what I do every day. I was thinking about retiring about a year ago. I was talking to my wife and she said, ‘You know, you could probably find something you like to do.’ Then I thought, why would I want to quit what I love to do to try and find something that I like to do. Right now retirement is not in my future
For all the doom and gloom surrounding the used-car business, several recent indicators show very positive signs.
May’s Manheim Used Vehicle Value reached 127.9, a record high and a 2.8 percent increase from a year ago.
Dealers bought the most vehicles at Manheim for the month of May since 2008.
Cox Automotive economist Jonathan Smoke said consumer demand outpaced the growth in inventory.
“The May index result challenges concerns that increasing wholesale supplies from near peak off-lease volumes and rising rental volumes would lead to rapidly declining used car values,” Smoke said. “Indeed, the opposite appears to be happening. Higher commercial volumes at auction are providing the used vehicle market with quality and choice that offers a compelling value to consumers.”
Consumer demand for used vehicles continues to grow.
A recent study by Autolist finds 38 percent of consumers want to buy their next car used, compared to 34 percent wanting new and 27 percent not sure.
Moreover, 53 percent buyers under 40 want to buy a used car next time around.
The first quarter finance report from Experian Automotive shows more prime consumers are buying used cars.
The average customer credit score for a used vehicle loan rose to 652 in the first quarter from 645 in the first quarter of 2016.
Prime and super-prime risk tiers combined for 47.4 percent market share of used vehicles in the first quarter, up from 43.99 percent in the first quarter of 2016. At the low end of the credit spectrum, subprime and deep-subprime share fell to 31.27 percent from 34.31 percent in the first quarter of 2016.
“The upward shift in used vehicle loan creditworthiness is likely caused by an ample supply of late model used vehicles,” the Experian report states.
“Leasing has been on the rise for the past several years (and is at 31.06 percent of all new vehicle financing today). Many of these leased vehicles have come back to the market as low-mileage used vehicles, perfect for certified pre-owned programs.”
Part of this increase in credit quality comes from tightening at the subprime end of the business.
So far, consumers seem willing to step up and pay more as this happens.
Used-vehicle buyers put down an additional $93 on average in May, an increase of 3.8 percent compared to May of last year. The average loan term, monthly payment and amount financed also rose.
Attendees at this year’s National Alliance of Buy-Here, Pay-Here Dealers heard about all kinds of ways the industry faces changes.
The event itself is about to undergo its biggest change in almost 20 years.
NABD founder Ken Shilson has announced his intention to sell the rights to the event he has been running for 19 years.
Shilson turned 68 in January. He said it was time to step back from the pressures of putting on the conference.
“I can’t do it forever,” he said. “The day-to-day management is getting to be more than a 68-year-old can handle.”
Shilson plans on turning the NABD over to an experienced event management firm. His main condition is that NABD be maintained as a unique event.
Shilson said he would seek input from attendees on how the NABD should move for- ward under new management.
Shilson is stepping back at a time of tremendous challenge and change for the industry.
Benchmarks for the buy-here, pay-here business are the worst in two decades, and could get even worse, Shilson said.
Buy-here, pay-here dealers today face an array of challenges, including increased regulations, changes in accounting practices, higher inventory costs and increased com- petition.
“You just need to be a better operator these days,” Shilson said.
The NABD benchmarks show that gross profit has declined to 29 percent of vehicle sales from 31 percent last year.
Bad debts as a percentage of sales have grown to 27 percent from 25 percent last year.
Shilson said the answer isn’t to try growing out of the situation.
Too many dealers have already taken on extra debt, with total debt growing to 62 percent of total as- sets from 56 percent last year. he said.
The better solution is to make operations more efficient.
Buy-here, pay-here dealers are also experiencing a massive change to the rhythm of their business.
Bill Neylan, president of TRS Tax Services, said they warned dealers last year that changes to federal law would squeeze tax season into two weeks.
Instead, it wound up being two days – Feb. 21 and 22.
Neylan said one of the stores he works with printed $1 million worth of refund checks in one day.
“It’s impossible to capture two months of sales in two days,” Neylan said.
He said one of his local dealers had 100 cars on his lot in January. By April, the store was closed.
Dealers need to prepare for this new normal, Neylan said.
Memorial Day might not be enough to stop the slide in new-car sales.
"Generous incentives are keeping traffic flowing to dealer lots, but a lot is riding on Memorial Day sales for automakers to keep momentum strong through the critical summer selling months," said Edmunds executive director of industry analysis Jessica Caldwell.
The new vehicle retail sales pace in 2017 is expected to be lowest for the month of May since 2013, according to a forecast developed jointly by J.D. Power and LMC Automotive.
"While consumers will see substantial discounts this Memorial Day weekend, they are not expected to overcome the slowing demand in auto sales," said Deirdre Borrego, senior vice president of automotive data and analytics at J.D. Power. "The holiday weekend is one of the heaviest trafficked car-buying periods and, in 2016, the Friday-Monday selling period accounted for more than 20% of May retail sales."
With one additional selling day in 2017, retail sales in May are anticipated to reach 1,222,000 units, a 2.9% decrease compared with May 2016 on a selling-day-adjusted basis. The seasonally adjusted annualized rate (SAAR) for retail sales in May is expected to be 13.4 million units, a decrease of 212,000 units from a year ago.
With the slowdown expected to continue in the second half of the year, LMC Automotive is reducing its retail light-vehicle sales forecast for 2017 to 13.9 million units.
Yet again, there is a clear divide in the market between cars and light trucks, and in May, Kelley Blue book anticipates the sales mix of cars to reach 38 percent, down 3 percent year-over-year. While SUV segments continue to see the most significant gains, full-size trucks are expected to increase market share by 0.5 percent in May, though deeper discounts and incentives are partially responsible for the growth.
"Consumers are continuing to defect from the mid-size car segment at a rapid pace," said Kelley analyst Tim Fleming. "Most commonly, they are turning to the compact SUV/crossover segment. As such, Kelley Blue Book expects mid-size cars to lose more than one point of share in May, while compact SUVs are expected to pick up nearly one point of share."
Kelley Blue Book reports that General Motors is poised to gain market share in May with growth driven by its SUVs, specifically the new GMC Acadia and Buick Envision. In fact, GM could see its SUV sales volume increase by more than 15 percent, which would offset any potential declines from its car and pickup truck models.
Hyundai-Kia could see one of the largest declines in May, with volume expected to drop more than 4 percent year-over-year. The company still faces challenges regarding the shifting demand toward SUVs, and compared to the other major manufacturers, Hyundai-Kia has the highest sales mix of cars at 69 percent, while the industry average sits at 37 percent.