Plan Ahead Before Bidding

You may avoid paying sales tax if you ship the car by common carrier to a non-sales-tax state

“Legal Files” had a great time at the Scottsdale, AZ, kick-start to the 2011 auction season. Auctions are a popular place to buy your collector car. But to ensure that you are as happy when you get the car in your garage as you were when you were bidding, there are quite a few details that need to be thought through ahead of time.

Condition and authenticity

Above all else, be sure that the car you’re buying really is what you think it is. Many cars are easy to fake. A Pontiac LeMans or a base Chevrolet Camaro can easily be cloned into a GTO or a Z/28 and then passed off as the real thing. A beautiful car can have a very poor transmission or an engine cobbled together out of odd parts that will last until the first time it reaches redline. If you become the victim of such a fraud, what is your recourse?

It’s very tempting to think that the auction company has taken care of all that for you, but that really is not the case. If something goes wrong, your legal recourse against the auction company can be limited. The auction company acts as a seller’s agent, and its job is to sell the car. To do so, it obtains information from the seller and passes it on to bidders—with inconsistent degrees of independent verification.

Of course, every auction company has ample reason to make sure that all cars offered for sale are authentic and properly represented, as they all want their buyers to be repeat customers. But before getting complacent about the auction company’s investigations, consider this language that comes from one auction company’s bidder contract (all auction company contracts work pretty much the same way):

Each Lot is sold “AS IS-WHERE IS”, with all faults and defects, and with all errors of description. Buyer understands that (i) any and all information concerning any Lot is provided by Seller; (ii) Auction Company does not make any representations or express any opinions of its own concerning any Lot; and (iii) Auction Company does not examine any Lot or any component of any Lot, research the title documents or the provenance of the Lot or verify any information provided by Seller, nor does Auction Company undertake any duty to do any of the foregoing for the benefit of Buyer or anyone else.

This statement is really an economically necessary legal position for the auction companies to take. In fact, they are not in the verification business, they are in the selling business. Lawyers can debate how far such contract provisions will really go, but a word to the wise—when the legal situation is something that “lawyers can debate about,” that means finding out the limits of a contract is going to be very expensive for you.

If the seller’s information is wrong, and you can’t negotiate the voluntary unwinding of the deal, your best recourse is probably to sue the seller for the misrepresentation. That presents several legal difficulties:

• The lawsuit would have to be filed either in the state where the auction was held or the state of the seller’s residence. You won’t necessarily be on your home turf.
• You have no idea about the seller’s financial condition. If the money you paid went to pay off other creditors, the seller might not be able to pay any judgment you receive.
• You can get caught in the middle if the seller claims that the auction company said different things about the car than he told them.

It is far better to spend the necessary time to inspect and verify the car before it goes on the auction block. Talk to the owner; have him start the car and test drive it if possible. Carefully review the car’s auction catalog description, documentation and service records, and assume the worst if any of that is missing. Assume the worst if any little questionable things about the car pop out. Finally, have someone who knows the model, preferably a professional, help you with the inspection and investigation.

Insurance

There’s an old adage about auctions: The title passes when the hammer falls. And so does risk of loss.

Say the worst happens. You’re the successful bidder. After taking care of the final financial details, you jump into your new acquisition and set off on a celebratory test drive. A half mile away, an uninsured drunk driver runs a red light and crashes into you, causing severe damage to your new car. Once the shock subsides, you start to wonder, “Am I covered?”

Most consumer auto policies provide automatic coverage for newly-acquired cars, usually for 30 days before they must be formally added to your policy. But when you submit your claim on your just-purchased $170,000 1973 246 GTS Dino Spyder, is your carrier going to know what to do with it? When they authorize the repair and repaint of the damaged corner of the car, are they going to paint the entire car to match or simply tell you, “Hey, it’s a 38-year-old car. How can you expect the paint to match?”

Fortunately, collector car policies can provide the same automatic coverage. According to Jim Fiske, U.S. Marketing Manager for Chubb Personal Insurance, new collector car purchases automatically get coverage under their policy for 30 days.

Since their policies are typically agreed-value policies, what if you paid too much for the car, like the $1,375,000 paid for the 1955 Mercedes Benz 300SL Gullwing at RM’s 2011 Phoenix auction?

Fiske chuckled, “There is no such thing as a stupid exclusion. Chubb would simply accept the bid as reflecting the market value of that car on that day.”

“Legal Files” has often counseled that collector car policies usually provide more effective coverage because the carriers are much more familiar with the peculiarities of collector cars and can handle claims more effectively. If you’re going to buy a collector car at auction, and you don’t already have a relationship with a collector car insurance company, or another collector car insured, having a specialized collector car policy in place beforehand would be a good move.

Sales tax

In many, if not most, states, the rule is that if you drive your car away from the auction site, you have to pay sales tax. And auction companies are typically required to charge the tax to you as part of the sale.

Some states have reciprocity arrangements with others, and let your home state impose the tax. Some charge a lower rate of sales tax if you are subject to sales (or use) tax in your home state—but that is still a significantly higher combined rate.

The most common exception allows you to avoid sales tax altogether when you ship the car by common carrier, without driving it, to a state that does not impose a sales tax. For example, you live in California and you buy a Ferrari Daytona Spyder in Scottsdale for $1m. If you drive it home, your sales tax cost is going to be in the $100,000 range. Instead, you can hire one of the professional collector car transport companies to haul the Ferrari to Oregon, a no-sales-tax state, for about $2,000 to $3,000, and you take delivery of it there. But now you have a home in California, and a car in Oregon.

Title and taxes

Getting the car out of Arizona is only the first step. Now, you have to title the car, and your home state is going to levy a use tax when you do that.

“Legal Files” has written about this before, but there are legitimate approaches to titling the car outside your home state. One useful approach is to leave the car in Oregon and title it there at a cost of around $140 for two years. Another is to form a Montana LLC to own the car, and title it there for a similarly nominal amount.

Both approaches have their pros and cons, but they are both superior to the approach of getting yourself licensed as a dealer. Dealers don’t have to pay sales tax on cars they buy for resale. But that makes the car inventory and, when you later resell it at a profit, the gain is taxed as ordinary income rather than as a capital gain. That can mean a 35% federal tax as compared to a 15% federal tax, making this approach penny wise and pound foolish.

We don’t have space to delve into all the sales tax details this month, but let’s get back to the auction. Once you buy your car, the auction company wants to know who will get the title for the car—and which state will get the title documents. The auction company has a lot of other cars to deal with at the same time, and they can’t release the car to you until these details are worked out. So, this is not the best time to tell them to sit tight, and you’ll get back to them in a week or so after you’ve had a chance to get some legal advice.

The best plan is to have all this worked out ahead of time. Knowing who the buyer is going to be, having the entity formed ahead of time, and having a storage facility already lined up for the car will make the entire administrative process go much smoother.

That, along with being comfortable with the claimed identity of the car and its condition, will go a long way towards letting you enjoy your new prize, rather than wishing you had attended to some of these details before you started waving your paddle.