Installment Sales Program

Major Manufacturer (MM): Installment Sales Program.

Brief Overview

The MM Tax attorneys had determined MM could defer revenue recognition of the sale of equipment to dealers by restructuring the sale as an installment sale. MM had been providing reimbursement of floor plan interest to the dealers for years. With the deferral of revenue, MM’s taxes paid could be deferred significantly. To qualify as an installment sale at least 10% of the proceeds must be received 30 days after the initial installment payment.  It was also perceived that if MM could make it lucrative enough for the dealers, their Captive Finance Company (CFC) could increase its market share into the MM’s dealer base because this program would only be offered through CFC. It should be noted that there is potential to further delay the revenue recognition to the ultimate payment by the customer if the loan or lease is done through a captive finance company. Before implementing such a program, financing should be taken into consideration since a securitization may constitute a sale and accelerate revenue recognition.

 

Situation

MM wanted to take advantage of the tax savings from installment sale but did not want to take the risk that the dealers would not pay the 2nd installment. As a result it was decided to establish a system that would allow the dealer to pay the entire invoice at the time of sale, but 10% would be placed in a Cash Management Account (CMA) and would pay interest, which would be free money to the dealer. Once the 30 days required to satisfy the tax rules had expired, the 10% would be withdrawn from the CMA account and paid to MM. MM needed a systems, processes and procedures to implement this tax initiative. Since the receivables would be held on CFC’s books the accounting system would need to be modified.

 

Why Goff Associates, Inc. (GAI)

GAI has substantial experience in tax, accounting, systems, processes, procedures and policies.

 

Results

Working with a team of tax attorneys, accounts, and operational personnel, the team developed the processes and procedures that would be required to implement this system. GAI developed a system that would extract the floor plan payoffs from the accounting system and restructure them as a 90% payment to MM and 10% deposit into the CMA account. The CMA account would pay interest to the dealer at a money market rate. After 30 days, the 10% payment would be withdrawn from the CMA account and paid to MM.

 

This program successfully deferred MM Sales for an average of 60 days and increased CFC’s market penetration. The program was so successful that dealers wanted to place additional funds into the account.

 

A problem arose after the program was implemented. It seems that since CFC is not a bank, it could not legally hold deposits in CMA accounts for its dealers. GAI was brought back in to solve this problem. By designing a system that simply recast all payments into the CMA accounts as payments and withdrawals from the dealer’s floor loans, MM avoided any legal ramifications with the program. This problem could be solved today by a CFC acquiring a bank.

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