What’s Your Best Price?

According to a recent study by JD Power, customers visit an average of 1.4 dealerships before purchasing a vehicle.  As recent as 2005, consumers visited 4.5 dealerships before purchasing.  By using the internet to gather information, customers are significantly narrowing the list of potential vehicles they wish to purchase prior to visiting dealerships.  Before online advertising, dealers often advertised a limited number of vehicles in print, on the radio, or on television.  Now, it is common for dealerships to advertise their entire inventory on their own websites, as well as inventory aggregation websites such as Cars.com or Autotrader.  This leads to higher occurrences of pricing errors and disputes arising from selling a vehicle for a price higher than the price advertised online.

The Federal Trade Commission (“FTC”) recently revised the .com Disclosures, which offer businesses guidance on what types of disclosures businesses should include in their online advertisements to avoid claims of unfair and deceptive practices.  Disclosures should be “clear and conspicuous,” and placed in close proximity to pricing information or triggering terms such as APR, lease payments, and down payments.  If a vehicle is priced incorrectly, a consumer may claim that the dealership’s refusal to honor the posted price constitutes a deceptive practice.  Your goal should be to minimize errors occurring, and promptly correcting any errors you find.  If you fail to do so, consumers may claim that these errors are endemic of the dealership’s deceptive practices.

If you decide to offer “internet only” pricing, you will have to make additional disclosures in your online advertisements.  First, your disclosure should state that the price is only available if the consumer produces something, like a printout of the vehicle display page from your website or the inventory aggregation website.  Also consider excluding prior sales, in case a customer purchases a vehicle and later checks your listings to see what the price posted online is.  If you do not, your failure to honor the advertised price may be deceptive.  This disclosure must be on each vehicle display page, and not only at the bottom of your website’s home page or each department’s webpage.  Your pricing online should be realistic; a customer should be able to purchase the vehicle at the advertised price without making additional down payments, having a particular FICO score, financing the purchase through your dealership, or qualifying for rebates that are not available to all customers.  Remember, if you provide an inventory feed to a third party website, you will be responsible for errors on the third party’s website.  You should review each website to determine whether the disclosures are compliant.

Failure To Protect Data May Violate The FTC Act

The Federal Trade Commission (“FTC”) has recently targeted dealers whose advertisements are deceptive or who engaged in unfair trade practices.  Because businesses from different industries may conduct their affairs in a similar fashion, it is important to monitor actions brought by the FTC against other businesses.  A recent enforcement action initiated by the FTC against a medical billing company may have a profound impact on automobile dealers.

Accretive Health, Inc. (“Accretive”), provides medical billing and revenue management services to medical providers throughout the United States.  Because of the services it provides, Accretive collects significant amounts of nonpublic personal information on patients.  This information includes social security numbers, dates of birth, billing information, and medical records.  The laptop of an employee of Accretive was stolen from the employee’s car.  The laptop contained twenty million pieces of information on twenty three thousand patients.  The FTC alleged in its complaint that Accretive’s practices were inadequate to safeguard against these kinds of thefts, and placed patients’ information at considerable risk.  Citing Section 5(a) of the FTC Act, which prohibits “unfair or deceptive acts or practices in or affecting commerce,” the FTC claimed that Accretive’s practices likely caused “substantial injury to consumers that is not offset by countervailing benefits” and “is not reasonably avoidable by consumers.”

With the popularity of “Bring Your Own Device,” it is easy to imagine a situation where a dealership’s data is compromised in a similar manner as Accretive’s.  For example, suppose your employees use their personal smartphones or laptops to access your DMS or CRM.  The theft of a smartphone or laptop could allow an unauthorized individual access to consumers’ nonpublic personal information.  Without processes in place to safeguard consumers’ data, dealers may face liability for violating several laws, including the FTC Act.

Many dealers are aware of their responsibilities to protect nonpublic personal information from theft or other loss.  The Safeguards Rule of the Gramm-Leach-Bliley Act requires dealers to implement processes to safeguard consumers’ information, and make modifications to their processes that are necessary to protect this information.  The Red Flags Rule requires dealers to implement and maintain processes to detect identity theft, and make any changes required to improve the efficacy of the processes.  Each of these laws has its own enforcement mechanisms and civil penalties.  Now, the FTC appears willing to interpret Section 5 of the FTC Act to include data losses, under certain circumstances, as deceptive practices.  Unfortunately for dealers, this means that a data loss may trigger liability under the FTC Act, in addition to any liability under the Safeguards Rule or Red Flags Rule.

FTC’s “Operation Steer Clear” Targets Auto Dealers’ Deceptive Trade Practices

On January 9, 2013 the Federal Trade Commission (“FTC”) announced enforcement actions against nine automobile dealerships over allegations of deceptive and unfair trade practices.  The FTC alleged that these dealers violated the FTC Act, which prohibits businesses from making false or misleading statements regarding products and services.  The complaints filed by the FTC also included allegations that the dealers violated the Consumer Leasing Act and the Truth in Lending Act by failing to disclose fees, interest rates, and other credit related terms.

Of particular interest is the FTC’s complaint involving a dealer’s advertisement of a purchase price reduced by a down payment.  For example, the dealership advertised a 2008 Chevrolet Tahoe for $17,995 and included in the disclosure that the price was “after $5000 down.”  Even though the advertisement disclosed that the price was conditioned upon the consumer making a down payment of $5000, the FTC alleged that the advertisement was deceptive because the vehicles “are not available for purchase at the prices prominently advertised” since consumers “must pay an additional $5000 to purchase the advertised vehicle.”  Based on anecdotal observation, this practice is far more common than many dealers may believe.

Dealers should closely review their own advertisements to see whether they may be deemed deceptive.  If you have advertisements that show a price contingent upon making a down payment, you should  avoid making these kinds of offers.  If you advertise lease or installment payments, you must make sure that you properly disclose any “trigger terms,” such as APR, duration of the loan, and any additional fees associated with the purchase or lease.  Payments that are “No Money Down” must really be no money down.  If the consumer must pay more to obtain the advertised payment or price, then the offer may be deceptive.

Auto Dealer Indicted For Illegally Structuring Cash Transactions

On June 13, 2013 a federal grand jury charged a dealer in Ohio with illegally structuring bank deposits to avoid IRS reporting requirements.  The 26-count indictment alleges that the dealer “made multiple cash deposits in amounts less than $10,000 on the same day or consecutive days” in order to avoid filing a Form 8300.  The dealer faces penalties of up to five years in prison for each count, while the business faces penalties up to $50,000 for each count.

This case illustrates that the authorities remain vigilant in monitoring cash transactions and prosecuting individuals and businesses that violate reporting requirements.  You should take cash reporting requirements seriously, and establish safeguards so that your employees will not only report cash transactions that exceed $10,000, but also detect efforts by others to avoid reporting requirements by making several smaller cash transactions.  Here are several things to remember when evaluating your dealership’s cash reporting processes:

  • Report cash down payments on retail installment sale contracts and lease agreements:  Many people incorrectly believe that a business does not have to report cash down payments made as part of a retail installment purchase or lease.  The IRS penalizes many businesses that fail to report cash amounts included in down payments that exceed reporting requirements.  Avoid these penalties by reporting cash and cash equivalent amounts above the reporting threshold used as down payments on installment purchases and leases.
  • Add up the cash equivalents and report:  Businesses often ask if they have to report consumers that use a combination of cash and cash equivalents, or a variety of cash equivalents, that, when combined, exceeds $10,000.  The answer is that you should report these transactions.  Remember, the IRS considers forms of payment such as cashier’s checks, traveler’s checks, and money orders as equivalent to cash.  So, if you have a combination of cash and cash equivalents, or no cash but an assortment of cash equivalents, that exceed $10,000, report this transaction to the IRS.
  • Your accounting office should not be only department responsible for compliance:  The accounting office will need the help of your sales staff to report cash and cash equivalents on the Form 8300.  For example, the Form 8300 asks the identity of a person in addition to the buyer who provides cash.  The accounting office may not have this information if it is not gathered by the sales staff at the time of the sale.
  • Don’t delay in notifying consumers that you filed a Form 8300 with the IRS:  While the law allows businesses to wait until next January to notify consumers of the Form 8300 filing, you should try to notify the consumer sooner.  The earlier you send the notification, the earlier you may be alerted to suspicious activity by the consumer, like providing the wrong mailing address to your staff.
  • Cash transactions involving $10,000 are not as rare as they used to be:  As vehicles have become more expensive, transactions involving amounts greater than $10,000 are more common.  As these transactions become more commonplace, your staff may become complacent.  Check with your DMS to see what reporting you can create that identifies transactions that you should report so you can create another safeguard should employees miss a transaction.
  • Know all of your customers, not just the ones that trigger cash reporting requirements:  The United States Criminal Code, and most state criminal codes, prohibits transactions where the business knows, or should know, that funds used in the sale came from criminal activity.  If you have reason to believe a consumer or your employees structured a deal to avoid cash reporting requirements, you should report such activity to the authorities, even when the transaction ultimately does not occur.

 

There are many factors to consider when setting up a legal entity. This article does a nice job answering some common questions that those setting up businesses ask.