Dealers fear Cash for Clunkers scenario as EV credit transfer nears

WASHINGTON — As car dealers anxiously await details on how tax credits will be applied to eligible electric vehicles at the point of sale as soon as Jan. 1, some are worried about a Cash for Clunkers scenario that could leave them footing the bill for several months.

Starting in 2024, eligible EV buyers will be able to transfer federal tax credits to dealers and use those funds as a down payment. The credit transfer is allowed under the Inflation Reduction Act's Section 30D credit for new EV purchases and Section 25E credit for used EVs, which provide consumers with up to $7,500 and $4,000, respectively, if certain requirements are met.

The U.S. Treasury Department said participating dealers will be able to register via an online IRS portal in the next few months. In January, those dealers will be able to submit EV sales information to the IRS and "promptly receive payments for transferred credits," Lily Batchelder, assistant secretary for tax policy, told reporters this month.

While many of the finer details are still to come, several dealers told Automotive News they are concerned about how seamlessly the process will play out on their showroom floors and how soon they will be reimbursed by the government.

"History would tell us we have a lot to be nervous about," said Tyler Slade, operating partner at Tim Dahle Nissan Southtowne in suburban Salt Lake City.

While applying the credit to a vehicle at the point of sale — or cash on the hood — is the "optimal situation," it puts more burden on the dealerships, Slade said.

"You're going to have plenty of dealers that aren't going to be comfortable with that risk … waiting for the government to pay, much like Cash for Clunkers," he said.

"It makes a lot of people nervous because that money can stack up really quickly."

Ohio dealer Michelle Primm recalled waiting a month to receive a direct deposit from the government once a "Clunker" deal was approved. Others weren't as lucky.

"There are horror stories out there that dealers didn't get paid for six months," said Primm, managing partner at Cascade Auto Group, which operates Audi, Mazda and Subaru dealerships in Cuyahoga Falls.

For the EV tax credits, Primm wants to see dealers reimbursed in a "timely manner," ideally no longer than a month — but the sooner, the better.

"Car dealers are asset rich and cash poor. Cash flow is something we look at every single day in a car dealership," she said. "What if that $200,000 the government owes me is the same time I have a big payroll, and I have floorplan to pay off and, oh, it's tax time? All of a sudden, the dealer is in a cash crunch."

Mike DeSilva, owner of Liberty Auto Group, which has three stores in New Jersey and sells vehicles from Genesis, Hyundai, Kia and Subaru, said he'd like to see reimbursement within 48 hours — but he's also realistic.

"A fair repayment time would be within five to seven days," he said. "Once it starts to be any longer than that, dealers will be less likely to lay out the money and wait for it. … We don't want to see a repeat of Cash for Clunkers."

To be sure, the federal government was under intense pressure in 2009 to quickly set up the nearly $3 billion federal scrappage program — officially named the Car Allowance Rebate System — to boost new-car sales and stimulate the economy in the wake of the Great Recession.

The program gave consumers as much as $4,500 to trade in old gas guzzlers for more fuel-efficient new vehicles, though the strategy wasn't without its problems.

"The downside, of course, was dealers didn't get paid very fast, and the reimbursement process was a little clunky," said Brian Maas, president of the California New Car Dealers Association. "But all in all, it did move a lot of metal, and that was a good thing, and I think the goal of all these [Inflation Reduction Act] credits is to move EVs."

With fewer vehicles eligible — given both the new- and used-EV credits' intricate rules — it's unlikely dealers will see as much volume, at least in the near term, said Adam Neporadny, managing director in the national tax professional standards group at Forvis.

"There won't be as much free cash flow involved with this program, but obviously the dealer is going to feel better the faster the IRS is able to reimburse them for the credit amount."

Meanwhile, the American International Automobile Dealers Association, or AIADA, is working to ensure the point-of-sale transaction is "as streamlined as possible."

"Americans need to understand and have access to the EV credit program, and dealers deserve to be confident that they will be reimbursed swiftly and accurately by the government," AIADA CEO Cody Lusk said.

"We are working to avoid the kind of confusion experienced during Cash for Clunkers, but policymakers also need to recognize that this is a very different situation with a different level of demand."

Franchised dealers also have the support of the National Automobile Dealers Association, which has reached out to the Treasury regarding the credit transfer's implementation and has been holding regular meetings with department officials.

"NADA's focus has been on communicating to the administration what is going to be really necessary to lead to a successful implementation of the statute, and what we are stressing is the need for all parties to have a workable, repeatable, standard operating procedure and to avoid scenarios that could lead to confusion or ambiguity," NADA spokesperson Jared Allen said in a statement.

NADA's priorities for a successful implementation include a seamless and simple dealer registration process, ease and repeatability of notices and forms that must be submitted to the vehicle buyer and the IRS, and an efficient funding portal for dealer reimbursement.

As part of the effort, the association also identified some dealers to participate in focus groups, which included sharing input on a mock-up website for dealer registration and other procedures.

Primm said one of her employees — an office manager who used to stay up until 2 a.m. to submit Cash for Clunkers claims to the government because the website was so bogged down during normal working hours — participated in one of the groups.

"There is a way this can be successful, but everybody has to do their part," she said.

"We have to make it easy for the customer and the dealership frontline staff to understand the credits, and the government has to come up with a website that works, and then they've got to pay us in a timely manner.

"If all those things happen, that's a success."