New EV tax credits raise fear of a ‘messy scenario’ in dealers’ showrooms

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WASHINGTON — With the transition to a new, tougher-to-meet — and “incredibly confusing,” as one dealer put it — tax credit for electric vehicles starting this week, some U.S. auto retailers are left scratching their heads as they wait for more guidance from automakers and the federal government.

President Joe Biden on Tuesday signed the Inflation Reduction Act into law, triggering a shift from the old $7,500 EV tax credit to a new, more complicated one designed to incentivize domestic EV production, reduce reliance on foreign supply chains and prevent wealthy buyers from getting a discount.

As of the bill’s signing, eligible EVs must be assembled in North America. New restrictions on sticker price, buyer income and battery component and critical mineral sourcing take effect Jan. 1.

While automakers consider reshaping their EV supply chains to meet the increasingly stringent sourcing rules, dealers — some remaining hopeful, but many discouraged by the credit’s arduous constraints — are unsure of how the new credit will work in their showrooms and are concerned by how the complex eligibility requirements will affect their customer relationships.

“It just creates a lot of confusion that we have to try to explain when it should have just been simple and straightforward,” said Cody Lusk, CEO of the American International Automobile Dealers Association.

Lusk, whose group represents more than 9,000 international nameplate dealers in the U.S., said few vehicles will qualify for the credit through the end of the year — and dealers are going to be tasked with explaining the eligibility nuances to customers.

“This creates a messy scenario on the showroom [floor], for dealers and customers, because customers think that this is going to be provided to them by the federal government,” he told Automotive News. “In reality, it isn’t going to be for a while — if at all.”

To be sure, the Biden administration said about 20 models meet the North American final assembly requirement and therefore still qualify for EV tax credits of up to $7,500 until the end of the year. However, none will be eligible for the full credit when additional sourcing rules take effect next year, according to the Alliance for Automotive Innovation, an industry trade group that represents most major automakers in the U.S.

The National Automobile Dealers Association said it supports several of the new provisions in the Inflation Reduction Act, including an expansion of the tax credit to allow fuel cell vehicles to qualify and the elimination of the 200,000-vehicle-per-manufacturer cap.

Under the new law, consumers can claim the EV tax credit on the purchasing year’s tax returns when filed or, starting in 2024, the credit can be transferred to the dealer at the point of sale.

Automakers will provide the VINs and their related eligibility, “allowing dealers to explain that vehicle eligibility was determined by Congress,” NADA said in a statement. “As with any revamped program, there will be a transitional period in the short term.”

Michelle Primm, managing partner at Cascade Auto Group, operating Mazda, Audi and Subaru dealerships in Cuyahoga Falls, Ohio, said the changes are challenging and don’t move the U.S. closer to reaching the administration’s climate goals, but instead “take us a step back.”

“These new credits — or the lack of credits — are incredibly confusing from the dealer perspective,” she said. “I can’t imagine consumers who want to buy an EV trying to navigate them on their own.”

Honda dealer Bill Feinstein said that while he was hoping for a broader-based consumer incentive, it’s less impactful for his stores in the near term.

“Our first [battery-electric vehicle] doesn’t come to market until 2024 with the Honda Prologue, so it’s a little bit of a wait-and-see for Honda,” said Feinstein, who is president of Planet Honda in Tilton, N.H., and general manager of Planet Honda in Union, N.J.

The longer wait may be an advantage for Honda, he added, allowing the automaker more time to adjust its supply chain to get the credits.

“The question is: If you don’t have the tax credits, will the EV still sell? Will customers still buy it?” asked Feinstein. “It could slow adaptation if most of the vehicles don’t qualify because there still is a tremendous disparity in price between your ICE vehicle and your typical BEV.”

Tim Jackson, CEO of the Colorado Automobile Dealers Association, said the new credit could “stir a lot of turmoil in the marketplace” for automakers and dealers, along with consumers who were considering EVs and anticipating the $7,500 incentive under the old program.

“Some of those customers will stay in the pipeline, and some won’t,” he said. “But it does create a lot of churn and I’m sure will create a lot of frustration.”

Before Biden’s signing, Toyota dealer Doug Eroh said his store contacted customers who were waiting for an EV to make sure they had the proper order documentation to see whether they would still qualify for the previous credit.

“We’re still learning that, to a degree,” said Eroh, president of Longo Toyota in El Monte, Calif., the nation’s largest Toyota dealership by volume. “Ultimately, we don’t build a business strategy or plan around tax credits.”

EVs eligible for the previous tax credit made up roughly 3 to 4 percent of the store’s business monthly, he noted.

“Is demand going to fall off?” Eroh asked. “It’s too soon to tell what the new legislation and the restrictions on content and assembly will do to that demand.”

California dealers such as Eroh at least have the advantage of experience navigating complex tax credits and rebates at the state level, according to Brian Maas, president of the California New Car Dealers Association.

“We have lots of credits on the hood for vehicles in California,” he explained. “We’ve also had MSRP caps and income caps, depending on which credit you’re talking about, so we’re used to trying to administer those things and helping consumers navigate.”

Following the bill’s signing, the IRS issued preliminary guidance on the transition from the old credit to the revamped one.

EV buyers can still qualify for the previous $7,500 tax credit — with no restrictions on price, income, battery content or final assembly — if they had written binding contracts to purchase a qualifying vehicle before the date of Biden’s signing, according to the agency.

“For example, if a customer has made a nonrefundable deposit or down payment of 5 percent of the total contract price, it is an indication of a binding contract,” the IRS said.

While the agency plans to post more information and request comments from the public “in the coming weeks and months,” several dealers said more guidance is needed now.

Acura dealer John Connelly said many retailers have customers put down deposits for new vehicles still on order because of low inventories and production delays caused by the chip shortage.

But for EVs eligible for the old tax credit, “that’s where the confusion lies,” he said. “Is that person who bought in that time period, are they contracted for that vehicle, or did they just simply get a spot in line?”

Connelly, who is also AIADA’s 2022 chairman, said some automakers have come up with a standard form that they’re hopeful will be enough for the federal government to grandfather in certain customers waiting for the tax credit. “But I don’t think anybody knows the definite answer if that will hold up or not,” he noted.

Without further clarification, he’s worried it will cause confusion for customers. “And the last thing that a dealer wants is the customer to feel as though they’re not being treated transparently,” Connelly said.

The new credit’s complex rules will increase the need for different shopping tools provided by automakers and other third-party sites that let customers know their own eligibility and vehicle eligibility upfront, said Chris Sutton, vice president of automotive retail at J.D. Power.

“That’s important for retailers,” he said. “They don’t want to be in a position to tell customers no. They want to be able to say yes and help the customer buy the vehicle they want.”

In the meantime, dealers are going to be “extraordinarily dependent” on their automakers and dealer associations to educate them on the new credit’s intricacies and how to simplify it for consumers, said Don Hall, CEO of the Virginia Automobile Dealers Association.

“This is something car dealers have to understand: Until the OEMs decide it’s no longer the direction we’re going in, you are on that electric train, and there is no getting off of it unless you’re going to sell your business and get out of it,” Hall said. “So embrace it, understand it, and make sure you understand what people qualify for.”