Did Autobytel Forget To Pay Sales Tax?

| About: Autobytel Inc. (ABTL)

In my last article, I described how the management of Autobytel (NASDAQ:ABTL) has been misleading investors into believing that all or most of the purchase requests that Autobytel sells to dealers originate from Autobytel websites. Since then, PricewaterhouseCoopers ("PwC") has resigned as the independent registered public accounting firm for the Company effective at the end of this quarter. PwC did not give any reason for their resignation.

The Sarbanes-Oxley Act requires public accounting firms such as PwC to register with the Public Company Accounting Oversight Board ("PCAOB") in order to conduct public company audits. If The PCAOB determines that PwC participated in violations of the Sarbanes-Oxley act, federal securities laws, or applicable professional standards, the PCAOB may discipline PwC. The PCAOB has a full range of sanctions at its disposal, including suspension or revocation of registration, censure and significant fines.

If it was determined that Autobytel violated federal securities laws while PwC was the company auditor, PwC could have their registration revoked by the PCAOB. In this case PwC would not be able to audit public companies and could go the way of Arthur Anderson. In light of this, PwC has much more at stake than Autobytel. It is not a surprise that PwC resigned as the independent registered public accounting firm for Autobytel.

Sales Tax

I spoke to a number of automobile dealers. In the industry, a purchase request is called a "lead". The automobile dealers that I spoke to stated that they are very frustrated with theft in the leads industry and that Autobytel does not collect and pay sales tax on the leads that Autobytel sells to dealers. As a result, Autobytel is in violation of California State sales and use tax laws and possibly the sales and use tax laws of other States. (I only researched California law.)

The Autobytel business model is very simple and works as follows:

1) Third party websites like CarsBelowInvoice.com collect contact information from consumers who request a price quote for an automobile. In the industry this is called a "lead" and consists of the consumer's name, phone number and email address.

2) The lead is sold to Autobytel for about $5, where it is matched with a dealer in the area of the consumer.

3) Autobytel sells the lead for about $20 to the local dealer, who contacts the consumer. Autobytel includes a printed copy of the leads in the form of back-up sheets with their invoice to the dealer.

I spoke with a Tax Auditor at the California State Board of Equalization. He stated that the publication "109 – Are your Internet Sales Taxable?" applies to Autobytel. He also stated that Autobytel is responsible for collecting and paying sales tax because Autobytel provides a hard copy of all the leads as back-up to their invoices.

Following is an excerpt from that publication:

However, if as part of the sale you provide your customers with a printed copy of the electronically transmitted information or a backup data copy on a physical storage medium such as a CD-ROM or diskette, your entire sale is usually taxable.

The economic impact on Autobytel can be substantial -- approximately $1.6 million per year in California alone and $4.5 million nationwide. If Autobytel is found to be evading sales tax then they can be liable for approximately $11 million in back taxes.

I am not a fan of high taxation, but the record keeping and auditing required of sales taxation would go a long way in combating theft in the industry. There are numerous opportunities for theft in the industry: a thousand leads at $5 each could easily be copied to a floppy disk and walk out of the Autobytel door every day. These leads would have to be laundered through a website to be sold to a competitor. What a racket!

Disclosure: The author has no position in Autobytel