By on July 22, 2014

2015-BMW-X4-06-550x366

Though most automakers prohibit sales of their wares to exporters, and though the government can sometimes block an export despite such exportation being legal, exporters in the United States are finding themselves in the crossfire over premium vehicle exports to Chinese consumers who prefer to pay lower U.S. prices over higher local prices.

Automotive News reports automakers are seeking help from the Secret Service and Customs to prevent any vehicle sold to a straw buyer from leaving port to the real customer residing in China, even though the exports are legal under current law.

Further, as the dealerships are paid in full for premium vehicles like the Land Rover Evoque or Tesla Model S, one federal judge in Ohio dismissed the alleged victimization of the dealer and automaker in her decision to make the federal government return two premium vehicles and $1.2 million in cash to an exporter.

Meanwhile, dealers must tread carefully around exporters, lest their automakers penalize such transaction, from chargebacks to being stripped of their franchise agreements. BMW, Porsche, Land Rover and Mercedes conducted the former to the tune of $30.4 million between 2008 and 2013.

Most of the legal trouble for exporters comes via tax evasion and identity faith, though those are ancillary to the civil lawsuits related to exporting premium vehicles to Chinese customers, who would otherwise be forced to pay two to three times the U.S. price at home. Said prices include heavy taxation and a 25 percent tariff on imported vehicles.

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32 Comments on “Exporters Caught In Crossfire Over US Auto Exports To Chinese Customers...”


  • avatar
    Noble713

    “automakers are seeking help from the Secret Service and Customs to prevent any vehicle sold to a straw buyer from leaving port to the real customer residing in China, even though the exports are legal under current law.”

    Explain to me how such actions have any sort of legitimate leg to stand on?

    • 0 avatar
      Chicago Dude

      Notice that the quote mentions a “straw buyer” and later on it mentions tax evasion and “identity faith” (whatever that means).

      A straw buyer typically means someone who makes a purchase as a proxy for someone that would otherwise not be able to make that purchase.

      Remember that import and export duties were the original form of revenue for the United States and that the Constitution gives explicit powers to the government for the regulation of international trade.

      It sounds like while some people are making these transactions legitimately, there are many who are not. When you have the potential for tens of thousands of dollars in profits for what ends up being a few hours of work, it tends to attract the kind of people who don’t quite follow the law so much. Let’s be perfectly clear: If there were really a perfectly legal way to circumvent all the taxes and duties on both sides of the ocean in such a way as to reduce the cost of the vehicle by >$100,000, the arbitrage play would eliminate that profit margin rather quickly. Nobody leaves that money on the table for long.

      • 0 avatar
        Pch101

        The point of using a straw purchaser in this transaction is to get around the dealers’ franchise agreements with their OEMs that forbid them from selling cars for export. A civil matter, and not really the US government’s business.

        That is different from using a straw purchaser to illegally buy a gun, the intent of which is to get the gun into the hands of someone who is forbidden by law from having one. A criminal matter.

        The feds have taken it upon themselves to act as cops on behalf of the automakers who themselves have weak ground to stand on. The exporters aren’t parties to the franchise agreement.

      • 0 avatar
        tekdemon

        They’re still paying taxes, it’s that they’re saving a lot because with the high tax rate in China the auto manufacturers have also jacked up their margins by huge amounts. There is also probably some tax savings because while a 3 series imported from the US would still get hit with the same tax rate as a 3 series BMW imports, since the price of the import from the us would be $45K and the price of the import BMW sells several times that, the taxes will still be lower on the car imported from the US by a pretty large amount.

        Mostly the auto manufacturers are the ones trying to stop this because they have insane margins in China that they want to protect.

        The only one that’s kinda weird is Tesla, I don’t know why you’d bother to import a Tesla to China when Tesla doesn’t further mark it up.

  • avatar
    Syke

    So now the manufacturers are attempting to make legal sales illegal. To keep the higher profit margin going in a market where the buyer is dumb enough to pay the inflated prices.

    If its a legal sale to a customer (even if said customer doesn’t intend to use the vehicle), where does the manufacturer get off attempting to decide what’s a ‘legal’ sale?

  • avatar
    sirwired

    I’d love to know under what rationale the customs service thinks they can regulate grey market auto exports. It’s clearly a civil matter and none of CBP’s business.

    There are export regulations, but I’m not aware of any that apply to automobiles, as long as the vehicles are not sold to anybody on the Denied Parties List. (countries, companies, and individuals under economic sanction; it’s a long list, as Iran and North Korea have an awful lot of front companies)

  • avatar
    ...m...

    …perhaps the automakers can lobby china to institute a “chlorine tax” to impose heavier duties on the importation of passenger vehicles…

  • avatar
    Halftruth

    I thought TTAC reported this recently about two guys from California offering straw buyers in New Hampshire 500 dollars to register cars for them. There was a big to do about the interpretation of new and used and the different rules that apply.

    From what I read, there was no problem BUT the same guy kept coming into this small town hall to register these expensive vehicles and the clerk got suspicious. NH has no sales/excise tax so it was attractive to them to buy the vehicles there. Part of the state’s argument was “they are taking business away from the dealer (service/maintenance etc) by removing the cars from the state.” I suppose out of state buyers should get in trouble for the same reason. It’s BS but very grey-area. The law says you can export the cars as these two guys in California were, but “interpretation” can make it look illegal. They were sentenced to a fine and probation.

    • 0 avatar
      Onus

      Interesting. They should pop down to CT. You get a sales tax exemption if you are exporting the car. It’s kind of hidden but with some searching on our DMV’s website you can pull it up.

      Found it once, still can’t find it. ARG.

      • 0 avatar
        Pch101

        In the US, sales taxes on new cars are paid to the state in which they are first registered, not necessarily where they are sold.

        In the New Hampshire example, it sounds as if the cars were being registered there by out-of-state owners who wanted to avoid paying taxes in their home states.

        • 0 avatar
          Onus

          I’m well aware i do live here after all.

          Every state is different.

          Some states you don’t even have to be a resident to register vehicles there. New Hampshire wouldn’t surprise me if it was one of those states. I know Vermont is one.

          I know in CT if i buy a vehicle out of state i pay taxes when i bring it back into state or the difference if i payed out of state sales tax. You even pay on private sales here. You pay the DMV when you go to register it.

          I know California has a special export scheme. You may not necessarily end up paying taxes.

          • 0 avatar
            Pch101

            Tax-free out-of-state exports are the norm. If you’ve purchased goods on the internet, then you’ve probably benefited from this. Connecticut is not unique in that regard.

            The NH situation sounds like an effort to avoid taxes that are due outside of New Hampshire. Going to Connecticut wouldn’t help those people.

  • avatar
    Aquineas

    Heaven forbid we make something in North America and sell it back to the Chinese at a cheaper price than what they’re used to.

  • avatar
    jmo

    Back in college a kid I knew from Taiwan got an M3 as a freshman and I think later another one. The law at the time was if you bought a car overseas and registered it there for two year, you could ship it back to Taiwan free and clear. So, that car was $50k in the US, he could drive it for two years, ship it back and sell it for $150k. He paid for college and a tidy profit playing that game.

  • avatar
    psarhjinian

    Globalization and free trade’s a bitch when it bites the rich folk, isn’t it? What’s next? Open immigration? Trans-national labour unions?! Oh, the horror!

    Look, if you can “double Dutch with an Irish sandwich” then we should be able to move goods and labour around unfettered.

  • avatar

    These automakers have scared their dealerships to the point that they’d much rather play it safe. Buying a vehicle out of your “territory” (such as when I skipped the OKC/Edmond BMW dealership and started talking to the one in Tulsa), paying for a car with cash, having very specific order requests (especially in black), having unverifiable or improbable income sources…all of these things are red flags to them. Security gets even tighter whenever a new model is introduced, because it’s that much more profitable to export. And world-class SUVs are particularly lucrative. That’s probably what’s been happening with a fair few of those new X5 and Range Rover Sport units.

    I’m not quite sure what interests the automakers themselves have in enforcing these policies. They wouldn’t be required to honor the warranties once the cars are in China, so that’s not it. They *may* be required to do this by the Chinese officials in order to sell cars in China. But they are definitely interested in the potential thousands of dollars that each car will need in maintenance, and how unlikely they are to get it if the car is exported.

    • 0 avatar
      Pch101

      “I’m not quite sure what interests the automakers themselves have in enforcing these policies.”

      They make more money. The invoice prices are higher in China than in the US.

    • 0 avatar
      PandaBear

      Come on, if they have to verify all those cash purchase with income source verification, what are those drug dealers gonna drive?

      Most likely scenario is if a car show up in a Chinese dealership for repair and the dealer there report the VIN to the HQ (complain, or customer throw a fit not knowing that it is not under warranty, not carrying certain parts and will not order for them, etc), the HQ would certainly throw a fit to the dealer that sell the car in the US.

      • 0 avatar

        “Most likely scenario is if a car show up in a Chinese dealership for repair and the dealer there report the VIN to the HQ…”

        That’s exactly what happens. The dealership gets huge penalties, which from what I understand are enough to wipe out profit on several units. Therefore dealerships determine that it’s not worth the risk of losing all of that money just to make one sale. Also, a buyer can go on a national blacklist, in which case no dealership operating under that particular brand will be allowed to sell a new car to said buyer, under any condition.

  • avatar
    05lgt

    Even if the only law being broken is a Chinese law, the US customs etc. has some jurisdiction to regulate the trade. When Chinese exporters are “only” breaking US law and the Chinese turn a blind eye as long as the only children poisoned are “foreign” that seems better?

    • 0 avatar
      Pch101

      The issue is not one of tax evasion in China, but of the multinational OEMs losing their Chinese price markup when the cars are sold here for Chinese consumption.

      All things being equal, the OEM would rather sell the vehicle in China than in the US because the pre-tax prices are substantially higher in the PRC.

      • 0 avatar
        05lgt

        Ahhh, thanks for the clarification. Well, I’m not happy with my taxes being used to enforce the OEM/dealership contract. Not sure why anyone thinks that is OK. Then again, I don’t like the whole dealership franchise thing in the first place. Was I breaking rules that don’t apply to me when I had an auto broker find the car I wanted instead of what the local dealerships wanted to sell?

        • 0 avatar
          Pch101

          “I’m not happy with my taxes being used to enforce the OEM/dealership contract. Not sure why anyone thinks that is OK.”

          It does make me wonder whether Automotive News and I are missing something.

          Franchise agreements are largely a civil matter and governed by the states. Why the feds would even bother with this is beyond me (and the judge, apparently.)

          • 0 avatar
            Extra Credit

            It is possible that the Feds are interested in monitoring who has the resources and connections to participate in a capital intensive grey market export operation. These groups could just as easily apply their talents to more nefarious activities (f they’re not already), in which the Feds may have significant interest. I agree, the Feds are not providing a favour solely for the benefit of the OEMs.

    • 0 avatar
      PandaBear

      It is “up to the importer” to file the correct tax in China, and if they fail to do so, it is up to the Chinese to bust them. I read news that some importers got busted and went to jail for it in China, so they have to factor that in their risk / reward estimate.

      Still, the point is the huge markup is lost even if the importers are paying full import tax. The buyer are paying less but they don’t get warranty because they are grey market, but they are probably still way ahead because labor is cheap and markup is high.

  • avatar
    PandaBear

    Let me get this straight, they are saying that buying in the US and ship them to China to let the Chinese “evade” their import tax and huge markup by the auto company there is “illegal”, and they want our government to fix it.

    But our European delivery option that let the buyer fly over to Europe, take a vacation, then ship the car back to the US is not an “evasion” of our own sales tax and registration? but they don’t want our government to fix it?

    • 0 avatar
      Pch101

      The Automotive News article never mentioned evasion of Chinese duties or import tariffs. The only issue at hand is the markup lost by the OEMs.

      I would presume that China sets vehicle import tariffs based upon a formula that isn’t determined by the price paid abroad. So the tariffs are probably the same whether the car is grey market or purchased at home.

      The only loser here is the OEM, which lost the additional markup. The amount lost per sale is probably substantial, which would explain why the OEMs care about it and why some customers would prefer to buy the grey market import.

      • 0 avatar
        1998redwagon

        certainly the manufacturers would like to see the higher profits, the dealers here would like to see more sales, the chinese government would like to see full taxes/duties paid on new vehicles, the purchasers overseas would like to see a lower price, and the straw buyers want to make money of their own.

        china and the manufacturers have already talked at length. you can bet on that.

        the manufacturers and the dealers have already talked at length. bet on that one too.

        the u.s. is getting involved late in the game because both china and the manufacturers are pressuring them. take that one to the bank.

        think about the desired outcome and who has leverage. i would not be surprised if chinese dealers are importing the cars to sell as new and making a handsome profit. esp since their vehicles are typically produced here and exported to there anyway.

        mr consumer, as long as you do all the maintenance and repair at our facility (under the table mind you to hide the vin) you can have this car at a drastically reduced rate (yet still higher profits for the chinese dealership) and the manufacturer will never know.

        someone should write a book.

  • avatar
    Hillman

    You see this with tobacco from the southern low tax states to the extremely high taxed northeastern states all the time. I really don’t know how you can stop it other then remove the profit motive.

  • avatar
    ExPatBrit

    Maybe BMW China should tell people the cars are unsafe and maybe not authentic.

    Same way our Politicians and Drug companies are putting the screws on their citizens and Fedex to prevent folks importing cheaper pharmaceuticals from the rest of the world.

    http://www.independent.co.uk/news/business/news/fedex-facing-drugtrafficking-charges-over-illicit-pharmaceuticals-9616936.html

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