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Warranty Retail Rate Reimbursement:To Surcharge or Not to Surcharge, That is the Question

by Peter K. Bauer

Pennsylvania’s dealer franchise protection law, the Board of Vehicles Act (Act), was recently amended effective December 31, 2013. Through the diligent efforts of PAA, the amendments to the Act include:

• Reducing the manufacturer warranty repair and sales incentive audit chargeback time frame from 24 months to 9 months;
• Allowing a dealer engaged in building a new facility, or remodeling  or upgrading a current facility, to use substantially similar goods and services through a dealer’s selected vendor; and
• Providing a new, optional process for a dealer to submit for, and receive, reimbursement at the dealer’s retail rate for warranty parts and labor.

This third item, retail rate reimbursement for parts and labor, has been an issue of contention for years with many dealers. Dealers have argued that retail, non-warranty customers have been subsidizing the manufacturer’s less than market reimbursement rates for warranty repair parts and labor. Some manufacturers have not provided appropriate parts and labor cost pay increases to dealers over the years. As a result, dealers have been looking for a way to secure market rate warranty parts and labor repair reimbursement from manufacturers. This new provision has been utilized in numerous other states, such as New Jersey, Virginia and  Illinois. The provision found at Section 9(a)(2)-(3) of the Act, provides Pennsylvania dealers the opportunity to secure retail rate reimbursement for parts and labor costs for warranty repair work being performed on behalf of manufacturers.

Previous Reimbursement Rate for Labor and Parts

Previously, the Act required a manufacturer to “reasonably compensate” a dealer for warranty or other service work performed on behalf  of the manufacturer. This would include reasonable compensation for diagnostic work, service and repair work, parts, and labor. While the concept of reasonable compensation for labor rate reimbursement was  further defined under the Act, and was tied in with retail labor rates being charged, it was due for revision. On the other hand, the warranty parts reimbursement calculation or formula was not defined in a very clear manner, and needed to be revised to give dealers an ability to ensure an appropriate warranty parts rate of reimbursement.

Optional Retail Reimbursement Rate Process Created

Dealers were looking for the parts and labor reimbursement provisions to be clarified, improved and strengthened, as had been done in other states, to permit a dealer to use a new, optional process to receive an increased retail rate of reimbursement for warranty parts and labor.  While very detailed in execution, in short, in order for a dealer to receive a rate increase, a dealer will need to submit 100 non-warranty repair orders to determine the appropriate reimbursement rate to be provided for  parts and labor. There are numerous exceptions to the calculation process to remove manufacturer subsidized parts for recalls, and special or promotional discounts, parts sold at wholesale, items not having individual part numbers, etc. However, a dealer may only submit for a retail rate reimbursement increase for parts and labor once each calendar year. Each dealership will need to determine if the detailed submission process for the retail rate of reimbursement for warranty parts and labor is worth the effort and cost involved. Warranty processing vendors and CPA firms are assisting with the detailed filing process. There may be other impacts that might result, such as a vehicle invoice surcharge, as discussed below.

No Statewide Surcharge of Dealers Who are Not Receiving Retail Rate

While the Act’s new provision allows a dealer to request a retail rate of reimbursement increase, the new provision also allows for a manufacturer to offset and charge a surcharge, if a dealer receives the retail cost for warranty parts and a labor rate increase. However, the Act’s new provisions do prevent a manufacturer from surcharging a dealer that does not apply for, or does not receive the retail parts and labor rate increase. While in other states manufacturers have imposed surcharges, dealers in other states have indicated most have been minor in comparison to the retail rate benefits received. In some states, some surcharges initially imposed, have since been dropped. Other dealers have surcharges imposed in some states by a manufacturer, but that same manufacturer is not surcharging in other states. While other manufacturers are not surcharging at all. So it is uncertain how the surcharge issue will affect dealers in Pennsylvania (and if charged, how much). However, some dealers in Pennsylvania have already been threatened with surcharges, if a dealer requests a retail rate of reimbursement for warranty parts and labor.

Manufacturers Threaten Dealers to Not Request Increase

These latest Act revisions provide a dealer an optional process to receive retail rate of reimbursement for warranty parts and labor, as is found in numerous other states. As unbelievable as it seems, there have been numerous dealer reports of various manufacturers  leveling implied threats of retribution (besides surcharges) against a dealer, who submits an increase request through the retail rate reimbursement  process. However, the Act’s other long standing provisions regarding inappropriate manufacturer activity, also restrict a manufacturer from threatening (or actual) conduct to be imposed against a dealer for taking advantage of any of a dealer’s rights under the Act. This includes seeking a retail rate parts and labor reimbursement increase. Any improper threats (or actions) can be reported to the dealer licensing board to be handled as a complaint against a manufacturer, which is also licensed by the board.

To Surcharge or Not to Surcharge

With this additional, new provision found at Section 9(a)(2)-(3) of the Act, which became effective on December 31, 2013, Pennsylvania dealers have the opportunity to secure retail level reimbursement for parts and labor costs for warranty repair work being performed on behalf of manufacturers. However, each dealership will need to determine based on its own review, if the detailed submission process for the retail rate of reimbursement for warranty parts and labor is beneficial versus the effort involved. Finally, whether a manufacturer is to surcharge or not to surcharge, is also a primary question.

© 2014 McNees Wallace & Nurick LLC

AUTO NOTES is presented with the understanding that the publisher does not render specific legal, accounting or other professional service to the reader. Due to the rapidly changing nature of the law, information contained in this publication may become outdated. Anyone using this material must always research original sources of authority and update this information to ensure accuracy and applicability to specific legal matters. In no event will the authors, the reviewers or the publisher be liable for any damage, whether direct, indirect or consequential, claimed to result from the use of this material.