Darryl Wilson owns Darryl's Deals on Wheels, a small used-car dealership in Humble, Texas. Wilson started the company three years ago, but he is still struggling to get a solid footing in the industry. The slow economy isn't helping—no one seems to have money to buy cars right now—and there is plenty of competition. The business provides the main source of income for his family, which includes his wife and two teenage daughters. Wilson has to make this business work to keep food on the table and to pay the typical expenses involved in raising a family.
Finding customers is essential to success in the car sales business, but so is holding down costs. This means Wilson has to find "rolling stock" that is in demand and inexpensive, but that is not easy to do because all the other dealers in his area are in the same boat. They, too, are trying to snap up the best deals, and this is driving up the cost of inventory. So, controlling costs means looking at other features of the business, and Wilson thinks he has found something that just may help. The state of Texas requires dealers to report the purchase of all vehicles they acquire for resale, which means the dealer pays a 2.5 percent inventory tax (based on the purchase price) when it sells the car later. But when Wilson buys a car from a private seller, he can usually convince him or her to sign over the title without designating a specific buyer. This allows Wilson to fill in that part of the title and the transfer form with the name of the person who buys the car from him, when that time comes. In the end, the state has no evidence of Wilson's involvement in the transaction, which allows him to avoid paying administrative fees and the inventory tax—a savings of about $250 on a typical sale. The state doesn't catch on, and his customers never seem to notice because they have to pay administrative fees and sales tax anyway when they buy the car and transfer the title into their own names.
So far, Wilson has not run into any problems with this practice. In his mind, this is nothing more than "heads-up business." Furthermore, his profits are so slim right now that playing by the book would probably mean that he would have to go out of business. Even the state would lose money then, because a company that is out of business pays no income taxes and Wilson would have to start collecting
Wilson finds it hard to identify a downside to his approach. What risks might he be overlooking?
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