Let’s start with two scenarios. The first scenario is factory delivery and the customer drives the Model S home. That has been covered in other threads. The second is a hybrid delivery scenario, where the customer visits the factory (or some other location) to ‘accept’ the vehicle and then Tesla still has to deliver it in the same condition to the customer-specified location.
The second scenario applies to cars that have been manufactured and passed all inspections, and just need to be delivered to the customer. If these vehicles are manufactured but not delivered by December 31, 2012 then those vehicles will be in ‘finished goods’ inventory on Tesla’s balance sheet on that date.
With this hybrid delivery scenario, I believe there are three major issues (Tesla may be already working on these issues as December 31, 2012 looms). First, Tesla wants to have customers take delivery of vehicles and Tesla wants to ‘recognize’ the revenue for their financial statements. Second, customers want to claim the $7,500 tax credit and need the vehicle to do so. The $7,500 tax credit requires the vehicles to be placed in service during the tax year and Form 8936 requires the date and VIN to be reported. The third issue is sales tax and when/where that tax is payable.
Tesla’s business model is to sell cars over the internet, not in stores, and then deliver the cars to wherever the owner requests delivery to be made. Payment must be ‘cleared’ at the time of delivery so there can’t be any question regarding the funds going to Tesla.
Regarding revenue recognition, in general, revenue is recognized when performance obligations are satisfied, which occurs when the customer has obtained control of the vehicle. Indicators that control has transferred include whether the customer has an unconditional obligation to pay, the customer has legal title, or the customer has physical possession of the vehicle.
So, accepting the vehicle at the factory and signing the ‘papers’ showing unconditional acceptance of the vehicle, with the payment made and cleared, and leaves only the delivery obligation to Tesla. If Tesla delivers the car to the location (state) that the owner specified then Tesla may be able to recognize the revenue for the vehicle except for the delivery charges (or, that portion of the purchase price relating to delivery).
For this to work, customers would have to come to the factory, inspect their vehicle, sit in it and take it for a short drive, and ‘accept’ the vehicle as is. Recording the distance driven on the odometer and having their picture taken at that time may provide assurance that the vehicle was ‘placed in service.’ If there was any way to have the registration/plates available at the acceptance location that would be very desirable. Insurance would help, too.
The remaining commitment by Tesla would be to deliver that same car to the location specified in the purchase agreement in the same condition as it was upon customer acceptable (e.g., same number of miles on the odometer).
If the car was delivered within days of the meeting at the factory then it would be easy to review such a transaction. If the actual delivery was not made, for whatever reason (e.g., transport truck crashed), then the sale could not be recognized. Complicating the matter would be if delivery was delayed for more than, say, 20 days then it may be much more difficult for Tesla to recognize the revenue at the factory and the buyer to claim the tax credit for the vehicle that was purchased, placed in service, but subsequently not delivered. By the way, the acceptance and in service location would not have to be at the factory – it could be at some other location where ‘acceptance’ but not final delivery could occur.
Regarding sales taxes, Tesla would have a binding purchase agreement and an obligation to deliver the vehicle to the owner-specified location. If the delivery location was in California, then sales tax would not be an issue. If delivery was to another state then the sales tax issue could be complicated. Given the sale occurred over the internet, it may be argued that the transaction did not occur in California, especially if Tesla has some type of physical presence in that other state (e.g., store front or service center). Often, sales taxes may depend on whether the seller has a ‘nexus’ in that state. If the customer takes delivery in California and then drives the vehicle back to their home state then it is clear that the sale occurred in California. It is less clear when the vehicle is accepted in California and then Tesla delivers the vehicle to another state.
As 2012 draws to a close, Las Vegas could be an easy and logical interim location for accepting cars in the final days of December as it is (relatively) close to Fremont and easy for customers to fly into/out of. What could be better than accepting your Model S on the last day of 2012, taking a short drive on private property and getting your picture taken with you behind the wheel of your new car, being able to claim the tax credit, and then ringing in the New Year in Las Vegas?