Before a vehicle reaches the end of its service life, many fleet managers first think abut selling it to the employee who has been driving it, as a way to minimize their fleet's holding costs.

However, employee sales involve a number of considerations that make this a much more complicated decision than it appears on the surface. Before a company aggressively pursues employee sales, it should look very carefully at all aspects of the practice.

The Advantages of Employee Sales

Here are some of the factors to consider that favor employee sales:

• Employees should take better care of their company-provided vehicle if they know they have the option to purchase it at the end of its service life.

• In theory, the company should receive the maximum market price for the vehicle since the driver knows the vehicle better than anyone else - a two-year test rive, so to speak. A driver will not knowingly try to purchase a vehicle in poor physical and mechanical condition.

• Employee sales mean quicker cash flow - the employee cuts a check for the old vehicle as the new vehicle is being delivered.

• A company may lower transportation costs, auction fees, and other costs associated with wholesale remarketing.

Hidden Cost of Employee Sales

On the surface, the preceding factors make employee sales look very attractive. However, there are other factors that also should be considered so you can make a well thought-out business decision on employee sales:

• Evaluate the overhead cost. These are the costs necessary to administer employee sales - personnel, telephone calls, administrative paperwork, title work, and other tasks.

• Sales tax liabilities on employee sales (casual sales) is collected in several states. Many times, the rules are confusing and require a considerable expenditure of time and effort to understand and satisfy state requirements. Also, as states struggle to find new revenue sources, employee sales will most likely become an increasingly attractive taxation target, further taking away value from this remarketing method.

• The definition of a casual sale varies among states. In general, a casual sale is an informal sale of a vehicle from one person to another in a personal transaction. Trying to find a consistent definition of casual sale used by each state is like trying to find a common definition for "salvage" - it varies by the state. Some states use the criteria of volumes of vehicles sold per year in their states, or if the operator of the vehicle purchased it, versus being purchased by a non-operator such as a friend, relative, business associate, or other third party. Your legal liabilities and responsibilities as the seller may greatly differ if the state in which the buyer resides considers the transaction as a non-casual sale, which involves tax liabilities, smog and emission certification, used-car "lemon laws," vehicle registration and licensing, and state inspections - basically turning a fleet into a used-car dealer.

• Litigation liability. Once again, the legal system needs to be considered in the event of an accident following the sale. If a commercial lessor or fleet manager sells a vehicle to an individual (employee or consumer) and an accident subsequently takes place, the person who suffers will more than likely seek damages from the legal owner who caused the sale of the vehicle. When lessors or fleet managers sell in the wholesale marketplace to a commercial dealer - one professional to another - their liability is somewhat limited.

• Fairness to employees. If a vehicle is sold to an employee for substantially less than market value, the difference is truly taxable income and should be treated as such; otherwise you've given cash consideration to one employee over another. Again the vulnerability to legal and tax issues becomes a consideration.

Consider All the Facts

When all of the factors of employee sales are taken into consideration, only then can a good business decision be made on the subject. If the decision is to conduct employee sales, then it comes down to a matter of proper market value pricing.

How much are you willing to "net" for that car? If it's a casual sale and no strings are attached, your costs and liabilities should be much less than if it is considered a non-casual sale.

Whichever way a fleet manager decides to go, the important thing is to  consider all the facts first.

Bob McDevitt is vice president of sales and operations for Anglo American Auto Auctions in Nashville, TN.