Last year, Kia Motors America Inc. charged dealer Dan Johnson $1.6 million for misreporting sales under a factory incentive program. Johnson says he had to sell his two dealerships, both in Florida, to pay the penalty, even after Kia cut it to $700,000.

Johnson concedes that he knowingly had reported some vehicles as sold before the deals closed. But he also says the incentive program's rules were unclear. And he insists that he should have had access to a better appeals process.

"Kia just held onto money they owed me," Johnson told Automotive News.

Kia did not respond to requests for comment about Johnson's case. But Kia is one of several automakers that dealers say are toughening their audits of how stores handle sales incentives programs as the size of those factory incentives has grown.

Industry consultants estimate that the rate of such audits has doubled over the past three years.

As factories have hit some dealerships with six- or seven-figure chargebacks, dealer groups are lobbying state legislatures to enact greater protection from aggressive audits and penalties. Without those measures, they say, dealerships that face big charges will not have a fair opportunity to appeal.

The penalties are called chargebacks because factories charge dealerships back for the amount of incentive payments deemed to have been made improperly. Details of factory incentive programs vary, but dealerships generally earn a dollar amount for each vehicle sold under a program -- sometimes several thousand dollars each.

Red flags

In some cases, factories are penalizing dealerships that report vehicles as sold during an incentive period when the sales formally conclude after the program has ended. Employees of a large dealership group who asked not to be identified say several of the group's stores face chargebacks for their reporting of incentive-related sales.

Another red flag for auditors is dealerships' application of retail incentives to vehicles they sell to brokers or leasing companies. The manager of a Chrysler brand dealership in Texas says he negotiated a reduced chargeback after the Chrysler group disallowed incentive payments for sales the store had made to a leasing company.

Retail customers leased the vehicles through the independent company, says the manager, who asked not to be identified. The vehicles were titled in the leasing company's name, he says.

Dealers say Ford Motor Co. and the Chrysler group are scrutinizing programs that offer discounts to factory or dealership employees. Chrysler group dealers say the company also is auditing dealership records of the employee discount program it offered consumers last year.

The Detroit 3 and several large import-brand automakers declined to discuss in detail their current incentive audits and appeals procedures. Ford spokesman Jim Cain says his company has not accelerated audits or changed its policies on incentives.

Richard Sox, a Tallahassee, Fla., lawyer who represents franchised dealers, says automakers often act as "judge and jury" in chargeback disputes.

"The chargeback can be so large that the dealer cannot afford to go to court but, instead, is just trying to survive," Sox says. "Three years ago, we never represented a dealer on a sales-audit chargeback case. Then, beginning last year, we have had at least 10 clients -- Chrysler, Ford, GM, Kia and Hyundai dealers."

State action

Since the late 1990s, 39 states have passed laws that address sales-incentive audits or chargeback procedures. The laws typically bar factory auditors from inspecting more than a year's worth of dealership records to assess chargebacks. Some laws require automakers to base chargebacks on reasonable, consistent standards.

Only North Carolina gives dealerships the right to appeal disputed chargebacks to the state motor vehicle commission. That state's law, passed two years ago, also prohibits factories from levying chargebacks until dealership disputes are resolved.

A large chargeback can cause a dealership's operating capital to drop below the level required in its franchise agreement, Sox notes.

"A dealer's only remedy, without the right to protest and stay the incentive (penalty), is to go to state or federal court and attempt to obtain an injunction," he says. "This is an extremely difficult and costly procedure."

Sox says he is working with dealer trade associations in several states that seek their own versions of the North Carolina law. He declined to name those states, saying the dealers did not want to publicize their lobbying.

Although big incentives have tempted some dealerships to break the rules deliberately, other dealers say they had to pay chargebacks for administrative errors. Rules for incentive programs can be vague and complicated and change often, some dealers complain.

Sometimes, dealers claim, factories charge back dealerships for technicalities such as typographical errors. They say Ford penalized some dealerships for rounding off the amount of the discount in an employee purchase.

"If the rules are not clear, dealers should not be penalized," says Jim Moors, a franchise attorney with the National Automobile Dealers Association.

Some bonuses tiered

Some factories pay tiered incentives; the bonus paid for each vehicle increases as dealerships hit graduated sales targets.

When the dealership reaches a higher sales tier, the large incentive is applied retroactively to the first vehicle sold.

"Often, one car sale will be the difference in making or not making thousands of dollars," says Michael Charapp, a dealer attorney in McLean, Va. "If the manufacturer can show that one sale was not made or not made in time, it can recoup thousands of dollars." Charapp says chargebacks have so angered many dealers that "they think the factories see these audits as a profit center."