AUTO SALES COMPANY-where to enter fee's collected for DMV fee's

I'd be inclined to deduct as Other Costs under Cost of Goods Sold.

I have been preparing returns for a licensing agency for years, We don't report the state's portion of the $$ at all (income or expense) .

In our state, the funds go into a State account, and the agency portion is periodically transferred to their account.

If the funds all went into the Agency account, I would probably report all of the receipts, with an "other expense" with some kind of description such as "License Fees and taxes collected for and remitted to State of ___ "

In Arizona, there are registration fees that go to the state, but the dealers also add in what looks like an official charge, "Dealer Documentary Fee," which I explain to my clients means "Additional Dealer Profit."  Just one of the many ways they transfer money from the buyers' pockets to their own.  Often it's printed on the contract, so it can't be negotiated (you just have to realize it's in addition to the price of the vehicle).  

I have seen this in another states also, I think some of the more consumer-friendly jurisdictions put a limit on how much it can be.  45 years ago it was usually only around $30, and was a fair price for the clerical work involved in doing the paperwork. One used-car dealer told me that for many sales, the only real profit was in the "dealer documentary fee."  

To answer your question -- if you expect an IRS audit to match bank deposits with tax return gross income, just subtract it the actual fees as part of cost of goods sold.  

I've handled new and used car dealerships.  In some states DMV fees are considered a cost of sale whereas in others it's treated the same as sales taxes (a currently liability which of course would have no effect on the Schedule C).