By Rose-Michele Nardi
Transport Counsel
PC
This article was published in the May 2014 edition of NTEA
News
Question: Do you have any quick tips companies can
use to determine if they are applying Federal Excise Tax (FET) correctly in some
common situations?
Answer: As you probably already know, FET is a
complex tax that has very few bright-line rules. Moreover, it is incredibly
fact-specific, so the correct application of FET generally will depend on the
specific facts of a particular transaction. That being said, following are some
quick tips that may help determine if your company is falling into some common
FET traps with respect to FET on truck bodies, tax-free sales for resale, tax
exemptions, in general, and marketing materials.
FET on Truck
Bodies
- FET determinations need to be
made separately for chassis and bodies. For example, a vehicle may
have a taxable chassis and a nontaxable body or vice-versa.
- Your company should determine
whether it is selling any truck bodies that fall within the following four safe
harbors established by Revenue Procedure 2005-19: (a) dump bodies 8 cu. yds. or
less, (b) van bodies 24' or less, (c) refuse packers 20 cu. yds. or less, or (d)
platform bodies 21' or less. If the answer is yes, the business generally should
not be charging tax on the sale of these bodies.
- With respect to any given model
body your company sells, you should be treating the sale of that model body as
either always taxable or always nontaxable, regardless of the gross vehicle
weight rating of the vehicle on which the body is mounted. If you are sometimes
charging tax on the sale of a certain model body, and sometimes not charging tax
on the sale of the same body, it means that you are either overcharging or
undercharging tax on some sales. The correct determination of whether a specific
model body is taxable (assuming it does not fall within one of the safe harbors
mentioned previously or does not otherwise qualify for a specific tax exemption)
is to apply the so-called “suitable for use” test. Learn more about applying the
suitable for use test.
Sales for
Resale
In order to conduct a sale tax-free based on
the sale for resale exemption, your company should confirm it has taken the
following steps. If the answer is no for any of these steps, this is a red flag,
and the company should consult its tax advisor.
- Does the company obtain a sale
for resale exemption certificate? In order for a sale for resale to be conducted
on a tax-free basis, the seller must obtain from the purchaser a resale
exemption certificate.
- Does the resale certificate
satisfy current requirements? In general, the form certificate should
mirror the form in Treasury Regulation 145.4052-1(a)(6), except that it
should include “penalties of perjury” language. See Treasury Regulation
48.4052-1. When the Internal Revenue Service (IRS) added the penalties of
perjury requirement, it did not update the form certificate to reflect this new
requirement. In addition, note that the form also includes purchaser
registration information, which is no longer required.
- Does the company obtain the
certificate at or prior to the sale? The IRS generally will reject resale
certificates obtained after the sale has occurred.
- Does the company have
mechanisms in place to flag expired certificates? For each recurring
purchaser, a company can obtain one certificate to cover all sales made to that
purchaser for up to 12 calendar quarters (three years). However, if the company
takes advantage of this convenience, it needs a system in place to avoid
inadvertently relying on expired certificates.
Tax Exemptions, in
General
The most common tax exemptions for an article
(e.g., a chassis, body or tractor) are found at Internal Revenue Code (IRC)
Section 4221, IRC Section 4053 and IRC Section 7701(a)(48). Before relying on
any tax exemption, your company should determine:
- Does the seller and/or
purchaser need to be registered with the IRS to conduct the sale as a
tax-free sale under the specific exemption on which the company is
relying?
- Is there any certificate or
other documentation requirement that the seller needs to obtain under that
specific exemption?
- If the answer to 2. is yes, are
there timing requirements under the specific exemption for obtaining such
documentation?
- Each of these exemptions has
its own detailed requirements and is very fact-specific.
It is often not sufficient that the type of article
being sold is potentially tax-exempt (or that the sale is to a potentially
tax-exempt purchaser or for a potentially tax-exempt use). There
are often additional requirements or restrictions an article must satisfy
in order for the exemption to apply. Review the applicable statutory and
regulatory exemption requirements/restrictions and recent rulings applying the
exemption prior to relying on it.
Marketing
Materials
Marketing materials (e.g., your website,
product brochures, etc.) are often the first place an IRS examining agent will
look in determining whether certain articles or equipment are taxable. Your
company should routinely review its marketing materials to confirm they are not
inconsistent with the company’s tax position.
- Review the statutory and
regulatory requirements of any tax position on which the business is relying on
for tax-free or tax-reduced treatment, especially any requirements regarding the
use or design of the article or equipment.
- Carefully compare the
requirements for tax-free or tax-reduced treatment with claims made in the
marketing materials about the article or equipment. For example, if you are
selling bodies tax-free on the basis they are feed, seed or fertilizer bodies,
be sure your website does not claim that the bodies are all-purpose bodies that
can be used with all types of loads.
If the claims in your company’s marketing materials are
inconsistent with the tax position the company is taking, this is a red
flag, and the business should consult with its tax counsel.