By Rose-Michele Nardi
Transport Counsel PC
This article was published in the March 2013 edition of NTEA
News
Question: A customer would like to purchase one of
our new, taxable truck bodies, but wants to pay a portion of the purchase price
with a used truck body as a trade-in. Do I need to include the value of the
trade-in when determining the Federal Excise Tax (FET) owed on the sale?
Answer: Yes, the value of the trade-in vehicle must
be included in the taxable base for FET purposes. The law is very clear on this
issue.
When a retail sale includes a trade-in vehicle as partial payment, the
taxable sale price, for purposes of calculating FET, is not limited
to the cash paid by the purchaser. In other words, a seller may not reduce the
taxable price of an article by the value assigned to the trade-in vehicle. See
Treasury Regulations Section 145.4052-1(d)(9) (tax should not be reduced for an
article received by seller from purchaser in exchange for the taxable article
sold); and Internal Revenue Code (IRC) Section 4052(b)(1)(C) (“the price
shall be determined without regard to any trade-in”).
The Treasury Regulations provide the following example to
clarify this principle: "[W]here a vehicle costing $20,000 is purchased for
$16,000 cash plus a used vehicle valued at $4,000, tax is $2,400 (12 percent x
$20,000)".
This example makes clear that you cannot exclude the trade-in value
($4,000) and apply the tax only to the cash portion of the sales price
($16,000). Instead, you need to apply FET to the entire sales price of the
taxable body, which consists of both the cash and the amount of the trade-in
article ($20,000 in the previous example).
A related issue is the value a taxpayer should assign to the trade-in
article. The IRS generally will presume the fair market value of the
trade-in vehicle is the allowance the seller and customer agree to assign
to it (which value, as discussed, should be fully included in determining the
tax base). See Revenue Ruling 81-268 (decided under the now-repealed predecessor
tax, IRC Section 4061); and Letter Ruling 8407027 (taxpayer may use holding in
Revenue Ruling 81-268 to calculate taxable base). (Of course, this principle is
based on an arm’s-length sale between the seller and the purchaser. See Revenue
Ruling 81-268).
However, there may be circumstances in which the agreed-upon allowance
for the trade-in does not reflect its fair market value at the time the sale
occurred. Letter Ruling 8407027 and Revenue Ruling 81-268 both address a
situation in which the agreed-to allowance of the trade-in article was (or
arguably was) greater than its fair market value. See Letter Ruling 8407027
(Nov. 14, 1983) (seller, shortly after accepting a trade-in vehicle, resold the
vehicle for less than the trade-in allowance); and Revenue Ruling 81-268 (Nov.
16, 1981) (taxpayer’s negotiations resulted in accepting trade-in allowance
greater than appraised value).
If the taxpayer accepts a higher allowance for a trade-in
than its fair market value, the taxable base also will be higher,
resulting in more tax. In such cases, the issue is whether the taxpayer
can reduce the taxable base to reflect the actual fair market value
of the trade-in. Generally, the answer is yes.
If the taxpayer can show that the agreed-upon value for the trade-in
was greater than its fair market value, the IRS generally will permit the
taxpayer to use the lower, fair market value of the trade-in vehicle for
purposes of calculating FET. See Revenue Ruling 81 268; and Letter Ruling
8407027.
However, note that (1) in comparing the agreed-upon allowance for the
trade-in and its fair market value, the fair market value should be determined
at the time of the trade-in; (2) the burden is on the taxpayer to demonstrate
that the agreed-upon allowance for the trade-in was greater than
its fair market value; and (3) in order to use a sale price as evidence of
fair market value, the sale must be an arm’s-length transaction.
So, for instance, assume a taxpayer sells a new, taxable article, and a
portion of the sales price includes an allowance for a trade-in. Subsequently,
the taxpayer resells the trade-in for an amount lower than the allowance. The
taxpayer now wishes to reduce the taxable base for its initial sale of the new,
taxable article to reflect the difference between the agreed-upon allowance for
the trade-in and the lower resale amount the taxpayer subsequently received for
the trade-in. The closer in time the resale of the trade-in occurs to the
initial sale of the new, taxable article, the easier it will be for the taxpayer
to argue that the lower resale price reflects the fair market value of the
trade-in at the time of the initial sale.
On the other hand, if for some reason, the agreed-to value is less than
the fair market value of the trade-in vehicle, the taxpayer could potentially
face tax liability. Revenue Ruling 81-268 indicates, without further discussion,
that the IRS may require a taxpayer “to substantiate that the stated invoice
amount is not less than the fair market value of the trade-in.”
Please note that the assignment of values for calculation of the
taxable base is generally very fact-specific. Taxpayers should consult
with their tax counsel regarding individual
transactions.