Applying Federal Excise Tax - A General Overview

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

  1. 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. 
  2. 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.
  3. 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.

  1. 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.
  2. 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.
  3. 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.
  4. 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:

  1. 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?
  2. Is there any certificate or other documentation requirement that the seller needs to obtain under that specific exemption?
  3. If the answer to 2. is yes, are there timing requirements under the specific exemption for obtaining such documentation?
  4. 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.

  1. 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.
  2. 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.