Are schools exempt from FET?

From an NTEA member Is there a Federal Excise Tax (FET) exemption for sales of taxable trucks to schools? It depends. Under Section 4221(a)(5) and Treasury Regulations 48.4221-6, there is an FET exemption for sales of taxable trucks to certain non-profit educational organizations. However, as with most FET exemptions, there are several requirements that must be satisfied before a sale will qualify. In order to determine if a sale is likely to qualify as tax-free to a non-profit educational organization, a seller generally needs to ask three questions_ Is the purchaser the type of entity to which tax-free sales under this exemption may be made? Does the sale satisfy the requirements of exclusive use, direct sale and first use? Do the seller and purchaser have the correct documentation to qualify for this type of tax-exempt sale? Is the purchaser the type of entity to which tax-free sales under this exemption may be made? In order to be a qualifying entity for this exemption, the organization_ Must qualify for an income tax exemption under Internal Revenue Code (IRC) Section 501(a), and Must satisfy either 1) or 2), which follow. The organization must be one that “normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on”, or The organization must be a “school operated as an activity of an organization described in IRC Section 501(c)(3)”, the school’s primary function must be “the presentation of formal instruction” and the school must satisfy the requirements in 1), above. See Treasury Regulation 48.4221-6(b). Are the exclusive-use, direct-sale and first-use requirements satisfied? Exclusive use Under the exemption, the taxable truck must be sold to the qualifying entity “for its exclusive use.” See Treasury Regulation 48.4221-6(a). Therefore, for example, if the truck were sold to a qualifying entity for purposes of raffling off the truck in a fundraising event, the exclusive use requirement likely would not be satisfied. See Letter Ruling 7108172060A (citing Revenue Ruling 64-269). In addition, an old revenue ruling suggests a more restrictive interpretation of this exclusive use requirement_ the taxable article must be used exclusively by the non-profit educational activity for the qualifying educational activities. In Revenue Ruling 74-234, a taxable article was both used to transport students to Sunday School and “used extensively” to transport people to church activities that were “not directly related to the school’s educational activities.” The Internal Revenue Service (IRS) concluded that the taxable article was not exempt under IRC 4221(a)(5) because it “was not purchased ‘for the exclusive use of’ the educational activity within the meaning of section 4221(a)(5)….” (Emphasis added.) Also, if at the time of the sale, the seller is aware that the educational organization has an agreement with another entity to re-sell the article after a period of use, the IRS likely would determine the initial sale by the seller to the educational organization did not meet the exclusive use requirement and did not qualify for the Section 4221(a)(5) exemption. See Technical Advice Memoranda 9416007 and 9219005 (interpreting a similar exclusivity requirement for tax-exempt sales to state or local governments). Direct sale In order to be exempt under Section 4221(a)(5), the sale must be directly to the qualifying non-profit educational organization. For example, a sale to a purchaser that will re-sell the vehicle to a non-profit educational organization would not qualify for the exemption. (Note, however, the initial sale could be done as a tax-free sale for resale, if the requirements for a tax-free sale for resale were satisfied.) First use Although not as clearly stated in the statute and the regulations under Section 4221(a)(5), it appears that an exempt sale to a non-profit educational organization also must be the first use of the taxable article. This requirement is consistent with the requirement in Treasury Regulation 145.4052-1(c)(4), which provides that a first use of a taxable article remains taxable, even if the article subsequently is sold in a sale that would have been tax-exempt if it had occurred prior to the first use. For example, a seller could not sell an article tax-free under Section 4221(a)(5) if, prior to selling the article to a non-profit educational organization, the seller used the article in its business for a couple of months. In that situation, the exemption would not apply and the seller’s use of the article would trigger FET. Do the seller and purchaser have the correct documentation? In order to qualify for the exemption, both the seller and the purchaser must be registered with the IRS to make tax-free sales of heavy trucks (i.e., file a 637 form with the IRS for “Q” activities and receive a registration number from the IRS). The seller and purchaser also must provide certain documentation related to the purchaser’s registration number and the fact that the sale is being conducted on a tax-free basis for an exempt purpose. These documentation requirements are described in Treasury Regulations 48.4221-1(b)(4) and (c), and Treasury Regulation 48.4221-6(c). If the documentation (whether provided by the seller or the buyer) does not satisfy the requirements, the IRS can reject the exemption. Therefore, sellers should consult with their tax advisors regarding these documentation requirements.

Are schools exempt from FET?

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