Can the value of a trade-in be excluded from FET?

From an NTEA member 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? 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 See Revenue Ruling 81-268 (decided under the now-repealed predecessor tax, IRC Section 4061); and Letter Ruling 8407027 (taxpayer may use holding in Revenue Ruling 81-268 to calculate taxable base).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.

Can the value of a trade-in be excluded from FET?

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