Installing a wrecker crane on used chassis: Is it taxable?

From an NTEA member We are installing a wrecker crane on a customer-owned used chassis with a gross vehicle weight rating of 34,000 pounds. The customer thinks there is a specific exemption from tax for wrecker cranes. Is he correct? No, there is no wholesale exemption for wrecker cranes. Under certain circumstances, the installation of a wrecker crane will be taxable. The customer is probably referring to the so-called “mere combination” exception. See Internal Revenue Code (IRC) Section 4052(c). Under that exception, merely combining a wrecker crane (or certain other specific items) on a used chassis will not be treated as “further manufacturing” the chassis (i.e., manufacturing an entirely new chassis that would be taxable upon its first retail sale or use). In addition, even without the mere combination exception, it is unlikely that the installation of a wrecker crane on a used chassis would be treated as further manufacturing. See IRC Section 4052(f) (providing, in general, that modifying a previously taxable chassis does not result in the manufacturing of a new chassis, unless the cost of the modification exceeds “75 % of the retail price of a comparable new article”). However, the wrecker crane may still be taxable. Although your installation of the wrecker crane will not trigger tax under the further manufacturing rules, it may still trigger tax under the so-called “six-month” rule. Under the six-month rule, the price of the wrecker crane and its installation generally will be taxable if (i) the chassis on which you are installing the wrecker crane has been in service for six months or less; (ii) the price of the wrecker crane and its installation (plus the price of any other parts or accessories installed in that six-month period) exceeds $1,000;* and (iii) the wrecker crane is not a replacement. See IRC Section 4051(b); Treasury Regulation Section 145.4051-1(c). If the wrecker crane were taxable under the six-month rule, your customer would be primarily liable for the tax, but you, as the installer, would be secondarily liable for the tax. Although the Internal Revenue Service has never clearly explained the concept of secondary liability, you would likely be held responsible for the tax should your customer fail to pay it. Accordingly, if the wrecker crane is taxable under the six-month rule, you may want to charge the customer the tax on your installation of the wrecker crane to ensure that you are not left paying the tax out of your own pocket. As always, the rules governing the application of Section 4051 tax are highly fact-specific. Accordingly, you should discuss in detail with your tax counsel the application of these rules to your specific transaction. * Effective Aug. 6, 1997, the Internal Revenue Code increased the dollar threshold in the six-month rule from $200 “or such other amount or amounts as the Secretary may prescribe” to $1,000 “or such other amount or amounts as the Secretary may by regulations prescribe.” The applicable provisions of the Treasury Regulations were not subsequently amended and continue to refer to a $200 threshold. Thus, it is not entirely clear whether the applicable threshold is $200 or $1,000. Letter Ruling 200052011 (Sept. 26, 2000) does not directly address this issue, but indicates that the applicable threshold is $1,000. Prior to relying on the $1,000 threshold, you should consult with your tax counsel. IMPORTANT NOTE: This document reflects the FET as of 5/10/2004. Transactions prior to this time may be subject to different rules because of changes in the FET Regulations, Statutory Amendments and IRS Rulings issued subsequent to the time of such earlier transactions. Similarly, transactions entered into after 5/10/2004 may be subject to different rules. It is, therefore, essential that users of the outline consult with their tax advisers before relying upon it. Also, users should recognize that IRS Letter Rulings referred to in these materials are binding only on the taxpayers to whom they were issued and only serve as an indication of the IRS's position on any issue.

Installing a wrecker crane on used chassis: Is it taxable?

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