Navigating tire tax credits

From an NTEA member What are some general guidelines for calculating Federal Excise Tax (FET) when a tire tax credit is available? Following are three aspects of the tire tax credit that may be especially confusing for taxpayers. 1. FET is not reduced by the amount of credit The credit is an amount equal to the manufacturer’s tax imposed on tires under Internal Revenue Code Section 4071. This prevents double taxation on the tires — once under Section 4071 and again under Section 4051. By using the credit, the taxpayer is reimbursed for the amount of Section 4071 tax, so Section 4051 is the only excise tax paid on the tires. While the total amount a taxpayer owes Internal Revenue Service (IRS) is reduced by the amount of the tire tax credit, this is not intended to lower the amount of Section 4051 tax owed. Accordingly, a taxpayer should report the full amount of Section 4051 tax liability on line 33 of Form 720 and then separately identify the tire tax credit total on the appropriate line in Schedule C. In other words, a taxpayer should not subtract the total amount of tire tax credit from Section 4051 liability and identify the difference on line 33. Doing so would result in underreporting Section 4051 tax liability. Similarly, a taxpayer should not deduct the tire tax credit amount from the Section 4051 tax triggered by a sale. For example, do not calculate a tax-included price (i.e., sale price multiplied by the 12-percent FET) and then subtract the tire tax credit. 2. Tire tax credit may not reduce base sale price Taxpayers can claim the tire tax credit whether or not they pass the amount along to customers. If they wish to give customers the benefit of the credit, they can discount the base sale price by the amount of the tire tax credit. This deduction should be made prior to calculating Section 4051 tax. In other words, taxpayers should first determine the base sale price of a taxable article (which may or may not include a discount for the tire tax credit). 3. Tire tax credit should not be treated as exclusion from taxable sale price Historically, IRS has distinguished the tire tax credit from other exclusions which may be subtracted from the taxable sales price (such as state sales tax, qualifying delivery charges, etc.). The conservative approach is to characterize the tire tax credit as a discount from the base sale price, rather than as an amount which could be excluded from the taxable sale price. If taxpayers want customer invoices to reflect the benefit of the tire tax credit, they might, for example, identify the price reduction as a “discount for tire credit.” Then, they would apply the 12% tax to the taxable sale price (i.e., amount of the discounted base sale price minus any permitted exclusions). For instance, if the base price of a taxable article was $50,000, the tire tax credit was $500 (which the taxpayer wanted to pass on to the customer) and available exclusions totaled $100, then Section 4051 tax should be $5,928 (12 percent multiplied by the difference between $49,500 and $100), and the total customer price should be $55,428. Using this example, if the taxpayer did not want to pass the benefit of the tire tax credit to the customer, Section 4051 tax should be $5,988 (12 percent multiplied by the difference between $50,000 and $100), and the total customer price should be $55,988. As always, please note application of Section 4051 tax is fact-specific. These general principles should be discussed with your tax adviser, in context of your particular taxable transactions.

Navigating tire tax credits

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