In Flint vs Stone Tracy Co (1911), the Supreme Court offered its definition of excise tax: “Laid upon the manufacture, sale, or consumption of commodities within the country, upon licenses to pursue certain occupations and upon corporate privileges.”
The simplified version: “A tax based on the value of services or property other than real estate.”
Ah, if only it were that simple. In reality, excise taxes are excruciating, exhaustive and, yes, even exhausting.
To sift through the nuances and gray areas, the NATM imported Bob Cirilli, an Internal Revenue Service agent specializing in excise and retail tax. He said he came not as an enemy, but as a friend who wants to protect the law-abiding manufacturers from the unscrupulous ones.
“Whenever someone gets away with something, the only people to get hurt are the people doing it right,” he said. “Those are the people I'm trying to protect. There aren't that many big-time crooks in excise anymore because a lot of the issues have been fixed.
“But there are some gray areas where aggressive manufacturers, retailers, and attorneys try to find little cracks to give their companies an advantage. We're out there to try to make sure that doesn't happen. We just don't want taxes to be a competitive advantage for anybody.”
Cirilli said Commissioner Charles O Rossotti has tried to change the IRS from an after-the-fact enforcement organization that punishes to a before-the-fact enforcement organization that teaches.
“Teaching is a whole lot more fun for everybody concerned,” he said. “I'd much rather that every taxpayer know every single thing they should and do it right and use it for that purpose than to have us come out to visit after three or four years, find something they've been doing wrong for a long time and jeopardize their business.
“I know what your burdens are. I know your emphasis is not on taxes but on selling your product at a profit. I'm making an extra effort to make sure I talk to as many people as I can.”
When he gave his phone number and encouraged the session's attendees to call, one of them yelled: “Do we have to tell you who we are?”
Tackling the Hot Topics
That levity served as a launching point for a positive session that included these “hot” topics identified by Cirilli:
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Exported sales. He said if a unit is manufactured and shipped directly to an export location, that unit is sold tax-free. If that unit later comes back into the country, it's subject to tax as a used vehicle because retail tax is assessed on the first US retail sale.
If a manufacturer sells trailers to a dealer in Buffalo, and that dealer subsequently sells those trailers to a Canadian company, and those trailers ultimately come back into the US, they're not subject to tax because when the Buffalo dealer received them, there was an opportunity for a US retail sale.
“The critical thing for your dealers' customers is that they have a documented trail of where the trailers went,” he said. “That doesn't seem like a big issue, but it's becoming more and more of an issue because end users that buy them or the importer that buys them back are, a lot of times, retail detailers who are looking for another source of inventory for used equipment. They're kind of jeopardized because if they don't have proof, we're going to assess tax. So to protect them, they should have documentation.”
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Freight. He said the law states that any freight charges that were incurred by the manufacturer to get a product to the dealership can be included in the sales price. If, however, a retail dealer orders trailers from a manufacturer and ships them directly to the customer, a portion of that might be exempt.
“Let's say the freight to your dealership was $200 and the cost to send it directly to your customer is $275,” he said. “Only $200 of that is includable in the taxable portion. As a manufacturer, it's not quite as clear. If you have one manufacturing plant and you sell out of that, any freight from that plant is excludable from the sale because the point of retail sale is your manufacturing plant.
“Where it gets sticky is if you're more advanced and you have a number of branches scattered across the country and you're sending trailers to each one of those locations for distribution or final delivery. You have to determine where the point of retail sales actually occurred. If every order that comes in from the end user goes to your main plant and gets processed from that plant and the end user pays at the plant, then that's the point of retail sale. Any freight that was sent out to your branches is not includable in the taxable amount.
“On the other hand, if every one of your branches can sell a unit or your customers go to that branch to do all the final arrangements, in reality that branch is the point of final retail sale. So any freight for sending that unit from the manufacturing plant to that branch is includable in the taxable amount.”
He said that in truck manufacturing — more so than with trailers — some manufacturers and their dealers have elected to pay tax at the point of manufacture to save money ($120 per truck, on average). He said some markets are so competitive that it is done that way, even though that wasn't the intent of the law.
“Trailers are slightly different because the law is written differently,” he said. “If the tax is paid at the point of manufacture, the retailer has to claim a refund under Form 720 for the taxes paid and recalculate the tax for the total amount they delivered. So the freight they incurred to get it from the factory to them is still going to be included.”
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Tax Reform Act of 1997. It eliminates the requirement that a retailer register Form 637 with the IRS and provide proof of that before a unit could be sold tax-free. The new act says that when a manufacturer sells to a dealer or a leasing company, the only requirement is that the invoice includes the phrase, “this unit is sold for resale or lease.” That verbiage relieves the manufacturer from liability and shifts it to the retailer. (Please turn page)
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Incomplete chassis. He said if a dealer sells an incomplete chassis, it must receive a statement from the buyer certifying that the unit won't be turned into a tractor.
“Let's say a Ford dealer has a F-350 and he takes the bed off and now that pickup truck doesn't have anything sitting on the rails,” he said. “Now he's selling an incomplete vehicle that will be subject to tax if it's converted into a tractor.
“Most of the RV trailers and new racing trailers are exceeding 26,000 GVW or they've gotten to the point where they're very close to that and need a heavy-duty vehicle. In ’99, the market was 15,000 for those recreational tow vehicles, so it's becoming a significant part of the industry. We're contacting every retailer we can find and telling them that those units could be subject to tax. An awful lot of units reach dealers' lots incomplete. A trailer chassis can get into that situation, too. A lot of people don't realize that trailers have a chassis and body, but they do.”
He said he can “almost guarantee” that there will be a private-letter ruling on this issue, adding that two livestock-related cases in Oklahoma are close to the courts.
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De-rating a trailer. Cirilli gave this example: An IRS agent visits a retailer or manufacturer, looks at trailers with high-capacity axles and says, “This doesn't make any sense. By my calculation, the GVW should be more than 26,000.” Then the engineer makes his calculation and says, “Yes, this trailer is designed for more than 26,000 GVW.”
“It's going to be a problem,” he said. “But the only way it comes up, though, is if the agent is in there looking at the records and he sees that it's standard operating procedure. If there's one trailer out of 100 that was down-rated in a year, he's never going to notice. Or if he does, he's not going to pay much attention to it.”
Cirilli said he realizes that the trailer industry is somewhat perplexed because there have been so many gray areas. His advice: Do what makes sense.
“It's like the recreational tow vehicles,” he said. “We look at why someone would buy that specific vehicle. I've pulled every kind of trailer. I know what I bought each individual trailer for. I knew if I was buying it for recreational use. Usually when you look at a product, the intent is clear. Essentially, you're in charge of rating the trailer.
“I'm hoping somewhere down the road somebody comes up with a better system for rating trailers so we don't have controversy. It's not fair to you.”