Experts tackle federal excise tax issues

April 1, 2002
AFTER getting the caveats out of the way, two specialists provided an update on federal excise tax issues during a seminar on FET at the NTEA convention

AFTER getting the caveats out of the way, two specialists provided an update on federal excise tax issues during a seminar on FET at the NTEA convention in Orlando.

Speaking at the session were Bob Cirilli, an excise tax specialist for the IRS and Mark Sidman, NTEA legal counsel. Cirilli works with IRS agents across the country in an effort to provide uniform application of excise tax regulations. Sidman, an attorney based in Washington DC, frequently represents NTEA members in FET cases.

“Bob and I do not always agree, but I respect the reasoning that goes into his decisions on excise tax,” Sidman said. “Don't treat my answers as legal advice, and don't treat Bob's answers as the official IRS position. We are giving you the best information we can, but the tax is very complicated and very specific. You will need to talk to your tax advisor or get an IRS letter ruling if you want a definitive answer.”

The two experts then proceeded to navigate their way through some of the new wrinkles that are showing up in the tax code.

Tax-resistant cranes

One of those wrinkles is a loophole that has allowed some companies to sell cranes tax-free while others have had to charge the 12% tax. The “mobile machinery exception” has been one of the hot topics in excise tax in recent years. The subject generated five letter rulings in 1999 and into 2000 — all of which have been revoked by the IRS.

The letter rulings represented favorable responses to what Sidman considered less than forthright representations about the types of truck-mounted cranes in question.

“When you send in a request, you are the master of what goes on that piece of paper,” Sidman said. “You can describe the equipment any way you want. But the ruling is only as good as the description you give to the IRS. The ruling requests were not really forthright in the way they described the equipment, which led the chief counsel's office to issue the rulings that they did.”

To qualify for the mobile mount exception, the chassis must have permanently mounted equipment, must have been specially designed only as a mount for the equipment, and must require substantial modification to be used for any other purpose. Some of the cranes being sold tax-free under the letter rulings were installed on conventional chassis.

“By the time the five rulings were out, about half of the industry had letter rulings and were able to sell tax-free,” Cirilli said. “The rest of the industry did not have a private-letter ruling and literally was dying on the vine.”

Cirilli said that members of the industry brought pressure on the IRS to reconsider the private-letter rulings. The IRS responded by revoking the rulings March 15, 2000.

Potshots at hotshots

Recreational tow vehicles, originally nicknamed hotshots, also are drawing fire from the IRS. The trailers are used in a variety of industries, including ranching, recreational, and automobile racing.

As these trailers increased in size, the ability of light-duty vehicles to pull (and more importantly to stop) them trailers diminished. About three years ago, Ford and General Motors both introduced 18,000-26,000-GVW chassis that could handle these larger trailers, and the truck body industry responded with bodies designed specifically for these towing vehicles.

The IRS now considers some of these under-33,000-pound GVWR trucks to be tractors — and subject to FET — if they are equipped specifically for that purpose.

“Tractors do not have any GVW threshold,” Cirilli said.

Cirilli encouraged anyone who is not sure about the tax status of a particular vehicle to contact him or another excise tax agent for clarification. A picture or a sheet of literature would help the agent reach a decision. The decision would be based on the primary design of the vehicle. Such vehicles are taxable if their primary purpose is to tow a trailer — even though the truck body may provide some cargo-carrying capacity and the vehicle has a GVWR below 33,000 pounds.

“We would much rather give you information before you make a mistake than when someone catches it two years later.”

Conversion experience

Changing the function of a vehicle — from a truck to a tractor or from a tractor to a truck — generally has been considered an event that triggers FET. But Cirilli surprised excise tax veterans by saying that excise tax probably is not due when the function of a used truck is changed. He pointed out that excise tax law is written around how the vehicle was designed when delivered to the first retail purchaser.

Cirilli said that the Tax Reform Act of 1997 changed some aspects of FET and had no effect on others. Under this law, tax is no longer automatically triggered when the function of a vehicle is changed. Because the law continues to allow the value of used components to be deducted from the selling price (a vehicle becomes used as soon as it goes into service), it is difficult to trigger tax by changing the function of a used vehicle. However, a nontaxable truck could become taxable if it is converted to a tractor prior to the first retail sale.

Sidman, however, was not convinced that changing the use of the vehicle is now tax-free in most cases. He advised caution.

To clarify these and other ambiguities regarding excise tax, only the chief counsel's office of the IRS can interpret the law to the point that an individual company is protected, Cirilli said. This can come in the form of either a private-letter ruling or a technical advice memorandum.