Excise Tax Changes Under New Federal Law

RECENT CHANGES brought about by the Taxpayer Relief Act of 1997 are good news for those who pay or charge federal excise tax, according to Mark Sidman, legal counsel for the NTEA.

The legislation contains several provisions that benefit those in the truck equipment industry. They include:

The six-month rule. Previously, buyers of taxable trucks could add a maximum of $200 in parts and accessories within the first six months of the purchase. Purchases in excess of $200 were subject to federal excise tax. Last year's legislation raises that threshold to $1,000.

"As before, the owner of the vehicle under the rule is primarily liable for the tax," Sidman explained. "The installer is still secondarily liable. However, the IRS has never clarified the meaning of secondary liability."

Tire tax credit. The second change involves how the taxable price of the chassis is computed. Previously, the seller was allowed to deduct the fair market value of the tires. Congress has replaced the deduction for fair market value with a credit for the actual excise tax paid on the tires. The old system was a common cause for tax audits.

"It became a huge audit issue," Sidman said. "Invariably, whatever number you came up with for the deduction, the auditor decided it was too high."

Tax on further manufacturing. This is the third and most important change, according to Sidman. Starting January 1, 1998, the new legislation all but eliminates the tax on further manufacturing on items that previously were taxed.

Sidman used the example of a single-axle truck rated at 34,000 pounds GVW that already had been taxed. If subsequently a lift axle is added to the truck, there will not be tax-unless the cost of the axle and installation is more than 75% of a comparable tandem-axle truck.

"Because the threshold is so high, there are almost no modifications that would be performed that would exceed the 75% threshold," Sidman said. "Most people would not pay that kind of money for a modification."

The same holds true for the restoration of trucks and for work that changes the transportation function of a vehicle, such as converting tractors to or from straight trucks. In these cases, when the cost is less than 75% of a comparable vehicle, no tax must be paid, unless the vehicle has not been previously taxed and the six-month rule does not apply.

"For the garden variety of cases, you probably will not have to worry about tax on further manufacturing," Sidman said.

Tax-Exempt Sales The IRS has simplified selling items tax-free for resale. Congress has directed the IRS to come up with new regulations that will allow for simple certification on the face of an invoice. The NTEA office has sample language that can be used on the invoice for such sales.

In addition, the law says there will be no registration requirement.

"This is a huge change," Sidman said. "The problem was not with sales from manufacturers to distributors. The difficulty was with the customer coming off the street. The distributor had no idea if the customer was registered for tax-free sales. He may claim to be registered, yet not have any proof that he was registered for tax-free sales-and he needed to buy today."

The law was passed last summer and went into effect January 1. However, the IRS had not issued regulations that clarify what the agency requires. Sidman expects the regulations to come out later this year.

"If you are registered for tax-free sales, you should stay registered," Sidman said. "If your customers have registration numbers, take them."

Congress gave the IRS the authority to eliminate registration requirements for other types of sales, including those to municipalities and for export. However, the agency has yet to act on this issue, Sidman said.

"The three major changes are the $1,000 threshold in the six-month rule, the changes regarding excise tax and tires, and the further-manufacture threshold of 75%," Sidman summarized. "All of these changes are positive. As far as tax legislation is concerned, we are pleased with it. Mike Kastner (NTEA's liaison in Washington) worked hard to get this legislation through Congress."

Not Suitable Sidman said NTEA continues to be most concerned that the excise tax still includes a suitability-for-use test. Because of this test, the industry can expect continued uncertainty over which particular truck bodies require distributors to charge customers an additional 12%.

"Small businesses need objective standards," Sidman said. "To charge tax based upon whether a body is suitable for use on a chassis rated below 33,000 pounds GVW is not an objective test. We are still working on that in Congress. We can't eliminate the tax, but we do think it is right that we have rules that everyone can understand."

Question: How much input do we as an industry have in the actual writing of these new regulations?

Sidman: The IRS has several avenues available. Most likely, the IRS will come out with regulations later this year, and we will have a chance to respond to them. We need to look at what will be proposed regarding the registration for tax-free sales. While the news is good, Congress was not specific about this area.

Question: Please clarify the tax status of modifications performed to used equipment.

Sidman: If you buy a used chassis and modify it (assuming it previously had been a taxable article), it would not be taxable on resale so long as the modifications cost less than 75% of the cost of a comparable chassis. If it was a single-axle truck rated just under 33,000 pounds GVW, for example, the truck would become taxable when you add a lift axle.

As for bodies: When you put a new body on any chassis-new or used-that body is taxable unless it is suitable for use on a chassis with a GVWR below the taxable threshold.

Question: Does the six-month rule on parts and accessories include labor?

Sidman: Yes. If the work is done as a series during the six months, you must count the value of the entire series. You as the installer are secondarily liable for the tax, but you are not primarily liable.

Question: For those cases where we have secondary liability for federal excise tax, is it possible to simply inform the customer of his tax liability, or do we have to charge FET?

Sidman: On a retail sale, the taxpayer under the law is the seller, not the buyer. The obligation to file a return is on the seller. The buyer is not the taxpayer.

Question: Is the cost of the installation of taxable bodies taxable?

Sidman: Installation is a particularly confusing area. There are rulings, and the regulations state that you get a deduction for the cost of installation. If you sell a complete package-taxable body and taxable truck-there is no deduction. The case of a taxable body being installed on a used chassis is different. The IRS has said that installation charges attributable to the attaching of a hoist to a body is taxable, but the installation of a body and hoist to a chassis is not taxable. The rulings in this area have been vague and convoluted.

Question: Does the 75% rule apply to the installation of new truck bodies on used chassis?

Sidman: No. A new, taxable body remains taxable-regardless of whether it is installed on a new chassis or a used one. However, you can spend up to 75% of the cost of a new body restoring the customer's old one and not have to pay excise tax. That is something you may want to discuss with your customer.

Question: We buy new trailers and convert them into mobile medical clinics. What is our tax liability?

Sidman: The worst-case scenario is that the components that are considered to be chassis are taxable. The medical equipment would not be taxable. Everything above the running gear likely will not be taxed. There are rulings on this. Contact the NTEA.

Question: If I sell mobile medical clinics to the federal government, the state government, or a municipality, do I need to charge any tax?

Sidman: Interestingly, the federal government currently is not excluded from federal excise tax. State and local governments buy tax-free.

Question: I understand that if the cost of the modification does not exceed 75% of a comparable new vehicle, there is no tax. What happens if the cost of the modification is below 75%, but the retail price exceeds 75%?

Sidman: The statute says that the cost of the repairs and modification must not exceed 75%. However, this is the type of issue where the field auditor is likely to be aggressive.

Question: If we restore a chassis and the van body mounted on it, how would we apply the 75% rule?

Sidman: Treat the chassis and body separately. Is the cost of the refurbished chassis less than 75% of a comparable new one? The same holds true for the body.

Question: A truck body manufacturer states that a particular body is designed to go on a truck rated less than 33,000 pounds GVW. However, the customer wants it installed on a taxable chassis. Is the body taxable?

Sidman: You should determine suitability for use only once. Once that determination is made, that body either always is taxable, or it never is taxable. The statute is so terrible because the phrase "suitable for use" is so vague. A body is considered suitable for use if it has "practical or commercial fitness." I look at it this way: Does it make sense on a price basis or an engineering basis to install the body on a chassis rated less than 33,000 pounds GVW?

That's well and good in theory. A 21-ft platform body may have practical and commercial fitness installed on a chassis rated below 33,000 pounds GVW. But auditors have read the 1988 technical advice memorandum about 21-ft platforms, and they have it in their minds that there is a 21-ft rule. This is not true.

Typically, auditors judge suitability for use by the frequency in which bodies are installed on taxable chassis. In one case, 250 identical refuse packers were installed, 15% on chassis below 33,000 pounds GVWR and 85% above. In that case, all were considered to be nontaxable. However, the IRS never has been willing to say that 15% proves the body's suitability for use on nontaxable chassis.

The first thing I would use to determine suitability for use is my own numbers. On large volumes of sales, a relatively low percentage-perhaps 15%-is sufficient to prove suitability for use. But if you only have five sales, and four of them went on taxable chassis, an auditor probably will say that you should have charged tax on the other. If that happens, you will have to prove-by sales other than your own-that the body is suitable for use on chassis rated below the taxable threshold.

Question: We have customers who ask us to convert tractors to straight trucks and install a body. What are the tax consequences of changing the transportation function of a used vehicle?

Sidman: In most situations, with the change in the further manufacturing rules, only the body is taxable.

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