FET Specialists Search for Tax Rx

We've been struggling with several issues that have come out of The Taxpayer Relief Act of 1997," said Mark H Sidman, an attorney with Weiner, Brodsky, Sidman & Kider, LLC. Sidman was speaking to a full audience during a Federal Excise Tax (FET) seminar at the 36th annual NTEA convention and exhibition.

Along with Sidman was Robert Cirilli, excise tax specialist with the Internal Revenue Service. "Now we are looking into ways to place clear understanding into the law for many of the body builders that are struggling with FET issues."

"The Taxpayer Relief Act of 1997 made several significant changes to the FET on the retail sales of truck, trailer, and chassis," said Sidman. "These changes involve the tax treatment of further manufacturing, the registration requirements for tax-free sales, and the six-month rule."

Fortunately, Sidman believes these changes are good for the industry. "Our concern is industries' understanding of these rules."

"A great place to gain some of the needed comprehension of FET issues is the Excise Tax quarterly published by the NTEA," said Sidman. "But I want to present a few circumstances that provide an indication of the direction that the IRS will follow concerning FET issues."

"Unfortunately not everything that we are talking about is as black-and-white as I know we would all like it to be," said Cirilli. "But I am spearheading a group of excise tax specialists that are actively looking into the clearing of many tax questions posed to the IRS by this industry."

Is it Suitable? One of the largest areas of misunderstanding is the 'suitable for use' observation, Cirilli said. If a body on a vehicle is below the FET floor level of 33,000-lb gross vehicle weight (GVW), then the body is not taxed under the FET statutes. When a body is built and used in this manner, it is considered nontaxable because it is 'suitable for use' on non-FET taxable chassis.

"According to our regulations, the IRS provides that a body or chassis is 'suitable for use' with a vehicle rated below the taxable GVW threshold if it has practical and commercial fitness for such use," said Cirilli. "Where confusion comes into play is at what percentage do we draw the line when considering the usage of a body on a non-FET chassis, and does this application have practical and commercial use?"

According to the first example provided by Sidman, a retail seller of a specialized body installs 45 of the 300 yearly sales of this body style, on chassis rated at 33,000-lb GVW or less. Sidman asked the audience if this is a taxable event under current FET regulation.

"Our discussions with the IRS would indicate that the overwhelming likelihood is that the body is not taxable," said Sidman. "The number of installations on vehicles below the FET taxable threshold is a large enough percentage that it does prove there is a 'practical and commercial fitness' for this subject body to be installed on nontaxable chassis."

Cirilli added, "We don't know at the field level the magic percentage. In this case, 15% of the bodies were used on non-FET chassis, but I can't tell you that 15% is the specific magic threshold number for all circumstances.

"Since consistency is expected for any given body, a problem exists at the retail level. A determination of commercial and practical fitness should be made at the manufacturer's level with data supplied to the retailer," said Cirilli. "A manufacturer or retailer just stating that a body has commercial and practical fitness is not enough."

In the second situation discussed by Sidman and Cirilli, a retail seller of a specialized body installs one of ten body sales on vehicles rated below the 33,000-lb GVW taxable threshold. The retail seller serves a specialized customer base, the mining industry, for example, that puts the completed vehicle into tandem-axle, heavy-duty service. The retail seller is aware that other sellers of the identical model body routinely install the bodies on single-axle trucks rated below the FET taxable threshold. Sidman poses the question of taxable liability for the specialized retail seller of the body.

Under Sidman's observation, any given model of a body is either taxable or nontaxable, regardless of who sells it. "The body is either suitable for use with a vehicle that has a gross vehicle weight of 33,000 lb or less, or it isn't," Sidman said.

"The problem in this example is one of proof." A seller whose own sales show a low number of units, in this case, ten, and a low percentage of vehicles rated below the taxable threshold, in this case, one, will face an uphill battle in convincing the IRS that the body is nontaxable, according to Sidman. "However, if the specialized retailer can obtain credible evidence of third-party installations of this model of body on vehicles below the taxable FET threshold, the body should be nontaxable."

The problem is, according to Sidman, that the specialized retailer won't be able to find accurate third-party data to support his claim. "Who would like to open their own records up to help this specialized retailer support his claim?" Sidman asked.

Exceptions to the Rule "There are easily definable exceptions to the rule of FET applicability," Sidman said. "Here are a few exceptions that seem to be well documented and defined by the IRS and the field agents."

*Specifically designed mobile machinery for nontransportation functions. This would be inclusive of, but not exclusively, any self-propelled vehicle that has a bolted, riveted, or other permanently affixed machinery whose function is to perform construction, manufacturing, processing, farming, mining, drilling, timber clearing, or operations similar in scope to the aforementioned, if A) the equipment is unrelated to transportation on or off a public highway, or B) the chassis has been specially designed to serve only as a mobile carriage, mount, or power unit for the specialized machinery or equipment involved.

*Trailers that are designed to serve no other purpose, other than providing an enclosed stationary shelter for the carrying-on of an office function, which is directly connected with and necessary to the aforementioned activities, specifically at an off-highway site.

"There is a great deal of risk for manufacturers and retailers of these types of vehicles," said Sidman. "IRS determinations are extremely fact specific, and taxpayers who rely on rulings issued to others proceed at their own risk.

"Sellers of these types of vehicles should strongly consider obtaining a private letter ruling," said Sidman. Cirilli strongly agreed with this advisory statement. "Right now the issue is unfortunately very gray. I would strongly advise a letter ruling for any manufacturer of this type of equipment."

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