United States

IRS provides guidance regarding heavy truck excise tax

TAX ALERT  | 

A federal excise tax of 12 percent is imposed on the first retail sale of heavy trucks and trailers. There are several exceptions to the tax, including ones related to (1) chassis suitable for a vehicle with a gross vehicle weight of 33,000 pounds or less; (2) trailers weighing 26,000 pounds or less; and (3) tractors weighing 19,500 pounds or less with a gross combined weight of 33,000 or less.

It is common in the trucking industry to refurbish used components of vehicles (especially engines and transmissions) and then reuse them by combining the refurbished components with other used components or with new components. Since the excise tax applies to the “first retail sale” of the article,  it was uncertain whether the excise tax would apply under several scenarios involving combining refurbished equipment with other new and used equipment. A recent chief counsel memorandum reviewed the following scenarios to provide guidance regarding whether the tax would apply:

Scenario 1

At a customer’s request, Outfitter removed the engine and transmission from the customer’s used truck and sent them to a remanufacturing company. At the customer’s request, the remanufacturing company sent Outfitter a different refurbished engine and transmission. Outfitter combined the refurbished engine and transmission with the following new components: finished cab and hood, front axle and brakes, front suspension and steering, rear suspension, chassis frame, fuel tanks, electrical system, engine cooling system, rear drive axle, and rear wheels and tires. Outfitter sold the finished truck to customer.

Scenario 2

At a customer’s order, Outfitter removed the transmission and rear axle from the customer’s used truck. Outfitter combined the used transmission and rear axle with the same new components as in Scenario 1 and sold the finished truck to the customer.

Scenario 3

A customer ordered a truck from Outfitter. To fill the order, Outfitter combined the same new components as in Scenarios 1 and 2 with an engine and transmission from a used truck in Outfitter’s inventory. Outfitter sold the finished truck to the customer.

Scenario 4

A customer provided Outfitter with new components, including a finished cab and hood, front axle and brakes, front suspension and steering, rear suspension, chassis frame, fuel tanks, electrical system, engine and engine cooling system, and rear wheels and tires. The customer also provided Outfitter with a used transmission and rear axle. The customer retained title to all the components. Outfitter assembled the components into a truck. The customer paid Outfitter for the assembly and overhead expenses associated with the finished truck. The customer used the finished truck in its business.

Analysis

Because the excise tax is based on the first retail sale of an article, the IRS had to determine whether each of the scenarios should be considered a first retail sale. The Code defines “first retail sale” as the first sale, for a purpose other than for resale or leasing in a long-term lease, after production, manufacture or importation. A safe-harbor rule provides that an article potentially subject to the excise tax is not treated as manufactured or produced solely by reason of repairs or modifications to the article if the cost of such repairs or modification does not exceed 75 percent of the retail price of the new article. Under the safe harbor, a chassis is not considered “manufactured” if its repairs and modifications do not exceed 75 percent of the retail price of a comparable new chassis.

The IRS determined that Congress intended to limit the 75 percent safe harbor to modifications to an existing article and did not intend the safe harbor to apply to the mere combination of automotive components. Additionally, the IRS noted the Boise National Leasing v. United States case, in which the court ruled that a combination of new cabs, frames and other minor components with major components of old trucks, such as engines and axles, to produce complete and operational trucks constituted manufacturing for excise tax purposes.

The IRS then determined that each of the four scenarios presented was subject to the retail excise tax. Scenarios 1 through 3 were subject to the tax because each constituted a first retail sale of an article. Scenario 4 was subject to the excise tax because the use of an article before its first retail sale is required to be treated as the first retail sale of the article.

The 75 percent safe harbor did not apply to any of the scenarios because neither the outfitter nor the customer was modifying or repairing an article. Instead, the IRS determined that each was manufacturing a new article from a combination of new and used automotive components, none of which were articles for federal excise tax purposes.

Conclusion

Taxpayers potentially affected by this guidance include any companies in the business of refurbishing truck components or combining new and used truck, tractor or trailer components. Because this guidance restricts the circumstances under which the safe harbor applies, taxpayers should carefully consider how it could apply to their specific facts.

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