United States

Recovery vehicle’s lifting and towing equipment not subject to excise tax

IRS rules certain equipment exempt from heavy truck retail excise tax

TAX ALERT  | 

On Nov. 21, 2014, the IRS released PLR 201447001 dealing with the taxability of certain machinery and equipment installed on an otherwise taxable vehicle. The taxpayer addressed in the ruling manufactures recovery vehicles (i.e., wrecker and tow vehicles) in the United States and sells these vehicles to end users or to retail dealers. These recovery vehicles are mainly used to: (1) retrieve a damaged vehicle from a difficult-to-reach accident site; (2) position a retrieved vehicle near a recovery vehicle that will tow the retrieved vehicle; (3) lift heavy equipment, such as air compressors and electrical transformers, over fences or other obstacles; and (4) position heavy equipment, such as air conditioning units, on rooftops.

The following equipment is installed by the taxpayer on the taxable recovery vehicles: (1) a boom assembly; (2) a drag winch; (3) outriggers; (4) a subframe; and (5) controls for the operation of the boom assembly and drag winch.

In addition to a double frame that provides sufficient strength to support the transportation of the equipment as well as to tow, the recovery vehicles have a subframe. This subframe provides the additional strength needed to support the safe operation of the boom assembly at the job site. The subframe also contains the other half of the large ring and pinion gear set in the rotator turret that enables the boom to rotate. The taxpayer represented that although the underlift assembly is partially mounted on this subframe, the subframe is not necessary to support the weight of the underlift assembly or to enable it to safely function. The recovery vehicle's underlift assembly is a separate piece of equipment that has an independent hydraulic system. The underlift assemblies were not at issue in this ruling request.

The issue at hand is whether this equipment is subject to the retail excise tax on heavy trucks and trailers under section 4051. Reg. section 48.4061(a)-1(a)(3)(ii) provides an exclusion from the taxable sale price of a chassis or body for amounts charged for machinery or equipment that are installed on a taxable chassis or body if (1) such machinery or equipment does not contribute toward the highway transportation function of the chassis or body, and (2) the reasonableness of the charge for the machinery or equipment is supportable by adequate records.

Accordingly, the exclusion in Reg. section 48.4061(a)-1(a)(3)(ii) applies to equipment if such equipment contributes more to the nonhighway transportation function than to the highway transportation function of a vehicle's chassis or body. In other words, the equipment is not subject to the retail excise tax on heavy trucks under section 4051 if it contributes primarily to the nonhighway transportation function of the vehicle.

The IRS stated that although the taxpayer's boom assembly's rotational capacity can aid in weight distribution and clearance when towing certain loads, this contribution to the highway transportation function of a recovery vehicle is incidental. The boom's primary purpose is to retrieve or position damaged vehicles and other heavy equipment. The drag winch does not contribute to the highway transportation function of a recovery vehicle because its function is limited to pulling heavy objects from uneven ground onto level ground or pulling objects out of resistant circumstances. The outriggers do not contribute to the highway transportation function of a recovery vehicle because their use is limited to boom and drag winch operations, neither of which contributes to the highway transportation function of a recovery vehicle. The subframe does not contribute to the highway transportation function of a recovery vehicle because the subframe provides the additional strength needed to support the safe operation of the boom assembly. The subframe is not needed to transport equipment, nor is it necessary to support or safely operate the underlift assembly. The control panel is primarily used to operate the boom assembly, the drag winch, and the outriggers. In some instances, the control panel may also operate the underlift assembly, but this operation is merely an incidental contribution to the highway transportation function of a recovery vehicle.

The IRS concluded that the taxpayer's equipment contributes primarily to the nonhighway transportation function of the recovery vehicles. Any contribution to the highway transportation function of the recovery vehicles is merely incidental. Accordingly, for purposes of section 4051, the IRS ruled that the taxpayer is permitted to exclude from the taxable sale price of a recovery vehicle amounts charged for the installed equipment that is installed if the reasonableness of the charge for the equipment is supportable by adequate records.

This ruling serves as a reminder to examine trucks for onboard equipment that does not primarily contribute to the highway transportation function of a vehicle's chassis or body in order to take advantage of the exemption from the retail excise tax.

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