March 2013, TruckingInfo.com - WebXclusive
The trucking industry recently asked the Internal Revenue Service for clarification about how Federal Excise Tax applies to glider kits, seeking what Greg Althardt, partner of the dealership group at accountancy firm CliftonLarsonAllen, called some "bright line" results. It got some clarification, but not enough.
FET normally is assessed on the first retail sale of a vehicle, but also can be assessed on vehicles that have been modified, which is where it comes into play with glider kits.
The IRS response was a Chief Counsel Advice that left a fair number of issues cloudy. “We were looking to get some clarity because there is so much gray area out there regarding glider kits,” Althardt says.
“We wanted to know what the rules are so everyone can follow them," says Bradley Miller, a member of the American Truck Dealers association's legal and regulatory affairs staff. “We posed a number of questions to the IRS and that is what resulted in the CCA.”
A CCA is considered to have general applicability to a situation, so all taxpayers can look at it as guidance when making decisions, Miller says.
Althardt explains that a CCA could be used to make a tax position or tax argument. It is not as strong as a Revenue Ruling or Revenue Procedure, but it is better than a Private Letter Ruling.
Applying the 75% Rule
The questions posed to the IRS centered on donor vehicles and the 75% rule, which is considered a safe harbor.
The 75% rule is used when a vehicle has been in a wreck and the owner wants to refurbish it, or if a vehicle owner wants to extend the life of a vehicle. “Generally speaking, as long as the cost of the repair to the vehicle was less than 75% of the cost of a comparable new vehicle, then it was not subject to FET,” Miller explains.
Glider kits complicate the issue, because it is not clear in those instances what constitutes a donor vehicle.
“We wanted the IRS to define what a previously taxed or donor unit was,” Althardt says. “How much of the unit does the individual have to use? If a dealer cannibalizes a unit down to the frame, rails and front axles, is that enough to constitute a previously taxed article? Or if they are taking an engine from an old unit and sticking it into a glider kit, is that enough to be a previously taxed article?”
Althardt says they industry gave the IRS several scenarios concerning donor vehicles, including having a previously taxed article and retaining the engine, transmission and front axle. “We wanted them to tell us that is the bright line test, or to give us a bright line test that tells us [what we have to have]. They did not do that.”
The industry was hoping to get some definitive answers to that question so they would be able to determine how to apply the 75% rule.
Determining the Comparable New Truck Price
The next question concerned what price to use for the comparable new truck price. “Is that the retail price, the manufacturer’s suggested sales price, the lowest price a unit has been sold for?" Miller says. "What exactly is it?”