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?”[PAGEBREAK]
Althardt says determining the retail price can be complicated. “In many cases it is difficult to know, because it could be a type of truck the dealer does not sell or a configuration he has not sold before.”
He believes the CCA gives dealers and others doing glider kits some latitude in the area of price, because one of the answers to the question about comparable price was average retail price.
“To me this means the transaction price on a retail sale," he says. "It does not mean using the price you get for selling 500 trucks to a fleet on which the fleet is receiving massive concessions from the manufacturer.
“I take it to mean the price I am selling to an individual on a stock unit; taking the average of transactional prices.”
One area where the IRS did provide clarity was with regard to who has the liability for collecting, remitting and reporting FET: the title holder.
“For example," Althardt says, "if the fleet has a donor unit (previously taxed) and has the dealer install a glider kits, then the fleet is responsible for determining if FET needs to be paid, because the dealer never took title to the donor unit."
According to Miller, the recent CCA does not provide a great deal of guidance, especially in helping to determine what the definition of a donor unit is.
Miller encourages those involved in the glider kit business to speak with their attorneys and tax advisors on FET as it relates to glider kits to ensure they are doing things properly.
“We want bright lines to the extent they are possible,” he says. “We don’t want dealers having to make judgment decisions for themselves about whether or not they should be charging the tax. It does not make sense for them to do it, and we think it is a place where the IRS really could help dealers as well as their own auditors.
“We are glad the IRS took the time to [issue a CCA], but we don’t think we are quite there yet in terms of giving clarity.”
You Haven't Heard the End of This
Althardt does not believe this most recent CCA is the last thing dealers will hear from the IRS on FET and glider kits.
“The IRS is very aware of the issue now. I think we will see a court case that ultimately will give us clarity on specific issues.”
There is one caveat, according to Althardt.
“The only question is, will the EPA actually beat everyone to the punch. This is kind of a wild card.”
Currently a fleet can purchase a glider kit and put its older engine into it and still run the unit.
“However, the EPA could step in and say in order to run a tractor across the country you have to have a post-2010 engine. The EPA could step in and put an end to the reason why a lot of individuals and fleets are moving toward glider kits.”