GREG Althardt told the NTDA attendees that he and his LarsonAllen LLP cohorts could sit in the meeting room for two days and still not answer everybody's specific questions about the Federal Excise Tax (FET) and IRS Code Section 263A.
Instead, Althardt, Dave Wiggins, and Terry Werner — CPAs for LarsonAllen — explained the issues involving FET and examined the top questions they have received.
Wiggins said the FET system was to expire on September 30, 2011, unless extended by Congress. On September 16, the Surface and Air Transportation Act was signed. Part of this act extended the existing retail FET tax on heavy trucks, tractors, and trailers through March 31, 2012. Beyond this date, it will have to be extended again, terminated, or changed.
The National Auto Dealers Association (NADA) and its American Truck Dealers (ATD) division have been seeking support for the following: eliminating the current FET system on heavy trucks (and presumably trailers) and replacing it with a “revenue-neutral” 7.3 cents increased diesel tax. Wiggins said there is little chance of that passing by March 31, 2012, but it could gain momentum depending on length of the next FET extension.
The top questions, and the answers Wiggins provided:
Q: When are trailers subject to FET?
A: “The Retail Federal Excise Tax on trailers and trucks are written into the IRS code in sections 4051-4053, and there are also detailed instructions under Publication 510. FET is due on the first retail sale of a trailer that is over 26,000 GVW. FET is 12% of the total sales price on the trailer and all applicable equipment. FET is set to expire again on April 1, 2012.
Q: How is the first retail sale determined?
A: “The first retail sale is defined by the IRS as the following: any sale that doesn't fit one of the following exceptions: (1) A prior taxable sale of a body has occurred (six-month rule on used trailers); (2) the sale qualifies for tax-free treatment under IRC S 4221; (3) the sale is for resale and the sale for resale satisfies the requirements for tax-free treatment. Use can trigger FET — use in a short-term rental fleet while for sale. Short-term or long-term leasing can trigger FET. The lessor is responsible for FET, and will want to include FET in figuring lease payments. With the sale of a used trailer within six months of the new sale, FET is due on the second sale, but you can file for reimbursement of FET.”
Q: What sales are exempt from FET under code section 4053?
A: “No registration is required or documentation under these sales: camper coach bodies for self-propelled mobile homes; feed and seed fertilizer equipment; house trailers; ambulances and hearses; concrete mixers; trash containers; rail trailers and rail vans; mobile machinery; idle-reduction devices; advanced insulation; off-highway transportation vehicles; and non-transportation trailers and semitrailers. Idle-reduction devices must be approved by the EPA prior to tax-free sale. It's only on tractors, not trucks, according to current legislation. Off-highway vehicles must be specifically designed for the primary function of transporting a particular type of load off road and because of their special design are substantially limited or impaired in their capability to transport a load over a public highway at 25 miles per hour.”
Q: When selling a unit to the US government, is this sale tax-free?
A: “Units sold to the US government are subject to FET. Tax-free sales involve sales to state or local governments; non-profit educational organizations; qualified blood collector organizations; sale for export; sale for further manufacturing; supplies for vessels and aircraft. With sales to state and local government, you must obtain an exemption certificate from the officer of the state or local government — no registration is required — and it must be for the exclusive use of the government entity. You should maintain all signed documents for a period of three years. With a sale to non-profit educational organization, it must be for the exclusive use of the organization; must be a 501(a) organization; must be a 501(c)3 organization and only conduct normal educational classes; must sell directly to the organization; and must keep documentation for three years.”
Q: If I'm importing a unit from Canada or Mexico and selling it to an end user, do I have to charge FET?
A: “The first question always is, ‘Has a first retail sale occurred prior to importation/exportation?’ If FET was paid prior to exportation, and it was subject to tax-exempt sale for export to an end user, then no FET is due on the importation of the US-manufactured trailer. With the exportation of US-built trailers, the sale of a US-manufactured body directly to an end user should be tax-free sale. Issue an exemption certificate for exportation. This is also deemed the first retail sale — no future FET is due if imported into the US, with a few exceptions. The sale by a manufacturer to a foreign dealer/distributor should be tax-exempt by issuance of a certificate for resale. It doesn't qualify as first retail sale, and future importation into the US is subject to FET.”
Q: Can a trailer ever be subjected to FET after the first retail sale?
A: “Further modification of a taxable item is taxable if it results in the modification of a different article. That would involve changing the transportation function, restoring a wrecked vehicle to usable vehicle, or extending a vehicle's useful life. Under the 75% Re-manufacturing Rule, if modifications to the chassis exceed 75% of the retail price of an equivalent unit, then FET is due on modifications. Components are separate. Tractor and trailer are separate.”
Q: What should I do if I'm being audited?
A: Do not represent yourself. Hire a Power of Attorney familiar with federal excise tax to represent you. Determine if there are possible tax overpayments that might be used to offset any audit deficiencies. Review how tax is determined and if ‘first sale’ occurred. Review non-taxable sales to be certain that exemption certificates are on file prior to the audit. Be sure deposits on Schedule A match with timing of deposits actually made. Similar to payroll tax reporting, most penalties are self-reported. For errors occurring infrequently, you will normally be able to get penalties abated. You will always pay interest. ‘Infrequently’ usually means errors less than three to five years. Fill in all tax lines on the Form 720 with zeros. This starts the statute of limitations at three years, otherwise indefinite. Have a self-audit done every two years by an outside consultant. Self-determined errors don't result in tax, penalties, and interest and give you an idea of your businesses exposure and processes.”