Interpreting Federal Excise Tax
As we sit here in the middle of Tax Season, it seems apt to cover one of the most complicated and confusing tax laws affecting the dealer market — Federal Excise Tax.
Believe it or not, the basis of excise tax is simple.
The Internal Revenue Service defines excise tax as “taxes paid when purchases are made on a specific good … Excise taxes are often included in the price of the product. There are also excise taxes on activities, such as on wagering or on highway usage by trucks.”
In the commercial truck market, the excise tax is assessed as a 12 percent tax on the first retail sale of a taxable body, chassis or tractor. Like the IRS states, it is included into the total cost of a product when sold, and paid by the customer. From there, it is the responsibly of the dealer to collect the tax and provide the tax to the IRS.
That implementation of the tax is pretty straight forward. But there’s more to FET than just what is levied on new truck sales, and it’s those other aspects of excise tax laws that cause issues for truck dealers.
“For routine transactions the [tax] code is very specific on how the tax should be applied, calculated and remitted,” says Greg Althardt, partner with CliftonLarsonAllen’s Truck and Trailer Dealership group. “It is the unusual transactions that can catch many people off guard.”
In addition to new truck sales, FET also must be assessed on several other specific sales, including previously untaxed components that are added to a commercial truck for on-highway use, and glider kits. In both cases it is again the responsibility of a dealer to assess and collect excise tax, but when it comes to these aftermarket sales, the rules identifying what products actually require an excise tax are not well defined.
Current IRS documentation states excise tax should be levied on previously untaxed components that will be used for these on-highway transportation functions: loading and unloading, maintenance or safety of the unit, preservation of cargo, comfort or convenience of the drivers or passengers.
For glider kits, there are two assessments to evaluate if a previously taxed donor unit requires FET — the Nature of the Modification rule and the 75 Percent rule. (For more on those tests and implementing FET into glider kit sales, CLICK HERE.)
This puts a lot of stress on dealers to interpret FET laws and understand when they need to consider adding the tax to customer purchases. This isn’t easy.
“When individuals attempt to complete their own research they may jump to a conclusion or not follow all the way through additional research on court cases,” Althardt says.
Cliché as it may be — knowledge is power. The more information you can find about excise tax, the more likely you are to correctly determine when it should be addressed.
And even though it’s not always the quickest option, Althardt says dealers also can contact the IRS as well.
“There is an avenue called the private letter ruling (PLR) where a taxpayer can request specific advice on a specific fact pattern to get an answer, unfortunately this is [an] expense and takes time to complete,” he says.
It’s also important to not be complacent when handling excise tax. During his presentation about FET at the ATD Convention in February, Althardt warned that even if you haven’t been contacted by the IRS about your excise tax procedures doesn’t mean you are doing everything correctly — or assessing it at the correct times.
Handling excise tax correctly 20 times won’t excuse you from IRS fines if you make mistakes on a 21st sale. Neither will neglecting to collect excise tax because you didn’t know it was required.
“The responsibility to collect the correct amount of FET on a sale and remit it timely is the responsibility of the dealer. The tax is to be paid by the purchaser, however if an item is incorrectly interpreted or a dealer is aggressive to his own risk tolerance the IRS assess all unpaid FET at the retailer level,” Althardt says.
“That’s why I’ve always said it’s a punitive system. Those who attempt to follow the law and comply with vague regulations usually error on the side of a conservative FET amount. Those who wish to be more aggressive, or through ignorance do not follow the law, gain a competitive advantage as their ultimate sales price will be less. Ultimately in both circumstances a dealer doesn’t necessarily know until an IRS FET audit occurs.”
To truly handle the tax, he says dealers have to constantly work to understand it. The IRS offers some guidance.
“The IRS provides publication 510 [that] is a quick and dirty guide to help taxpayers navigate the FET regulations, although in many respects I think it does more harm than good,” he says.
He recommends courses and webinars that focus on how the system works, as well as contacting peers and manufacturers for advice when necessary. Althardt also says dealers must be willing and able to review their business, working with a tax professional to make sure the tax is being handled correctly.
“I strongly suggest getting a FET expert to assist in an independent review of FET practices to identify possibly liabilities and correct practices before a FET auditor corrects them for you,” he says. “Do not hesitate to call an FET expert, as the short-term expense outweighs the long-term liability every time.”
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