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.