Opinion - Clarify the Federal Excise Tax

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img src="/sites/default/files/images/articles/printeditiontag_new.gif" width=120 align=right>By Jerry Turnauer

I>Chairman, American Truck Dealers

ust because we recently have filed our personal income-tax returns does not mean that people in the trucking industry can put aside thoughts about the tax code for another year. On behalf of the American Truck Dealers, which represents more than 2,400 of the nation’s franchised truck dealers, I need to call your attention to a quirk in our tax law that needs the attention of Congress.

We dealers are responsible for collecting the 12% federal excise tax on retail sales of trucks, tractors and trailers. This is money that feeds the Federal Highway Trust Fund. Because of an ambiguity in the definition of a highway tractor, we sometimes have difficulty determining whether to collect the tax. A dealer failing to collect the excise tax at the time of sale may have to pay the tax, possibly with interest and penalties, if an Internal Revenue Service audit later reveals a problem.

Let me provide some background to explain the dilemma that a dealer may face.

The statutory definition of a taxable truck is clear. The Internal Revenue Code requires truck dealers to collect a 12% FET on the retail sale of trucks with a gross vehicle weight rating of more than 33,000 pounds This is a simple, bright-line test.

The statutory definition of a taxable trailer is also clear. The code requires dealers to collect a 12% tax on the retail sale of trailers with a GVWR of more than 26,000 pounds — another simple, bright-line test.

However, the statutory definition of a taxable highway tractor is ambiguous. The code requires dealers to collect the 12% FET on the retail sale of highway tractors “of the kind chiefly used for highway transportation in combination with a trailer or a semi-trailer.” Since tractors are taxable by function — without regard to their weight — there is no simple, bright-line test for assessing the excise tax. Furthermore, Treasury Department regulations have done little to clarify the situation.

Absent a very clear test for tractors, some dealers have had trouble complying with the law and agents have had trouble administering it. Some truck dealers have been exposed to significant economic risks because of the ambiguity. Purchases that dealers thought were not taxable at the time of sale have been reclassified as taxable many years after the transaction.

In some instances, IRS audits have resulted in assessments for substantial deficiencies, interest and penalties. Even if the dealer’s case has had merit, the cost of mounting a defense has been significant. Additionally, many IRS field agents have had a difficult time determining which of the wide array of vehicles are taxable and which are not.

At ATD we have been working to resolve this problem. Several months ago we approached tax authorities to explore the possibility of working with existing law to develop more concrete guidelines for collecting the tax on highway tractors. We also enlisted the help of Rep. Phil English (R-Pa.), a member of the Ways and Means Committee of the House of Representatives, which has primary, initial jurisdiction over the tax code. While we understand that the IRS is finalizing some additional administrative guidelines on this issue, we do not believe that the current regulatory approach will provide the clarity and certainty that the industry needs.

Now that you understand the dealers’ dilemma, why should you as fleet operators and managers be concerned? If the IRS auditors step up enforcement in this gray area, the dealers will have no choice but to collect the 12% tax on vehicles that, to date, have not been taxed. For example, some current audits have targeted Class 5 vehicles configured with fifth wheels for towing.

In the short term, more extensive audits could prompt a 12% price hike on that type of vehicle. In the long term, the ambiguous tax could distort the product mix in the market. The worst-case outcome would be an expanded application of the confusing tax on a vehicle-by-vehicle basis. That uncertainty could disrupt the innovation that you need to improve the productivity and efficiency of your fleets.

As a result of our previous efforts, we are convinced that legislative action is necessary to correct this ambiguity in the tax code. In order to achieve success, however, we need to develop a legislative approach that passes political muster in Congress. We are assembling a coalition to make the case on Capitol Hill. We hope that manufacturers, suppliers and user groups, as well as interested dealers, will join in this endeavor. If you have an interest in eliminating this confusing aspect of the FET, please contact ATD at (800) 352-6232.

The author is also president of Bayshore Ford, Sterling and Mitsubishi-Fuso Trucks in New Castle, Del. ATD is a division of the National Automobile Dealers Association.

This article appears in the April 26 print edition of Transport Topics. Subscribe today.