By Rose-Michele Nardi
Transport Counsel
PC
This article was published in the November 2014 edition of NTEA
News
Question: A customer recently
purchased a new truck chassis, and the invoice for the truck included Federal
Excise Tax (FET). He now wants our company to install an additional part on the
truck chassis. (The part would have been taxable if it was included on the truck
when the truck was sold.) Since the customer already paid tax on the truck, is
there any tax risk for our company under Internal Revenue Code (IRC) Section
4051?
Answer: Yes, there
could be a tax risk for your company. You will need to apply the so-called
“Six-Month Rule” to determine if your installation of the additional part would
trigger Section 4051 tax (FET). If it does, then you would have “secondary
liability” for the FET.
In order to determine whether or not your installation
is taxable under the Six-Month Rule, consider the following questions:
- Is the new taxable part being
installed within six months after the date the owner took actual possession of
the vehicle?
- If no, then no FET will
be triggered under the Six-Month Rule.
- If yes, then FET
may be triggered under the Six-Month Rule. Go to Question 2.
- Is the part a replacement
part?
- If no, then FET
may be triggered under the Six-Month Rule. Go to Question 3.
- If yes, then no FET will
be triggered under the Six-Month Rule.
- Is the price of all
parts or accessories installed during the six-month period after the owner took
actual possession of the vehicle more than $1,000?
- If no, then no FET is
triggered under the Six-Month Rule.
- If yes, then FET will
generally be triggered under the Six-Month Rule.
If the price of the part you are installing is more than
$1,000, then the third question is easy to answer. If the price of the part is
less than $1,000, the answer is more difficult since installations under $1,000
may still trigger FET if the owner previously had a different installer
install taxable parts or accessories within the applicable six-month
period.
Consider this example: An owner takes actual possession
of a vehicle in November, has Company A install a taxable part priced at $800 in
December and then has Company B install a $300 taxable part in January. In this
situation, the installation by Company B could trigger FET under the Six-Month
Rule since the total price of all the parts installed on the vehicle within the
applicable six-month period was more than $1,000. In addition, it appears the
Internal Revenue Service (IRS) might apply the $1,000 threshold to all the parts
and accessories installed on both the chassis and the body of the vehicle (as
long as the installations occur within the applicable six-month period for each
of those articles), rather than applying the dollar threshold separately to
chassis parts and body parts.
If triggered by your installation, FET would be
calculated based on the price of the accessory (including the cost of
installation). Although the owner would be primarily liable for the FET, you, as
installer, would have “secondary liability”. The IRS has done little to clarify
this term, but secondary liability suggests that if the owner does not pay the
FET, the IRS can assess the tax against the installer.
For more information about the Six-Month Rule, see IRC
Section 4051(b); Temporary Treasury Regulation 145.4051-1(c). (Note: the
Treasury Regulations provide that FET may be triggered under the Six-Month Rule
if the aggregate price of parts or accessories exceeds only $200; in 1997,
Congress increased this amount from $200 to $1,000 in the statute, but the
Treasury Regulations were not similarly updated. However, the IRS has applied
the $1,000 threshold in at least two private letter rulings since 1997.)
In addition, whenever you modify a used vehicle, you should also keep
in mind the further manufacturing rules. If your modifications “further
manufacture” a vehicle, FET will typically be triggered, even when the
modifications are made after the owner has possessed the vehicle for six months.
However, as long as the chassis was taxable when new, “further manufacturing”
will generally occur only if the cost of such modifications is more than 75% of
the retail price of a new chassis comparable to the now-modified chassis. This
means most modifications to a previously taxable chassis will not trigger FET.
See IRC Section 4052(f).