Definitions of Chassis and Body for FET Put Limits on Use of Safe Harbor
Heavy-duty truck dealers and others in the transportation industry have had their hands full with the federal excise tax (FET) and its related 75 percent safe harbor provision. The regulations are cumbersome and confusing, especially for dealers or transportation companies who restore and repair existing, worn, or wrecked units to functional conditions — even more so for those who use glider kits in that process. To offer some clarification, the IRS recently released Notice 2017-5 (previously titled 2016-81), which provides interim guidance and specific definitions of the terms “chassis” and “body” in the application of the safe harbor provision.
And while that may be enlightening, we think the clearer definitions will ultimately cast a wider net to capture more articles subject to FET. Here’s why.
Definition of chassis means components can’t be mixed up
Until now, neither the Internal Revenue Code nor federal regulations had clearly defined “chassis” or “body” for determining which articles are subject to FET or when applying the 75 percent safe harbor provision. Now, Notice 2017-5 defines them as follows:
- Chassis — a vehicle’s frame, supporting structure, and all components that are attached to it, except those items that are explicitly exempt, such as certain idling reduction devices. The IRS also defined chassis “components” and provided a nonexclusive list of examples, such as the engine, axles, transmission, drive train, suspension, cab, and exhaust after-treatment system (which includes the diesel particulate filter).
- Body — the cargo or load-carrying structure of a truck, trailer, or semitrailer. Examples of a body thereby include a flatbed body, tanker, and a box body.
It’s common in the industry these days for dealers and transportation companies to remove certain components from a (previously taxed) worn or wrecked unit and incorporate them into a new glider kit or an unrelated chassis to create a fully functional unit. Now, when you apply the 75 percent safe harbor provision on this process, you will invite even more IRS scrutiny, as this practice does not align with the definitions in Notice 2017-5.
So, the IRS will likely assert that in order to satisfy the safe harbor provision, any components (as defined by Notice 2017-5) that are removed from a previously taxed chassis and are remanufactured or repaired must be put back into the same chassis. A dealer or transportation company can then apply the safe harbor provision and compare the repair or refurbishing costs to a similar new unit and determine if FET applies.
However, failure to place these components back into the same chassis will result in these components losing their identity with the previously taxed article or chassis. In that case, the safe harbor provision cannot be applied to the completed unit when determining if FET is applicable.
In short, the IRS is indicating that you must begin and end with substantially the same, identifiable article to apply the safe harbor provision. By contrast, the process of merely incorporating parts and pieces from other previously taxed articles into a “kit” or unrelated chassis will not satisfy the safe harbor provision rules. The IRS will likely assert that a new unit has been manufactured and is therefore subject to FET.
Comments accepted through May 2017 — but definitions in effect now
While this guidance is considered interim and is still open for comments until May 2017, the clarified definitions are in effect now. If you are currently in the process of refurbishing or repairing a unit to a functional condition, we strongly suggest you consider the guidance in Notice 2017-5 in connection with your activities when determining if FET applies.
How we can help
FET and the 75 percent safe harbor provision are complex and confusing. Our FET review services can help determine if your truck or trailer dealership is compliant and detect potential IRS exposure.