Glider Kit and Federal Excise Tax Update for Heavy Duty Trucks and Trailers
Confusion continues for trucking companies, dealers, and manufacturers nearly four months after the Chief Counsel Advisory (CCA) memo was released on the taxability of certain truck chassis components known as glider kits, and the applicability of Federal Excise Tax (FET) to these units. The memo outlined four scenarios that seemed to indicate an “about face” from prior guidance.
“We've continued our dialogue with the IRS since we published our initial reaction to the matter, and have outlined our conversations to help you properly account for your situation,” says Tim Reynolds, a national dealership and trucking principal with CliftonLarsonAllen.
Original vehicle as part of the completed unit
The question of “how much of the original donor vehicle must be incorporated into the completed unit” is still a somewhat gray area. Assuming the finished unit is comprised of key, integral parts that are new and/or remanufactured, the IRS indicated that someone is always going to be subject to FET on the completed unit. In other words, the more the completed unit is comprised of original donor components or systems that have not been remanufactured, the less likely it will be viewed by the IRS as a new unit subject to FET.
Trucking company responsibility
Where the glider kits are sold to trucking companies and the majority of the assembly process is completed by the trucking company, the IRS indicates the FET compliance burden shifts to the trucking company and the manufacturer/dealer is relieved of responsibility to assess FET. As such, trucking companies should be aware of this shift and be prepared to properly self-assess FET in these instances.
“It is likely the IRS will be reviewing and gathering information on these sales at the dealership level to identify possible examinations where trucking companies have made a substantial number of purchases of these kits,” says Reynolds.
Safe harbor rule still alive
The 75 percent safe harbor rule is not entirely dead. Sales of stripped down glider kits or other parts that utilize a substantial amount of original, non-remanufactured components from the donor unit in the completed unit, may still qualify for this rule. Unfortunately no clear measure exists to know for sure when the new and used donor components are considered a “new article” or a “repair or modification,” to which the 75 percent test applies.
A new vehicle identification number?
In some states, donor units with glider kits added require the owner of the donor unit to obtain a new Vehicle Identification Number (VIN). This is not required or permitted in all states.
“Dealers have asked if a new VIN number requirement determines whether FET is applied or not,” says Reynolds. “But the IRS indicates that state VIN laws have no bearing on whether FET applies to a glider kit, and therefore cannot be used to determine if FET should be assessed.”
Four percent markup on glider kit sales
The new CCA guidance requires a 4 percent markup on sales of glider kits. This is considered a new twist to the calculation of FET on these kits and the IRS confirmed that the markup is required by IRC 4052(b)(4).
“The 4 percent markup makes little sense considering that the glider kit, parts, and possibly labor are purchased by the donor owner at retail prices,” says Reynolds. “The markup rule was added to ensure that manufacturers using articles for the first use were paying FET on the retail price equivalent. Unfortunately, we have no other guidance to follow that isn’t in opposition to the CCA memo.”
How to account for sales made prior the CCA guidance
The new guidance does not address the FET implications on taxpayers currently under IRS exam, nor does it cover the sales of glider kits that occurred prior to the release of the memo.
“This issue will be addressed on a case-by-case basis, but most expect that the IRS will show leniency if a taxpayer is in compliance with the prior CCA guidance on these transactions,” notes Reynolds. “We suggest that you consider the new rules for sales subsequent to its release.”
Whether or not to apply the FET to glider kit sales should be determined by the dealer or donor owner in consultation with tax advisors.
How it affects trailers
Although the new CCA is geared toward truck chassis, the same guidance will also apply to trailers where there has been a substantial overhaul of key or integral components. The IRS has indicated that its focus will be on determining if a “new article” exists, or if a “used article” is just being repaired or modified. Unfortunately, this cannot be clearly determined.
How we can help
While the CCA memo does not constitute law, it is an IRS interpretation of existing laws and should be considered by all affected parties and their tax or financial advisors when accounting for glider kits.
The information we gathered above reflects the informal guidance we have received from various sources in the IRS and other industry thought leaders. Although it is not formal authority that taxpayers can assert to avoid tax, interest, or penalties, it should give you and your advisors some insight that you can use to determine how to approach your situation. CliftonLarsonAllen will continue to work with the IRS and other industry sources on this matter and will share any new developments as they become available.