The Automotive Filter Manufacturers Council

Transcription

1 DISCUSSION PAPER The Automotive Filter Manufacturers Council The Automotive Filter Manufacturers Council ("AFMC") is a trade association of automotive filter manufacturers whose members produce approximately 95% of the automotive filters (oil, fuel, air and water) that are manufactured and sold in this country. A membership roster is attached to this Discussion Paper. The Issue Involved. Section 4061(b)(1) of the Internal Revenue Code imposes an 8% excise tax on the manufacturers * selling price of certain automotive parts and accessories. The issue with which we are concerned is the applicability of the 8% excise tax to certain filters and filter elements. It is difficult to determine the applicability of the tax to certain filters because taxability is determined by use. Filters that are used primarily for off-highway applications are not taxable; filters that are used primarily in connection with over-the-highway vehicles (other than passenger vehicles) are taxable. However, many, if not most, filters are dual use filters which are used for both over-the-highway applications and off-highway applications. In fact, filters are not made for vehicles but for engines and any particular engine may have a multiplicity of uses, including over-the-highway, off-highway, marine and industrial uses. The problem is compounded by the fact that the determination of primary use, under the Internal Revenue Service regulations and rulings, is to be made on an industry-wide basis. An individual manufacturer, particuarly one who sells substantially to the automotive aftermarket (replacement sales), does not even know the eventual use of the filters it manufactures, much less the industry-wide use of comparable filters. Further, the use of filters often changes as engines become obsolete or are adapted for different uses.

2 The result of this problem has been a serious lack of uniformity in the collection of excise taxes in the filter industry and in the determinations that are made, on audit, by the various District offices of the Internal Revenue Service. In essence, agents have no better idea than do the manufacturers of "industry-wide usage". Excise tax audits regarding filters have generally involved bargaining on dollars rather than dealing with the very confusing and impractical legal standards. Unfortunately, smaller companies do not enjoy the bargaining power of some of the larger companies and this exacerbates the inherent inequities. Internal Revenue Service Involvement Recognizing the lack of uniformity in field audits, the National Office of the Internal Revenue Service initiated a project study more than four years ago to determine appropriate standards of taxability for filters of all types. Counsel for the AFMC was informed of this project study and, because of the expertise that could be brought to such a study by its members, the AFMC was invited to participate in the study and meet with representatives of the National Office. These general discussions began when there was no active audit situation involving any members of the AFMC. There was a spirit of mutual cooperation. At the several meetings held and in its written submissions, the AFMC repeatedly made the point that the excise tax in question is passed along by the manufacturers to their customers (and eventually the ultimate consumer). Therefore, the manufacturers have absolutely no objection to collecting the tax and passing it along, provided that all manufacturers are aware of the tax standards so that the uncertainty of the application of the tax is not a competitive element. It is the uncertainty and lack of conformity to which the manufacturers object. Not knowing what is taxable places the manufacturer in an untenable position. Charging an 8% tax not charged by other manufacturers makes the taxing manufacturer immediately noncompetitive. Yet, failure to charge the tax may lead to a retroactive tax assessment which must be paid out of earnings and profits. Since it must be passed along in future price increases, it places the assessed manufacturer at an even more severe competitive disadvantage. -2-

3 In early 1975, the AFMC suggested that the Internal Revenue Service publish a revenue ruling setting forth the standards of taxability and listing those filters that would be taxable under such standards. Such a listing could only be developed with the technical assistance of the AFMC which offered to provide such assistance. A key element of the proposal was that any such ruling be prospective in its application, pursuant to 7805(b) of the Internal Revenue Code, to insure uniformity and avoid unfair competitive disadvantages. Later that year, a member of the APMC was audited and presented with an excise tax deficiency that clearly highlighted the very issues the AFMC had been discussing with the Internal Revenue Service. The matter was brought to the attention of the National Office of the Internal Revenue Service pursuant to a procedure known as a Request for Technical Advice. Indeed, the Request for Technical Advice was entertained by the National Office precisely because of the lack of uniformity that existed in the industry as a whole. Since then, in the context of this Request for Technical Advice, AFMC counsel has made several detailed written submissions and attended formal conferences with Internal Revenue Service representatives. Finally, at the request of the Internal Revenue Service, the collective industry knowledge of the AFMC members was pooled (at significant expense in terms of time and effort) to provide the Internal Revenue Service with a detailed listing of those filters which have some appreciable over-the-highway usage and which, if prospective application were forthcoming, could be treated as taxable items. The letter from counsel transmitting that listing, dated April 17, 1978, is attached to this Discussion Paper. It should be noted that, at one point during the four years of effort involved, the Excise Tax Branch of the Internal Revenue Service recommended a published revenue ruling which would treat all filters as nontaxable. There is substantial legal justification for this position on the basis that such items are consumables and never rise to the level of being "parts or accessories" However, the primary reasons for recommending this position were the extreme administrative difficulty of making appropriate excise tax determinations and the obvious disruption in the industry created by lack of uniformity. The proposal was rejected either by the Individual Income Tax Division or by Chief Counsel's Office. -3-

4 Internal Revenue Service "Answer" In December, 1978, the Internal Revenue Service promulgated Revenue Procedure which sets forth a list of filters the same list provided to the Internal Revenue Service by theafmc ' and holds that such filters are taxable. With a single exception,the determination of taxability was not made prospective. The very issues of competitive disadvantage and lack of uniformity which the Internal Revenue Service and the AFMC worked for four years to resolve were left unresolved. Revenue Procedure is a heavy-handed, insensitive approach to legitimate taxpayer concerns regarding common understanding and uniform application of complex tax laws. Because of the degree of assistance and cooperation of the AFMC, the publishing of the revenue procedure brings into question the good faith of the Internal Revenue Service in its alleged efforts to achieve a fair and even-handed tax system. The Congress,in Code 7805(b), has required the Internal Revenue Service to make rulings prospective when such action is necessary to ensure fair taxpayer treatment. Indeed, the Court of Claims has held, "Parity in the levying of manufacturers' excises is peculiarly essential to free and fair competition." International Business Machines Corp. v. United States,343 F.2d 914, 923 (1965).The failure of the Internal Revenue Service to grant prospective treatment in this instance is, we submit, a violation of the obligation placed upon it by the Congress. Congressional Concern Regarding Excise Taxes The Congress, recognizing the clear potential for competitve disruption, has exhibited a history of concern over the proper imposition and administration of excise taxes. Most recently, in the report of the Committee of Ways and Means accompanying HR 1337 (which became Public Law ), this concern was succinctly stated as follows: When the present system of manufacturers excise taxes was enacted, in 1932, this Committee recognized that two of the fundamental tests that such taxes should meet are: rcertainty, both as to liability and amount, must be obtainable in"" advance of the sale 1 and 'The tax must be imposed uniformly and without discrimination. 1 H. Rept. No , 95th Cong., 2nd sess. 2 (March 16, 1978), citing H. Rept. 708, 72nd Cong., 1st sess. 31 (1932). Emphasis supplied. -4-

5 Neither certainty of application nor uniformity of imposition has existed in the area of filter taxation. The failure of the Internal Revenue Service to seize the opportunity to remedy this inequitable situation necessitates the AFMC's petitioning Congress to accomplish this result. Former Senators Curtis and Griffin have previously expressed their views to Commissioner Kurtz of the IRS and their joint letter is attached. Suggested Congressional Action The AFMC is seeking congressional assistance in the form of (i) communications to the Treasury Department (attention: Donald C. Lubick f Assistant Secretary for Tax Policy) seeking administrative reversal of the retroactive aspect of Revenue Procedure 78-36, or, in the alternative, (ii) sponsorship of, or support of, legislation designed to accomplish the same result. While the AFMC would prefer legislation to the effect that filters and filter elements are not taxable at all, it has been, and remains, the position of the AFMC that it is not the tax which is objectionable, it is the uneven application of the tax. Consistent with this position, the AFMC seeks only to prevent the Internal Revenue Service from promulgating regulations or rulings having retroactive effect. A recent example of this type of legislation is contained in Section 530 of the Revenue Act of 1978 which prohibited the Internal Revenue Service from retroactively reclassifying a worker as an "employee", rather than an "independent contractor", where there was a "reasonable basis" for independent contractor status "Reasonable basis" was statutorily defined to include reliance on long-standing recognized practice of a significant segment of the industry affected. That precise situation exists in the filter industry. Moreover, it is far more difficult to determine whether a filter is taxable than it is to determine whether a person is an "employee" or an "independent contractor". Thus, the equities involved, the potential damage to an entire industry, and the existence of recent legislative precedent justify congressional action. If the Treasury Department does not respond administratively, legislation would be appropriate. -5-