Federal Excise Tax: Update, New Developments, and Risk Reduction

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1 Federal Excise Tax: Update, New Developments, and Risk #ATD2017 Tim Reynolds Principal CliftonLarsonAllen LLP Kansas City, MO nnect.com Dave Wiggins Principal CliftonLarsonAll en LLP St. Louis, MO claconnect.com Bradley Miller Director, Legal and Regulatory Affairs NADA Tysons, VA I bmiller@nada.org

2 2 The views and opinions presented in this educational program and any accompanying handout material are those of the speakers, and do not necessarily represent the views or opinions of NADA. The speakers are not NADA representatives, and their presence on the program is not a NADA endorsement or sponsorship of the speaker or the speaker s company, product, or services. Nothing that is presented during this educational program is intended as legal advice, and this program may not address all federal, state, or local regulatory or other legal issues raised by the subject matter it addresses. The purpose of the program is to help dealers improve the effectiveness of their business practices. The information presented is also not intended to urge or suggest that dealers adopt any specific practices or policies for their dealerships, nor is it intended to encourage concerted action among competitors or any other action on the part of dealers that would in any manner fix or stabilize the price or any element of the price of any good or service.

3 3 Learning Objectives Discuss some fundamental concepts that can pose the biggest risks with. The first retail sale Parts and accessories Tax exempt sales Import and Export Transactions

4 4 Learning Objectives Identify some best practices and pitfalls to avoid in connection with FET and your dealership

5 5 Learning Objectives Update on Glider Kits and share our experiences on what we ve learned from the Internal Revenue Service on these transactions and what we re seeing in industry

6 6 Learning Objectives Discuss how to prepare for an IRS examination and ideas on how to perform self audits

7 7 Learning Objectives Update on IRS FET proposed regulations.. Proposed rule ATD efforts Potential dealer impact

8 8 First Retail Sale Concepts Any sale that does not satisfy one of three exceptions: 1. Prior taxable sale of the body, chassis or tractor 2. Qualifies as tax-exempt under Internal Revenue Code 4221 (e.g. export, state/local gov t) 3. Sale for resale

9 9 First Retail Sale Concepts The first retail sale may occur if any of the following have occurred prior to a sale to the end user: 1. Use of the unit 2. Leasing/rental of the unit 3. Insufficient documentation of resale exemption

10 10 Retail Exemption Certificates Must be submitted prior to a purchase Can elect for single or multiple sales Must be in a particular form Are valid for 12 calendar quarters Form 637 registration NOT required for sale for resale

11 11 Parts and Accessories Must be attached to a taxable body, chassis or tractor Must contribute to the Highway Transportation Function: Loading and unloading Maintenance or safety of the unit Preservation of cargo Comfort or convenience of driver or passenger

12 Parts and Accessories Specific exemptions for Qualcomm units, reefer units, replacement, and warranty parts Parts and accessories sold within first

12 12 Parts and Accessories Specific exemptions for Qualcomm units, reefer units, replacement, and warranty parts Parts and accessories sold within first six months of first retail sale taxable unless: Replacement /Warranty Aggregate parts and installation during entire six month period is less than $1,000

13 13 Tax Exempt Sales 1. Identity of the purchaser: State and local government Nonprofit education organization Qualified blood collector Red Cross and United Nations Form 637 registration required for purchaser and seller Not required for state and local government sales specific exemption certificate available

14 14 Tax Exempt Sales 2. Based on Use/Disposition Sale for further manufacturing certificate required Export export documentation required Resale certificate required Specific bodies, equipment and machinery under Internal Revenue Code 4053 (e.g. Farm, Mobile Machinery, etc.)

15 15 Import and Export Transactions Import Transactions Taxability on the importation will be subject to any prior first retail sales in the United States Importation of foreign manufactured units will be subject to FET on use or first retail sale in the United States

16 Import and Export Transactions Export Transactions Can be conducted tax-free if proper documentation is obtained to substantiate Sale to foreign

16 16 Import and Export Transactions Export Transactions Can be conducted tax-free if proper documentation is obtained to substantiate Sale to foreign dealer sale for resale certificate is required Seller must obtain export documentation within six months of sale or shipment date whichever is earlier

17 17 Import and Export Transactions Acceptable export documentation: Copy of export bill of lading by delivering carrier Certificate from export carrier showing proof of export Certificate of lading from customs office of foreign country Statement by foreign consignee if no customs office Statement or certification by authorized office or department of foreign country verifying export

18 18 FET Best Practices and Pitfalls to Avoid Keep up-to-date retail excise tax-exempt forms on file Must be submitted PRIOR to a purchase Only good for 12 calendar quarters Understand that USE may trip FET liabilities Sale to related-party entities requires a presumed markup factor 4%

19 FET Best Practices and Pitfalls to Avoid Parts and Accessories that do not contribute to the transportation function are not taxable (decals) DO

19 19 FET Best Practices and Pitfalls to Avoid Parts and Accessories that do not contribute to the transportation function are not taxable (decals) DO NOT Assume a part or accessory does not serve a transportation function Get confused by Publication 510 Try to avoid FET by invoicing parts separately

20 FET Best Practices and Pitfalls to Avoid If making a tax-free sale, assume documentation is needed Consult an expert to verify required documentation Do not allow your

20 20 FET Best Practices and Pitfalls to Avoid If making a tax-free sale, assume documentation is needed Consult an expert to verify required documentation Do not allow your customers or other dealers dictate what sales are tax-free without documentation Failure to document, comply and be too aggressive can result in costly errors if audited!

21 FET Best Practices and Pitfalls to Avoid Collect all applicable export documentation within six months of the earlier of the shipment or sale date The tire tax credit is

21 21 FET Best Practices and Pitfalls to Avoid Collect all applicable export documentation within six months of the earlier of the shipment or sale date The tire tax credit is not a reduction to the FET liability Make all FET deposits on time see IRS Pub 509 Do not assume if you have had a clean FET audit in the past that you have no FET liability

22 FET Best Practices and Pitfalls to Avoid Informal guidance is not admissible as statutory law If selling and not collecting FET, be ready to defend your

22 22 FET Best Practices and Pitfalls to Avoid Informal guidance is not admissible as statutory law If selling and not collecting FET, be ready to defend your position If you have multiple locations, verify you have a consistent method of FET application It is important that you review your FET procedures before the IRS does!

23 Glider Kit Guidance Understanding the landscape: All appear to apply to Glider Kits (or Similar Assemblies) Prior guidance : IRC Sec 4052(f) 75 Percent Test POSTN (CCA ) IRS Informal Memorandum Released: 2/8/13 Dated: 1/7/13 POSTN (CCA ) IRS Informal Memorandum Released: 1/17/14 Dated: 10/31/13 Don t rely on CCA Both CCAs provide This advice may not be used or cited as precedent. 23

24 IRC Sec 4052(f) 75 Percent Test (f) Certain repairs and modifications not treated as manufacture (1) In general An article described in section 4051(a)(1) shall not be treated as manufactured or produced solely by reason of repairs or modifications to the article (including any modification which changes the transportation function of the article or restores a wrecked article to a functional condition) if the cost of such repairs and modifications does not exceed 75 percent of the retail price of a comparable new article. (2) Exception Paragraph (1) shall not apply if the article (as repaired or modified) would, if new, be taxable under section 4051 and the article when new was not taxable under such section or the corresponding provision of prior law. 24

25 POSTN (CCA ) IRS Informal Memorandum Released: February 8, 2013 References glider kits Provides two situations 1. Truck owner provides chassis which has glider kit added and renovated by outfitter. When renovations are complete renovated truck is returned to truck owner. 2. Outfitter installs glider on used chassis. Outfitter sells truck with or without new engine to customer. Finding: Both situations are not subject to FET!!! 25

26 POSTN (CCA ) IRS Informal Memorandum Released: 1/17/14 (What a difference a year makes!) Does not refer to a glider kit Provides four scenarios : 1. Customer used engine and transmission sent to refurbisher, different refurbished engine and transmission combined with other components. 2. Customers used transmission and rear axle combined with other components. 3. Outfitter (dealership) combines components with used engine and transmission from Outfitters inventory 4. Customer provides other components and used transmission and rear axle to Outfitter. Outfitter assembles and combines parts and returns to Customer. 26

27 POSTN (CCA ) IRS answer All four scenarios result in assessment of FET!!! First three scenarios Outfitter is secondarily liable for FET, along with customer Last scenario Outfitter is not responsible, customer is liable for FET 27

28 What Components Is this a glider? New CCM does not refer to glider kit at all Scenarios 1 and 3 same components a finished cab and hood, front axle and brakes, front suspension and steering, rear suspension, chassis frame, fuel tanks, electrical system, engine cooling system, rear drive axle, and rear wheels and tires. Scenarios 2 and 4 same components changes components by eliminating rear drive axle 28

29 Open Questions and IRS Informal Responses If rear axle or real wheels and tires are not included in the kit will the glider/components be subject to FET? Response: Yes, the rear axle, wheels and tires are not determinative for determining FET If dealership sells glider to customer, sells parts to customer, and sells reman. engine and trans. to customer, dealership combines customer components.is dealership responsible for FET? Response: Yes, dealership appears to be trying avoid rules and would still have liability for FET collection 29

30 Open Questions and IRS Informal Responses If a dealership sells a glider kit or the components listed in the recent CCM along with other parts or accessories, is there ever a time the dealership will be required to collect FET? Response: No, as long as the dealership does not assemble or combine the parts. Customer will likely be responsible Is a wrecked unit versus an old exhausted unit different with regard to FET treatment of adding a glider kit or CCM components? Response: No, wrecked and old have the same FET treatment 30

31 Open Questions and IRS Informal Responses Some states require that glider kits or substantial repairs similar to the CCM components receive a new Vehicle Identification Number (VIN) or other identification registration, does this affect FET status? Response: No, state treatment has no bearing on the FET taxability status Dealerships mark up parts and labor sales with regard to glider kits or related components, is a dealership really required to add the four percent markup to these already marked up prices? Response: Yes, this is required by Sec. 4052(b)(4) and the CCM issued 31

32 Open Questions and IRS Informal Responses How will the IRS handle FET tax paid on gliders for periods prior to the recent CCM? Response: No position has been issued by the IRS. It will be determined by the examining agent and their manager. Based on recent IRS exams of dealerships and related trucking companies purchasing gliders the Service is pursuing transactions prior to most recent CCM. In some cases they are pursuing tax for up to 7 years if no 720 s were filed. Comment: Truck dealers need to be discussing taxability of gliders with their customers. Customers are changing dealerships when glider situation is not clearly explained by truck dealership. Comment: In contrast to earlier informal IRS discussions, the Service is aggressively pursuing glider transactions for all periods for all Sellers and purchasers. 32

33 Open Questions and IRS Informal Responses Can this CCM and its conclusions be applied to truck bodies or trailers? For example: If a trailer or other body is old and is stripped down to specific used items that are combined with new components could FET be due if total cost does not exceed 75 percent of new cost? Response: No specific guidance has been issued in the CCM or otherwise, however, we believe the position and conclusion reached in the CCM could be applied to trailers or other truck bodies improved similar to the CCM scenarios. 33

34 Gliders Final Thoughts All guidance is informal Many questions are unanswered we are aware of dozens of examinations being conducted this year at dealerships and trucking companies Some assessments are extremely large and we expect possible litigation in the future Penalties are being assessed on some of these 34

35 Gliders Final Thoughts The safe position is to collect tax on any glider transactions in which the dealership combines, adds or assembles the glider components that are the owned or sold by the dealership. A Private Letter Ruling (PLR) might be one way to get specific guidance for particular transaction done frequently by a dealership. Educate your trucking company clients so they are not blind-sided 35

36 Gliders Final Thoughts Phase II program standards New rules on gliders IRS FAQ document 36

37 IRS Exam Guidance Key areas Preparation is the key to success Compliance Exemption certificates Review specific exemptions Handling examinations 37

38 Compliance Good Procedures Set up standardized forms to be used in every FET transaction Have forms reviewed by tax advisors to arrive at the best format and structure FET calculations should be present in every file Documentation should be in every file for every exempt transaction containing detail as to why the sale is exempt 38

39 Compliance Good Procedures Current exemption certificates should be reviewed for every exempt sale Designate employee responsible for FET compliance Perform self audits each year of all transactions. Consider self audits by qualified FET advisor this will provide external review of calculations and reasons for exemption 39

40 Exemption Certificate Problems These are a problem in virtually every examination Certificates are not present for every transaction. Lack of review for exempt sales Determine if you are using single transaction or multitransaction exemption certificates Certificates are not current 3 years Wrong certificates are used for a particular transaction Certificates used are not complete signatures, dates, etc. 40

41 Review Specific FET Excluded Transactions These generally don t require exemption certificates Many exempt sales made by dealers don t meet specific exemptions vacuum pumps, farm use equipment, etc. Dealerships rely on IRS publications that are not law IRS publications are unclear on exemptions Dealerships are relying on manufacturers or other dealers to determine exempt sales 41

42 Handling Examinations Most dealers handling FET transactions the question is not if you ll be audited, just when.. Control the exam process Review the exam period prior to the agent conducting examination Limit access to documents and files require the agent to request specific documents. Don t provide all files and unlimited access to information Gather information before the exam to support positions taken Clean up information good information leads to a more likely assumption that taxpayers are in compliance Consider representation during the examination. Representation will be familiar with documents to be signed during exam and provides a buffer to handling all questions. Such buffer allows the dealership to prepare the best possible response to all questions. Consider appeals. 42

43 Update on IRS FET Proposed Regulations Further defining highway vehicle Revising definitions of tractor and truck Potential changes in format for various exemption certificates 43

44 Questions 44

45 Federal Excise Tax: Update, New Developments, and Risk Reduction Tim Reynolds Principal CliftonLarsonAllen LLP Kansas City, MO nnect.com Dave Wiggins Principal CliftonLarsonAll en LLP St. Louis, MO claconnect.com Bradley Miller Director, Legal and Regulatory Affairs NADA Tysons, VA I #ATD2017 Please visit the NADA Pavilion in the Expo Hall for information on accessing electronic versions of this presentation and the accompanying handout materials, and to order the workshop video recording.

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