Are You Correctly Assessing Federal Excise Tax on Parts and Accessories?

Federal Excise Tax (FET) on the sale of parts and accessories for heavy duty trucks and trailers continues to confuse dealers.

“Whether the parts and accessories are sold at the time of the initial sale of the unit or after, dealers and customers continue to have different interpretations of the laws,ˮ says Tim Reynolds, a dealership principal with CliftonLarsonAllen.

For example, dealers may be liable for FET on sales of parts and accessories even if the customer purchased the unit from another dealer. This could create exposure with the IRS in some cases if not handled correctly.

Application of the 12 percent FET

Under Section 4051 of the Internal Revenue Code, the addition of taxable parts and accessories within six months of the original sale of a unit sold in connection with a truck or tractor that was subject to FET, are subject to the 12 percent FET regardless of when they are actually installed or if they are billed separately from the unit. These parts must be attached to a taxable body, chassis, or tractor and must contribute to the highway transportation function. The highway transportation function includes any part and/or accessory that contributes to one or more of the following functions:

• The loading or unloading function of the unit
• The maintenance or safety of the unit
• The preservation of cargo
• The comfort or convenience of the driver or passengers

Exemptions

Section 4051 also provides a few exemptions to FET in cases where the part or accessory installed is a replacement part or the aggregate price of the parts and accessories (and their installation) does not exceed $1,000 within the first six months of the date the unit is placed in service by the purchaser.

There are also specific parts that are exempt from FET:

• Qualcomm units
• Reefer units
• Parts added during warranty work
• Certain cranes designed for purposes other than loading and unloading the unit
• Non-transportation equipment and machinery
• All parts and accessories suitable for use with light passenger cars and trucks

Contested exemptions and controversy

The non-transportation equipment and machinery exemption is a hotly contested area with the IRS. Under this exemption, equipment and machinery that do not contribute to the transportation function as previously defined, are not taxable for FET purposes. Examples of these types of exemptions include:

• Street sweeper attachments
• Industrial vacuum loader attachments
• Sewer cleaning attachments

All of the above provide a cleaning function and not a transportation function. Decals are also exempt as they do not serve a transportation function.

Your assumed exemption must be substantiated and supported by the requisite documents, but dealerships should be cautious in interpreting exemptions. For instance, the IRS considers parts and accessories such as pumps, hoses, tubes, etc. that are used only in connection with loading or unloading the unit as taxable for FET purposes, even though they are only used when the unit is idle or not while transporting a load on the highway. This is true even though guidance published in the IRS’s own publications can lead the reader to believe they are not taxable.

“In practice, we see many taxpayers refer to IRS Publication 510 for assistance with determining whether an item is taxable or non-taxable, however, this publication should not be relied upon as law or official guidance to support a position taken,” says Reynolds. Dealerships can only refer to the Internal Revenue Code and Regulations, Private Letter Rulings and court cases to support their position as to what is taxable and non-taxable.

How we can help

Dealers and their parts personnel should have a strong working knowledge of these laws when selling parts and accessories to their customers. Parts staff should strive to document sales that are exempt by setting up a strong process to monitor FET exemption certificates. Dealers should be aware that they may be liable for FET on sales of parts and accessories even if the customer purchased the unit from another dealer.

Proper training of personnel, proper documentation, and asking the proper questions to customers can help prevent exposure with the IRS for FET in connection with sales of parts and accessories. We can help train your staff and set up documentation procedures for this confusing rule.