Guidance regarding excise tax exemptions for specialty trailers

user-gravatar Headshot
Updated Sep 28, 2022
Man working on finances

Tim Reynolds, CPA from DHW, offered a tutorial on federal excise tax (FET) specialty trailer exemptions for National Trailer Dealers Association (NTDA) members last Wednesday.

During his presentation Reynolds first covered IRS § 4053, which provides guidance regarding specialty exemptions for trailers, chassis, truck bodies, parts and other items, with a focus on the IRS’s Mobile Machinery exemption.

In kicking off his comments, Reynolds was quick to note that while there are no special exemptions or certificates dealers need to provide to the IRS to substantiate the tax-exempt states of specialty equipment, when the IRS investigates a seller for failing to collect FET the agency can and will check a company’s marketing materials and business promotions to make sure it has not advertised a product as capable of a use what would require FET collection.

[RELATED: Avoiding the pitfalls of assessing federal excise tax]

He adds IRS § 4053 and the Mobile Machinery exemption are “filled with grey areas that can get you in trouble.”

Reynolds started his summary of IRS § 4053 by listing products that are tax exempt, such any body designed for and used exclusively to process, haul and spread feed, seed and fertilizers. Reynolds says often farmers will think anything they purchase is tax exempt, but he says a unit designed to haul grain in a farming capacity does become taxable if it also is used to haul gravel or mulch. Reynolds says other tax exempt units include house trailers, ambulances and hearses, concrete mixers and auxiliary solutions like idle reduction devices.

Regarding the Mobile Machinery exemption, Reynolds says for a mobile chassis to earn exempt status it must meet a number of parameters. First it must be permanently mounted; used to perform a construction, manufacturing, farming, mining, drilling, timbering or similar application; and have its operation be unrelated to transportation on any public highways. Additionally, the chassis must be specially designed specifically to carry its mobile machinery, and due to its special design it cannot be used without substantial structural modification for any other use.

Reynolds uses the example of a crane built into a chassis or trailer. He says if the crane is used off roadways but must be built on a chassis so it can move from jobsite to jobsite it can qualify for an FET exemption. But if the chassis also has space to haul cargo — such as pallets of equipment to be used at the jobsite — then the chassis would no longer be exempt and the seller would be expected to collect FET. Reynolds does note the IRS allows a tiny bit of leeway on chassis storage — a toolbox or a few small tools used specifically with the crane are accepted — but advises sellers and purchasers to never attempt to haul more on a tax exempt chassis than the equipment itself.

He adds if one does, “you better be ready to defend your position to the IRS.”

Finally, Reynolds concluded Wednesday’s session with a brief summary of the IRS off-highway use exemption.

[RELATED: A new coalition is fighting to reduce trucking’s federal excise tax requirements]

Reynolds says with these trailers, chassis and pieces of equipment, what matters is what the unit is capable of, not a purchaser’s intent. He says a farmer buying a flatbed trailer and intending to add large tires and put into off-highway use doesn’t make that unit tax exempt. He also says equipment attempting to earn an off-highway use exemption must pass both the IRS Special Design test and the Substantial Impairment test. Reynolds says a unit passing the first test but not the second would not earn exempt status, and visa versa.

Reynolds then closed with an update on pavers, noting that since a tax law change the IRS most often deems pavers as taxable unit. He says buyers and sellers who believe a paver qualifies for tax exempt status would need documentation to support that designation.

Learn how to move your used trucks faster
With unsold used inventory depreciating at a rate of more than 2% monthly, efficient inventory turnover is a must for dealers. Download this eBook to access proven strategies for selling used trucks faster.
Used Truck Guide Cover