Originally enacted to help pay for World War I, the federal excise tax (FET) has been causing headaches for heavy-duty dealers since practically the dawn of trucking.
That’s because while trucking has evolved, the IRS's code has not.
“It creates a lot of gray areas, a lot of subjectivity and interpretations,” says Tim Reynolds, CPA and partner at DHW CPAs and Strategic Advisors. Reynolds is an expert on FET, manning a hotline for the National Trailer Dealers Association and taking dealership clients to help mitigate any exposure they may have. And the exposure could be considerable.
The biggest change to the federal excise tax in its 100+ years is an increase in the rate from 6% to 12%. And 12% on a sale of a new truck, trailer and attendant accessories is a hefty price tag.
“I see a lot of dealers get in trouble by not knowing the rules and not interpreting them correctly in order to get the sale,” Reynolds says.
[RELATED: Got a federal excise tax-related question? Tim Reynolds, CPA, will answer your questions in an April 30 webinar. Ask your questions now or register for the webinar.]
That becomes trouble when the IRS pays a visit. Reynolds says to protect the bottom line, there are some best practices dealers can put into place to limit any exposure.
Exemptions
There are lots of exemptions from FET, including those for farmers and government agencies, but even those can be difficult to interpret. Reynolds says dealers should not allow customers to dictate what’s taxable and what’s not.
“You’ve got to be careful just taking what the customer gives you verbatim,” Reynolds says. “Don’t let the customer bully you.”
Instead, push the burden of proof onto them. Make them prove the item is exempt from federal excise tax.
Reynolds says a dealer’s sales staff should know what’s taxable and what’s not, and even after the first line of defense against exposure, there should be second and even third checks of each deal.
But we’re getting ahead of ourselves. Back to those exemptions.
“When the IRS comes in, the first thing they look at is all your exempt sales,” Reynolds says. “There are a few exemption forms [dealers] need to use in connection with buying a unit from their OEM or potentially selling to another dealer or selling to a state or local government.”
Those forms should be in the deal file and should be properly dated. Dealers should have someone on staff checking the dates and being proactive about those forms for each applicable client as part of the month-end business cycle.
If a dealer does decide a sale is exempt, they should keep a defense on file, too. Reynolds suggests making a closing checklist for each deal, with one box being checking FET calculations and having appropriate documentation.
Show Your Work
That brings us to documenting the deal itself.
Reynolds says to keep the calculations for federal excise tax in a deal file. That can be part of a dealer management system or just an Excel sheet.
Not having the calculations on hand could suggest to an IRS agent that “you don’t really have your ducks in a row,” Reynolds says. By showing your work, dealers can enable the agent to get comfortable with its numbers and calculations.
“They see you have a system, template, formula or methodology in place,” Reynolds says.
Checking those calculations is important, too.
“Make sure your people are trained across all levels,” Reynolds says. “Have some kind of backstop on it to make sure you’re doing the right thing.”
Also, people leave. They go on vacation or move away or get a job elsewhere. That level of cross-training ensures whoever subs in for a regular FET whiz doesn’t create exposure for the dealership.
Consistency is Key
For multi-location dealer entities, it is vital everyone across the business is on the same page regarding FET practices. Even for dealers with one location, all staff should follow processes and checks. Dealers also should conduct regular self-audits to limit risk.
“It shows you know what you’re doing,” Reynolds says.
And when acquiring an existing location, make sure it’s on board, too. Checking the incoming dealership’s federal excise tax practices should be part of a purchaser’s due diligence to make sure the company’s not acquiring exposure along with assets and staff.
“Depending on how the buy/sell agreement is written, they could be on the hook for it,” Reynolds says.
Finally, don’t assume clean audits in the past are an endorsement of how anyone’s doing business, either.
“You might get a different agent,” Reynolds says. “They might focus on something entirely different.”
