PLR 1104004: IRS determines the first retail sale and tax base for discounted LNG trucks and tractors

Plain-English summary

A truck manufacturer asked how the federal excise tax on trucks and tractors applies when a government-funded incentive reduces the cost of installing liquefied natural gas engines. The IRS ruled that the first retail sale occurs when the manufacturer sells the completed vehicle to its dealer because the dealer will not provide an exemption certificate for resale. The IRS also ruled that the taxable price is reduced by the incentive because the manufacturer and dealer transact at arm's length and the incentive reflects a genuine cost reduction. The ruling matters to manufacturers calculating the tax imposed on the first retail sale of covered heavy vehicles.

Ruling snapshot

• Question: When does the first retail sale occur, and is the taxable price reduced by the LNG engine incentive?
• Outcome: Approved
• Key authorities: IRC §§ 4051 and 4052; Treas. Reg. §§ 48.4052-1 and 145.4052-1

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201104004 Third Party Communication: None
Release Date: 1/28/2011 Date of Communication: Not Applicable
Person To Contact:
Index Number: 4051.00-00 ------------------------------
ID No. -------------------
Telephone Number:

                                                            ---------------------

------------------- Refer Reply To:
------------------ CC:PSI:7
-------------------------- PLR-117027-10
---------------------------- Date:
October 15, 2010

LEGEND:

X = -------------------

Brand = -------------

Engine Company = -----------------------------------

State = -------------

Agency = --------------------------------------------------
---------

Committee = --------------------------------------------------
-------------------------

Region = ------------------------------------------------------------------------

$n = -----------

Dear ---------------:

    This replies to a letter ruling request dated April 15, 2010, submitted on X’s

behalf by its authorized representative, requesting rulings under § 4051 of the Internal
Revenue Code.
PLR-117027-10 2

    According to the information submitted, X manufactures light, medium, and

heavy duty trucks and tractors through several of its divisions, including Brand. X
delivers its products and services worldwide through an extensive dealer network. X,
through Brand, will engage in sales of trucks and tractors that will take into account
certain subsidies offered by State for the use of liquefied natural gas (LNG) engines as
described below. Brand currently has a contract with Engine Company to provide it with
diesel truck and tractor engines for installation into Brand’s trucks and tractors. Brand
will obtain the LNG conversion engines from Engine Company as well, through the
same procedures already established for the diesel engines.

    Engine Company researches, develops and markets high performance, low

emission engine and fuel injection systems that use alternative fuels, such as LNG, both
directly and through its partially and wholly owned subsidiaries. State enacted
legislation that allowed State to fund certain programs to reduce air pollution from motor
vehicles. Some of these funds are allocated to a regional Agency that serves as the air
pollution control agency for Region. Agency engages in grant programs to assist end
users of trucks and tractors in replacing diesel trucks and tractors with ones powered by
alternative fuel. State law established Committee to determine which projects should be
funded through Agency. Through this process, Agency entered into an agreement with
Engine Company, through its subsidiary, to provide for LNG engine “buy downs” out of
Agency funds. The “buy down” will provide Engine Company with an $n per engine
incentive which will reduce the cost of installing an LNG system on a truck or tractor
engine.

    Engine Company collects participation agreements from prospective purchasers

of LNG system trucks and tractors and coordinates the applications with Agency. If
Agency accepts the participation agreement, the $n incentive is passed through to the
person who ultimately purchases the truck or tractor from the Brand dealer (hereinafter
the “program participant”). The obligations of the program participant and the
consequences for breach of any obligation are described in the participation
agreements. Specifically, the participation agreements contain a geographic restriction
requiring that at least 75% of annual mileage or engine hours be used within Agency’s
jurisdiction for at least 3 years. The participation agreements also provide for various
payments ranging from 60% to 100% of $n that the program participant must pay to
Agency if the program participant does not meet the obligations contained in the
agreement. If the trucks or tractors are subsequently leased, the lessee must agree to
the terms of the participation agreement.

    The flow of funds from Agency or Committee through Engine Company and

Brand is as follows. The program participant applies for the “buy down” through Engine
Company, which submits the application to Agency. Once Agency approves the
application, Agency releases funds to Engine Company to “buy down” the cost of an
LNG engine conversion. Engine Company passes this “buy down” along to Brand by
selling the LNG conversion to Brand at a $n discount. This ultimately lowers the price at
PLR-117027-10 3

which Brand sells the converted truck or tractor to the Brand dealer. After the Brand
dealer’s mark-up, the dealer sells the truck or tractor to the program participant for a
lower price than the program participant would have paid without the “buy down.”

     The engine conversion work will be performed on-site at Brand’s manufacturing

facilities. The price for the conversions will be computed after Engine Company rebates
and the Agency “buy down.” All of the trucks and tractors will be custom ordered and
destined for use within Agency’s jurisdiction.

   For transactions involving “buy downs,” the Brand dealer will not provide Brand

with exemption certificates described in § 145.4052-1(a)(6) of the Temporary Excise
Tax Regulations Under the Highway Revenue Act of 1982 (Pub. L. 97-424) and
§ 48.4082-1(a) of the Manufacturers and Retailers Excise Tax.

   Section 4051 generally imposes on the first retail sale of certain articles,

including automobile truck chassis, truck bodies (including in each case parts or
accessories sold on or in connection therewith or with the sale thereof), truck trailer and
semitrailer chassis, truck trailer and semitrailer bodies, and tractors, a tax of 12 percent
of the amount for which the article is so sold.

   Section 4052(a)(1) provides that the term "first retail sale" means the first sale,

for a purpose other than for resale or leasing in a long-term lease, after production,
manufacture, or importation.

   Section 4052(b) provides that in the case of any article sold (otherwise than

through an arm's-length transaction) at less than the fair market price, the tax under
subchapter C of chapter 31 shall be computed on the price for which similar articles are
sold at retail in the ordinary course of trade, as determined by the Secretary.

    Section 145.4052-1(a) generally provides that the term “first retail sale” means a

taxable sale. A sale is taxable if it is not exempt under § 4221, the item sold was for
resale or for leasing in a long-term lease pursuant to § 48.4052-1, or there has been a
prior taxable sale under certain circumstances.

  Section 145.4052-1(a)(6) provides that a certificate signed by the purchaser may

be accepted by a seller in support of a nontaxable sale to the purchaser.

    Section 48.4052-1(a) provides tax is not imposed by § 4051 on the sale of an

article for resale or leasing in a long-term lease if, by the time of sale, the seller has in
good faith accepted from the buyer a statement that the buyer executed in good faith
and that is in substantially the same form, and subject to the same conditions, as the
certificate described in § 145.4052-1(a)(6), except that the certificate must be signed
under penalties of perjury and need not refer to Form 637 or include a registration
number.
PLR-117027-10 4

   Section 145.4052-1(d)(1) provides that the price for which an article is sold

includes the total consideration paid for the article whether that consideration is paid in
money, services, or other forms. Similar rules to § 4216(a) and the regulations
thereunder, relating to charges to be included in the price and excluded from the price,
shall apply.

   Section 145.4052-1(d)(10) provides that for purposes of § 145.4051-1 and

145.4052-1, a sale is considered to be made under circumstances otherwise than at
"arm's length" if (i) one of the parties is controlled (in law or in fact) by the other, or there
is common control, whether or not such control is actually exercised to influence the
sale price, or (ii) the sale is made pursuant to special arrangements between a seller
and a purchaser.

   You have requested a determination that the first retail sale of Brand trucks and

tractors occurs when the Brand dealer purchases the trucks or tractors. You have also
requested a determination that the tax base is determined after the “buy down”
described above is taken into account.

    The first issue is whether the first retail sale occurs when Brand sells the truck or

tractor to the Brand dealer or when the Brand dealer sells the truck or tractor to the
program participant. Under § 4052(a)(1), the “first retail sale” means the first sale for a
purpose other than for resale or leasing in a long-term lease, after production,
manufacture, or importation. In order for there to be a tax exempt sale due to an
intended resale, the purchaser must provide the seller an exemption certificate similar to
the certificate described in § 145.4052-1(a)(6). In this case, the dealer will not provide
such an exemption certificate. Thus, we conclude that the first retail sale occurs when
Brand sells the truck or tractor to the Brand dealer. See also, § 145.4052-1(e), Example
6.

   The second issue is whether the tax base includes or excludes the amount of the

“buy down.” Section 4051 imposes a tax on the first retail sale of certain articles,
including automobile truck chassis, automobile truck bodies, truck trailer and semitrailer
chassis, truck trailer and semitrailer bodies, and tractors. In this case, the LNG engines
subject to the “buy downs” are not taxable articles under § 4051; rather, they are
components used in the manufacture of taxable articles.

   Further, § 4052(b)(2) provides that if an article is sold (otherwise than through an

arm's-length transaction) at less than the fair market price, the tax shall be computed on
the price for which similar articles are sold at retail. Here, by virtue of a “buy down”
provided to Engine Company by Agency, Brand purchases component LNG engines
from Engine Company at a reduced cost and passes the savings on to the Brand
dealer. The Brand dealer then sells the truck or tractor to the program participant at a
lower cost than would otherwise be the case without the “buy down.” The sale is at
PLR-117027-10 5

arm’s length under § 145.4052-1(d)(10) because Brand does not control the Brand
dealer and the sale price is the result of a bona fide cost reduction Brand gets from
Engine Company and Agency, rather than through a special arrangement between
Brand and the Brand dealer. Accordingly, we conclude that the tax base is determined
after the “buy down” is taken into account.

   Except as expressly provided herein, no opinion is expressed or implied

concerning the tax consequences of any aspect of any transaction or item discussed or
referenced in this letter.

  This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of

the Code provides that it may not be used or cited as precedent.

     In accordance with the Power of Attorney on file with this office, a copy of this

letter is being sent to your authorized representative.

                                               Sincerely,




                                               Stephanie Bland
                                               Senior Technician Reviewer, Branch 7
                                               Associate Chief Counsel
                                               (Passthroughs and Special Industries)

Enclosures (2)

Copy of this letter
Copy for § 6110 purposes

cc: