CCA 1306019: CCA applies the heavy-truck excise tax to renovated chassis

Plain-English summary

Chief Counsel advice considered when renovating a used highway truck chassis creates a new taxable article for purposes of the 12% retail excise tax. In the first scenario, the cost of repairs and modifications was $95,000, more than 75% of the $125,000 retail price of a comparable new chassis. The IRS concluded that the renovated chassis was taxable, with a $120,000 tax base after excluding the used rear axle supplied by the owner, and a tax of $14,400. The owner was liable when using the chassis before its first retail sale. In the second scenario, the first retail sale would not be taxable if renovation costs did not exceed 75% of a comparable chassis's retail price.

Ruling snapshot

• Question: When does renovation of a used truck chassis trigger the retail excise tax under §§ 4051 and 4052?
• Outcome: advice
• Key authorities: IRC §§ 4051, 4052; Treas. Reg. § 48.0-2

Full text (IRS public release)

       Office of Chief Counsel
       Internal Revenue Service
       Memorandum
       Number: 201306019
       Release Date: 2/8/2013
       CC:PSI:7:                                Third Party Communication: None
       POSTN-143596-12                          Date of Communication: Not Applicable

UILC: 4051.00-00, 4052.00-00

date: January 07, 2013

 to:   Chief, Excise Tax Program
       Holly L. McCann

from: Branch Chief, CC:PSI:7
Frank Boland

subject: Section 4051: Chassis Renovation

       This responds to your request for Non-Taxpayer Specific Legal Advice regarding the
       application of the tax imposed by § 4051 of the Internal Revenue Code to two scenarios
       in which a glider kit is used to renovate a truck chassis. This advice may not be used or
       cited as precedent.

       Situation 1

       The owner (Owner) of a used highway truck chassis, the first retail sale of which was
       taxed under § 4051(a)(1)(A) when it was sold to Owner, delivers the chassis to an
       unrelated heavy truck dealer (Dealer) for renovation. Owner keeps title to the chassis
       and will continue to use the chassis in its business when the Dealer returns the chassis.
       When the renovations are complete, the chassis will remain a chassis that is subject to
       the § 4051 tax. Owner does not regularly sell chassis at retail in arm’s length
       transactions.

       In renovating the chassis, Dealer does the following:

             • Incorporates into the renovated chassis the rear axle assembly valued at
       $5,000.

             • Removes the chassis’ engine and sends it to an engine remanufacturer. The
       engine remanufacturer sells Dealer a remanufactured engine for $20,000 cash and a
       $5,000 credit for the chassis’ engine that the Dealer sent.

             • Removes the chassis’ transmission and sends it to a transmission
       remanufacturer. The transmission remanufacturer sells Dealer a remanufactured
       transmission for $5,000 cash and a $2,000 credit for the chassis’ transmission that the
       Dealer sent.

             • Purchases a glider kit for $50,000.

             • Purchases $1,000 worth of other new components.

       The dealer charges Owner $12,000 for labor, fees, internal costs (including a share of
       overhead expenses) related to the labor involved, and other related charges.

       The average pre-tax (retail and sales taxes) sales price (based on Dealer’s sales) of a
       comparable new chassis is $125,000.

       Law

       Section 4051(a)(1)(A) imposes a 12 percent excise tax on the first retail sale of a
       highway truck chassis suitable for use with a vehicle that has a gross vehicle weight in
       excess of 33,000 pounds.

       Section 4052(a)(1) defines “first retail sale” as the first sale, for a purpose other than for
       resale or leasing in a long-term lease, after production, manufacture, or importation.

       Section 4052(a)(3)(A) provides that if any person uses an article taxable under § 4051
       before the first retail sale of such article, then such person is liable for tax under § 4051
       in the same manner as if such article were sold at retail by him.

       Section 4052(a)(3)(C) provides that in the case of any person made liable for tax by
       § 4052(a)(3)(A), the tax is computed on the price at which similar articles are sold at
       retail in the ordinary course of trade, as determined by the Secretary.

       For purposes of §§ 4051-4053, § 4052(b)(1) defines “price” as including any charge
       incident to placing the article in condition for use and excludes: (1) the § 4051 tax; (2)
       if stated as a separate charge, the amount of any retail sales tax imposed by any State or
       political subdivision thereof or the District of Columbia, whether the liability for such
       tax is imposed on the vendor or vendee; and (3) the value of any component of the article
       if the component is furnished by the first user of the article, and the component has been
       used before the first user furnished it. Additionally, “price” is determined without regard
       to any trade-in.

       Section 48.0-2(a)(4)(i) of the Manufacturers and Retailers Excise Tax Regulations
       defines “manufacturer” as a person who produces a taxable article from scrap, salvage, or
       junk material, as well as from new or raw material, (1) by processing, manipulating, or
       changing the form of an article, or (2) by combining or assembling two or more articles.

       Section 48.0-2(a)(4)(ii) provides that if a person manufactures or produces a taxable
       article for another person that furnishes materials under an agreement whereby the person
       that furnished the materials retains title thereto and to the finished article, the person for
       whom the taxable article is manufactured or produced, and not the person that actually
       manufactures or produces it, will be considered the manufacturer.

       Section 4052(f)(1) provides that an article taxed by § 4051(a)(1) is not 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
       modification does not exceed 75 percent of the retail price of a comparable new article.
       Therefore, a chassis is not considered “manufactured” if its repairs and modifications do
       not exceed 75 percent of the retail price of a comparable new article.

       Questions

             1. Is the renovated chassis subject to the retail excise tax imposed by
       § 4051(a)(1), taking into consideration § 4052(f)(1)?

       Cost of Repairs and Modifications

       Remanufactured engine                                           $25,000
       Remanufactured transmission                                     $ 7,000
       Glider kit                                                      $50,000
       Other new components                                            $ 1,000
       Labor, fees, and other related charges                          $ 7,000
       Internal costs (including a share of overhead expenses)         $ 5,000
       Total                                                           $95,000

       Retail price (pre-tax) of a comparable new chassis              $125,000

       Dealer’s cost of repairs and modifications to the chassis are $95,000, which is more
       than $93,750 (75 percent of $125,000), the cost of a comparable new chassis.
       Therefore, § 4051(f) does not apply. Consequently, the chassis is subject to the tax
       imposed by § 4051(a)(1)(A).

             2. What is the amount of the tax?

       The tax is 12 percent of the price at which similar articles are sold at retail in the
       ordinary course of trade. See § 4052(a)(3)(C). In addition to the § 4052(b)(1)(B)(i)
       exclusion of the § 4051 tax, § 4052(b)(1)(B)(ii) mandates that any retail sales tax, if
       stated as a separate charge, also be excluded. Likewise, the price also excludes the
       value of the used rear axle assembly provided by Owner. See § 4052(b)(1)(B)(iii).

       Retail price (pre-tax) of a comparable new chassis:                            $125,000

       Value of used rear axle assembly provided by Owner                              <$5,000>

       Tax base                                                                       $120,000

       Tax rate                                                                             12%

       Tax amount                                                                       $14,400

             3. Who is liable for the tax?

       Owner is liable for the tax when Owner uses the chassis before its first retail sale
       because Owner is the manufacturer. See § 48.0-2(a)(4)(ii) and § 4052(3)(A).

             4. If the chassis were owned by Dealer, who would be liable for the tax?

       Assuming Dealer does not use the chassis before its first retail sale, when Dealer
       makes the first retail sale of the chassis, Dealer would be liable for the retail excise tax
       on its sale of the chassis. This tax would be 12 percent of the amount for which the
       chassis is sold. See § 4051(a)(1)(A).

             5. Would the amount of tax increase if the glider kit included a rear axle?

       Yes, assuming the cost of a glider kit that includes a rear axle increases the cost of the
       repairs and modifications made to the chassis.

             6. Would the answer change if the original engine and transmission were
       renovated and re-used?

       The answer depends on the effect the cost of renovating the engine and transmission
       has on determining whether the 75 percent test in §4052(f)(1) is met.

             7. How much of the chassis must be used for the 75 percent sale harbor to apply
       so as to not to lose its identity as discussed in Rev. Rul. 63-128, 1963-2 C.B. 476?

       Rev. Rul. 63-128 does not apply to these facts under present law.

       Situation 2

       A heavy truck outfitter installs on a used chassis that was taxed under § 4051 on its first
       retail sale the following items: a rebuilt engine, a rebuilt transmission, a finished cab and
       hood, a complete interior, front axles and brakes, front suspension and steering, a chassis
       frame, fuel tanks, an electrical system, and an engine cooling system. The outfitter may
       rebuild the engines and transmissions or purchase rebuilt engines and transmissions. The
       outfitter allows customers to choose an engine or provide an engine of their choice. The
       outfitter also allows customers to choose a combination of new chassis components.

       Question

       Is the first retail sale of the renovated chassis subject to the § 4051(a)(1) tax, taking into
       consideration § 4052(f)(1)?

       If the costs of renovating the chassis does not exceed 75 percent of the retail price of a
       comparable chassis, the chassis is not subject to the § 4051(a)(1) tax.

       Please call Celia Gabrysh at (202) 622-3130 if you have any further questions.