GAS GUZZLER TAX LIABILITY APPLIES TO IMPORTED AUTOS WITHOUT EPA FUEL ECONOMY RATING

Rev. Rul. 86-20

ISSUE

If an automobile is imported without a prototype-based fuel economy rating assigned by the Environmental Protection Agency (EPA), is that automobile subject to the requirements of the tax imposed by section 4064(a) of the Internal Revenue Code (the "gas guzzler tax")?

FACTS

EPA issues certificates of conformity to domestic manufacturers and large importers of automobiles for those classes of automobiles complying with federal emission standards. This certificate is based on tests of a prototype vehicle and is the manufacturer's or importer's license to build or import automobiles as described in the manufacturer's or importer's application to EPA for certification. The EPA also conducts fuel economy testing in conjunction with the emission testing conducted on these vehicles. An urban fuel economy fuel test and highway fuel economy test are conducted utilizing different driving schedules and different test procedures, and urban and highway fuel economy values are then determined. The combined fuel economy (also referred to as model type fuel economy), upon which the gas guzzler tax is based, is a weighted average of the urban and highway fuel economy values (with urban weighted 55 and highway weighted 45).

When an automobile is imported without a "certificate of conformity," a bond equal to the value of the vehicle, plus duty, is posted with the U.S. Customs Service. Most such "nonconforming vehicles" are imported by individuals or small volume importers. EPA requires any nonconforming vehicle to be either (1) converted, by installation of emission controls, to conform, in all material respects, to a vehicle that if already certified for sale in the United States, or (2) modified by the installation of emission control components and then individually tested to demonstrate emission compliance in accord with the Federal Test Procedure outlined in 40 C.F.R. Part 86 (1984). After the conversion or modification is completed and emission compliance has been demonstrated to EPA, a bond release letter is issued by EPA to the Customs Service. Inasmuch as a highway economy test is not required by EPA under either of these two procedures, no fuel economy ratings are derived from establishing the emission compliance of the individual automobiles.

There are also certain EPA enforcement and regulatory exemptions to the emissions compliance requirements for imported automobiles. Fuel economy ratings are not required by EPA for these automobiles.

LAW AND ANALYSIS

Section 4064(a) of the Code imposes on the sale by the manufacturer of each automobile a tax determined on the basis of fuel economy ratings for vehicle model years beginning with 1980.

Section 48.4064-1(a)(3) of the Manufacturers and Retailers Excise Tax Regulations provides that the tax imposed by section 4064 of the Code is payable by the manufacturer making the sale. An automobile sold before the time a determination of fuel economy is made for the model type (as defined in section 48.4064-1(b)(6)) is subject to tax if it is subsequently determined that the fuel economy level of that model type is within the taxable range.

Section 48.4064-1(b)(1) of the regulations provides that a "sale" includes the use (within the meaning of section 4218) or the first lease (within the meaning of section 4217(e)) of an automobile by the manufacturer.

Section 4064(b)(1)(A) of the Code defines the term "automobile" as meaning any 4-wheeled vehicle propelled by fuel which is manufactured primarily for use on public streets, roads, and highways (except any vehicle operated exclusively on a rail or rails) and which is rated at 6,000 pounds gross vehicle weight or less.

Section 4064(b)(5) of the Code provides that the term "manufacturer" includes a producer or importer. Under section 48.4064-1(b)(2) of the regulations, an importer is a person who imports an automobile whether or not in connection with a trade or business.

Section 4064(c)(1) of the Code provides that fuel economy for any model type shall be measured in accordance with testing and calculation procedures established by the EPA Administrator by regulation. Procedures so established shall be the procedures utilized by the EPA Administrator for model year 1975 (weighted 55 percent urban cycle, and 45 percent highway cycle), or procedures which yield comparable results. Procedures under this subsection, to the extent practicable, shall require that fuel economy tests be conducted in conjunction with emissions tests conducted under section 206 of the Clean Air Act, (42 U.S.C. section 7521 (1982). The EPA Administrator shall report any measurements of fuel economy to the Secretary.

Section 48.4064-1(c) of the regulations provides that, for purposes of the gas guzzler tax, the fuel economy for any model type is determined (or redetermined) in accordance with the testing and calculation procedures utilized by the Environmental Protection Agent Administrator for model year 1975 (weighted 55 percent urban cycle and 45 percent highway cycle) or any other procedures (yielding comparable results) established by the Administrator. The Environmental Protection Agency's determination (or redetermination) of a model type's fuel economy is made at the time the general label fuel economy value is calculated (or recalculated). This determination (or redetermination) is conclusive for purposes of the gas guzzler tax.

Thus, the sale, use, or first lease by an importer of a new or used automobile (as defined in section 4064(b)(1) of the Code) that has not previously been subject to the tax imposed by section 4064(a) is subject to tax if the fuel economy rating of the model type in which the automobile falls is within one of the taxable categories in the tables in section 4064(a).

In those situations where an automobile is imported without a "certificate of conformity" and an accompanying EPA assigned fuel economy rating, the fact that EPA has not required a highway fuel economy test for purposes of emission compliance and bond release does not exempt the importer form liability for the gas guzzler tax. It would be impractical, however, for EPA to ascribe a fuel economy rating to all imported nonconforming automobiles of a particular model, based on EPA's testing of one such nonconforming vehicle.

The method of determining the amount of tax depends on the manner in which the vehicle establishes emissions compliance. If the automobile is modified to conform to a vehicle already certified for sale in the U.S., tax liability is based on the fuel economy rating of the certified vehicle it has been made to conform with. Alternatively, if the vehicle is brought into conformity with emission standards through modification and testing, tax liability is based on a presumption of low fuel economy. See Rev. Proc. 86-9, elsewhere in this bulletin, for procedures on the computation of liability. In either instance, the importer may elect to have the vehicle tested for the purposes of generating a fuel economy rating. The procedures to calculate fuel economy are set forth in 40 C.F.R. Part 86 (1984) and are available for use in situations where a fuel economy rating for a certified vehicle is not available for reference.

An automobile that is imported into the United States in a nonconforming mode and that is exempted from conformance to federal emissions standards is not exempted from the gas guzzler tax unless specifically exempted under the gas guzzler tax provisions. Inasmuch as an automobile without emission system modification cannot be compared, for fuel economy purposes, to a certified automobile that is in compliance with federal emission standards, the fuel economy rating of such an automobile has to be independently determined. See Rev. Proc. 86-9, elsewhere in this Bulletin.

HOLDING

An automobile imported without a fuel economy rating assigned by EPA is subject to the requirements of section 4064 of the Code and is subject to the gas guzzler tax if its fuel economy rating falls within one of the taxable categories under section 4064(a).