TRACTOR TRAILER OWNERS AND DEALERS SUBJECT TO RETAILERS EXCISE TAX WHEN EQUIPMENT IS OVERHAULED

Rev. Rul. 86-130

ISSUE

If, in the situations described below, truck tractors are refurbished by use of a "glider kit" and other new components, are the refurbished truck tractors subject to the retailers excise tax imposed by section 4051(a)(1) of the Internal Revenue Code? If so, what is the tax base in each situation?

FACTS

SITUATION 1. A truck dealer receives a used highway truck tractor in a trade-in, overhauls it, and resells the overhauled truck tractor at retail. In the overhaul, a set of unassembled new parts commonly known as a "glider kit" is combined with other new components and with the retained used components.

A glider kit usually consists of a cab, fenders, dash instruments, wiring, steering wheel, steering gear, seats, chassis frame, front axle, and copper tubing for the brake system.

SITUATION 2. The owner of a used highway truck tractor purchases a glider kit and other new components and overhauls the truck tractor as in SITUATION 1. The owner then uses the overhauled vehicle in the operation of its business. The owner does not regularly sell such truck tractors at retail in arm's length transactions.

SITUATION 3. The owner of a used highway tractor delivers the vehicle to an unrelated truck repair shop for overhaul. The repair shop purchases a glider kit and other new components for incorporation into the truck tractor, overhauls the truck tractor, and delivers it to the owner for use in the operation of its business. The repair shop bills the owner for the completed overhaul operation. The owner does not regularly sell such truck tractors at retail in arm's length transactions.

LAW AND ANALYSIS

Section 4051(a)(1) of the Code imposes on the first retail sale of certain enumerated automotive articles (including in each case parts or accessories sold on or in connection therewith or with the sale thereof) a tax of 12 percent of the amount for which the article is so sold. Included among those articles are tractors of the kind chiefly used for highway transportation in combination with a trailer or semitrailer. The term "first retail sale" is defined in section 4052(a)(1) to mean the first sale, for a purpose other than for resale, after manufacture, production, or importation.

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

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

Section 145.4052-1(c)(5)(ii) of the Temporary Excise Tax Regulations provides that if the seller of an article regularly sells such articles at retail in arm's length transactions, tax liability on its use of any such article shall be computed on its lowest established retail price for such articles in effect at the time of the taxable use. In establishing such price, there shall be included and excluded, as applicable, the charges and readjustments specified in sections 4216(a), 4216(f), and 6416(b)(1) of the Code as in effect at the time the tax liability on the use of the article is incurred. If the seller of an article does not regularly sell such articles at retail in arm's length transactions, a constructive price on which the tax shall be computed will be determined by the Commissioner. This price will be established after considering the selling practices and price structures of sellers of similar articles.

Section 4052(b)(1)(B)(iv) of the Code provides that in determining price for purposes of the retailers excise tax, there will be excluded the value of any component of such article if (1) the component is furnished by the first user of the article, and (2) such component has been used before such furnishing.

Section 48.0-2(a)(4)(i) of the Manufacturers and Retailers Excise Tax Regulations provides that the term "manufacturer" includes 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) of the regulations provides that, under certain circumstances, as where a person manufactures or produces a taxable article for another person who furnishes materials under an agreement whereby the person who 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 who actually manufactures or produces it, will be considered the manufacturer.

Rev. Rul. 71-584, 1971-2 C.B. 358, which dealt with the now repealed manufacturers excise tax on trucks under section 4061(a)(1) of the Code, concerned the assembly of a truck tractor by a company for its own use, by combining a glider kit with salvaged parts from a used truck tractor removed from the company's own fleet. The revenue ruling concluded that the assembly of the glider kit and used components was an act of production or manufacture of an article taxable under section 4061(a)(1). The conclusion was based on the definition of the term "manufacturer" set forth in section 316.4(a) of Regulations 46 (made applicable to the 1954 Code by Treasury Decision 6091, 1954-2 C.B. 47). That definition is the same as the definition of "manufacturer" now found in section 48.0-2(a)(4)(i) of the regulations.

Thus, under section 48.0-2(a)(4)(i) of the regulations, an act of manufacture has occurred in the three situations described above. That act of manufacture results in the production of a new truck tractor that is subject to the tax imposed by section 4051(a)(1) of the Code upon the first sale at retail or the first use before a retail sale.

In SITUATION 1, the dealer is liable for tax under section 4051(a)(1) of the Code on its sale of the refurbished truck tractor at retail. In determining the taxable selling price of the vehicle, the dealer may not invoke section 4052(b)(1)(B)(iv) to exclude the value of the used components because the used components were not furnished by the first user of the new article, the dealer's vendee.

In SITUATION 2, the owner is liable for tax upon its use of the refurbished truck tractor in its business. The owner does not regularly sell such truck tractors at retail in arm's length transactions within the meaning of section 145.4052-1(c)(5)(ii) of the temporary regulations. Accordingly, the tax must be computed on a constructive price determined by the Commissioner. After consideration of the selling practices and price structures of sellers of refurbished truck tractors, the Commissioner has determined that the constructive sale price upon which tax is to be computed is the cost to the owner of all the components used by the owner in the manufacturing operation plus an amount equal to 150 percent of the owner's labor costs (including overhead) in the manufacturing operation. Unlike SITUATION 1, the person furnishing the used components, the owner, is the first user of the new article. Thus, under section 4052(b)(1)(B)(iv) of the Code, the owner may exclude the value of any used components furnished by the owner and incorporated into the new truck tractor. Where the owner believes that facts and circumstances justify using a markup rate of less than 150 percent, a specific ruling may be sought from the Internal Revenue Service. See Rev. Rul. 54-490, 1954-2 C.B. 416.

In SITUATION 3, as in SITUATION 2, the owner is liable for tax on its first use of the refurbished truck tractor in its business. Here again, the owner does not regularly sell such truck tractors at retail in arm's length transactions. Where the owner of the used truck tractor contracts with a repair shop to perform the overhaul operation, the Commissioner has determined that the constructive sale price upon which tax is to be computed is the amount the repair shop bills the owner for the completed overhaul operation, plus the cost of any new components furnished by the owner to the repair shop. As in SITUATION 2, since the owner is the first user of the new article, the value of any used components furnished by the owner to the repair shop and incorporated into the overhauled truck tractor is not included in the constructive sale price.

HOLDING

In SITUATION 1, the truck dealer has manufactured a taxable truck tractor and is subject tax under section 4051(a)(1) of the Code on its sale of the truck tractor. The tax is based on the sale price of the vehicle with no exclusion for the value of used components incorporated into the manufactured vehicle.

In SITUATION 2, the truck tractor owner manufactured a truck tractor and is liable for tax under section 4052(a)(3)(A) of the Code on its use of the vehicle. The tax base on its use of the truck tractor is the cost to the owner of parts and accessories (exclusive of the value of used components supplied by the owner) plus 150 percent of the owner's labor costs (including overhead) incurred in manufacturing the truck tractor.

In SITUATION 3, the owner of the truck tractor is considered to have manufactured a truck tractor and is liable for tax under section 4052(a)(3)(A) of the Code on its use of the vehicle. The truck tractor owner's tax base is the total cost to the owner for the manufacture of the truck tractor (exclusive of the value of used components supplied by the owner).