Blanket Certificates Needed in Proposed Excise Tax Regs, KPMG Says

KPMG LLP ("KPMG") has been engaged by a Client to submit comments on the proposed federal excise tax regulations issued March 31, 2016 (REG-103380-05) ("proposed regulations") relating to the tax on heavy trucks and trailers imposed by Internal Revenue Code section 4051. The proposed amendments affect the Highway Use Tax Regulations (26 CFR part 41), the Manufacturers and Retailers Excise Tax Regulations (26 CFR part 48), and the Temporary Excise Tax Regulations Under The Highway Revenue Act of 1982 (Pub. L. 97-424) (26 CFR part 145). We are writing to express significant concern with proposed regulation section 48.4052-1 (d), relating to the certificate needed for an exempt sale under the first retail sale rules ("reseller certificate"). Further, we are requesting that Treasury and the IRS provide guidance allowing electronic collection of the reseller certificates, including rules for accepting electronic signatures to execute the certificates. Finally, we request that the proposed applicability date of the final regulations be delayed to allow affected taxpayers sufficient time to develop procedures for collection of the new required information set forth in the proposed regulations and that a transitional rule be provided with respect to existing reseller certificates.

Background

Client manufactures taxable truck chassis and taxable trucks ("taxable articles"). Under Client's business model, Client sells all taxable articles at wholesale to dealers and the dealers sell the taxable articles at retail. Client forecasts selling 20,000 taxable articles in calendar year 2016. There are currently several thousand U.S. dealerships licensed to sell Client's taxable articles. In 2015, Client was required to obtain reseller certificates from fewer than 500 of its dealers with respect to sales of taxable articles; however, any licensed dealer could purchase a taxable article for resale in the future.

Client's sales process generally begins two to three months in advance of manufacturing. Client's sales force negotiates commitments from its dealers on the number of orders they anticipate placing. This commitment gives Client the ability to forecast sales for the year. A dealer may either order on behalf of a customer or for its dealer inventory. The dealer selects the options and packages and places the order through Client's ordering system. Because of the complexity of the options and packages associated with the taxable articles, Client confirms the build specifications before the order is placed into Client's ordering system. Once ordered, the vehicle remains in an order queue until it is ready to be manufactured. Amendments to an order can be made only up to a certain point in time. The Vehicle Identification Number ("VIN"), a unique 17-digit identifier, is created and assigned in stages between placement of order and the build. It is not uncommon for the VIN to change to reflect changes in a customer's order during the process. The vehicle is delivered to the dealer and electronically invoiced to the dealer on delivery.

In compliance with the existing regulations, Client's practice is to obtain from each of its dealers a reseller certificate that covers a period of 12 calendar quarters ("three year blanket certificate"). To obtain the three year blanket certificates, Client's tax department engages in a burdensome manual process, as none of its current systems lend themselves to obtaining the certificate automatically through the ordering process. Client obtains paper or scanned copies of the reseller certificate from the dealers and maintains these paper documents in files or binders. The process to obtain three year blanket certificates under the existing regulations has taken Client approximately 500-800 hours with respect to the fewer than 500 dealers from whom it was required to obtain them.

Client has an electronic system ("System") that it uses for dealer programs, promotions, certifications, and notifications. It allows dealers to accept terms and conditions for programs that require dealer acceptance. The System can send communications to the dealers. Dealers can respond by a secured internet website where the terms and conditions are spelled out and the dealer accepts them. The System documents the dealer's acceptance of the terms and conditions and records the time and place of acceptance. Parameters can be set so that only certain individuals (e.g., general manager or president of dealership, etc.) can receive a communication and only that person can respond and certify to the relevant communication.

Overview of Heavy Trucks and Trailers Excise Tax

Section 4051(a) imposes on the first retail sale of certain truck, trailer, and semitrailer chassis and bodies and certain tractors (and 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 sold. The tax applies to truck chassis and bodies suitable for use with a vehicle with a gross vehicle weight ("GVW") over 33,000 pounds, truck trailer and semitrailer chassis and bodies suitable for use with trailer or semitrailer having a gross vehicle weight of over 26,000 pounds, and tractors of the kind chiefly used for highway transportation in combination with a trailer or semitrailer where the tractor has a GVW over 19,500 pounds and the tractor, in combination with the trailer or semitrailer, has a gross combined weight ("GCW") over 33,000 pounds.

Section 4052(a)(1) provides that the term "first retail sale" means the first sale, for purpose other than resale or leasing in a long-term lease, after production, manufacture, or importation.

Section 4052(g) provides that the Secretary shall prescribe regulations which permit, in lieu of any other certification, persons who are purchasing articles taxable under this subchapter for resale or leasing in a long-term lease to execute a statement (made under penalties of perjury) on the sale invoice that such sale is for resale. The Secretary shall not impose any registration requirement as a condition of using such procedure.

Under existing regulations, section 48.4052-1 (Heavy trucks and trailers; certification requirement) provides that tax is not imposed by section 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 section 145.4052-1(a)(6) of this chapter, except that the certificate must be signed under penalties of perjury and need not refer to Form 637 or include a registration number.

Existing regulation section 145.4052-1(a)(6) (Certificate) provides that a certificate signed by the purchaser, or an officer or employee authorized by the purchaser to sign the certificate, may be accepted by a seller in support of a nontaxable sale to the purchaser. If it is impracticable to furnish a separate certificate for each sale because of the frequency of sales to such purchaser, a certificate covering all orders between given dates (such period not to exceed 12 calendar quarters) will be acceptable. The purchaser may revoke the certificate by sending a written revocation to the seller. The certificate and proper records of invoices, orders, etc., relating to sales made pursuant to such certificate, must be retained by the seller as provided in section 6001 and the regulations thereunder (emphasis added). The existing regulations provide a model three year blanket certificate, reflecting the 12 calendar quarter rule.¹

Comments on Proposed Regulations

1. Modifications to Proposed Regulation sec. 48.4052-1(d)

The proposed regulations amend the rules relating to the definition of first retail sale in existing section 48.4052-1. Among other things, proposed section 48.4052-1(b) provides that the sale of a taxable article is a taxable sale unless the article is sold for resale or leasing in a long-term lease and, at the time of sale, the seller has obtained from the buyer a certificate stating, among other things, that the buyer will either resell the vehicle or lease it in a long-term lease; has no reason to believe that any information in the certificate is false; and has not received a notification from the IRS with respect to the buyer.

Proposed section 48.4052-1(d) provides that the certificate must be signed under penalties of perjury by a person with authority to bind the buyer, be in substantially the same form as the model certificate provided in the proposed regulations,² and contain all information necessary to complete the model certificate. Among other things, the proposed model certificate requires the date and location of sale, the chassis VIN, and the body's identification number. The certificate may be included as part of any business records normally used to document a sale.

Significantly, the proposed rule entirely eliminates the ability to accept three year blanket certificates. This change means that for each transaction, a new certificate must be obtained. For taxpayers without an automated system specifically designed for this purpose, the proposed rule would require the taxpayer to manually gather and track the certificates for each sale rather than obtain one certificate from each dealer every three years. For example, for Client the rule would dramatically increase the already daunting 500-800 hour burden it incurred in 2015 to obtain fewer than 500 reseller certificates to spending tens of thousands of hours to obtain 20,000 reseller certificates contemporaneously with each sale transaction. The proposed rule also places a disproportionate burden on certain dealerships. Of the fewer than 500 dealers that purchased Client's taxable articles in 2015, ten to fifteen percent of these dealers accounted for seventy percent of Client's sales. For this handful of dealers, the compliance would go from filling out one certificate per manufacturer every three years to filling out approximately 1,000 certificates every year.

Moreover, the proposed regulations add unnecessary complexity to the process. As noted, section 4051 imposes the tax on certain articles depending on GVW and GCW. Under the current regulations, manufacturers can obtain a three year blanket certificate from every dealer without the need to analyze whether any particular sale is of a taxable article. However, as manufacturers produce both taxable and nontaxable vehicles, under the proposed regulations, each sale would have to be analyzed to determine whether an article is taxable. For Client, this would require analysis of more than 20,000 transactions per year. If taxable, manufacturers would then have to request that the dealer fill out and submit the exemption certificate -- a certificate that no longer just requires certification that the vehicle is held for re-sale but now requires seller's name and address, buyer's name and address, date and location of sale, and VIN. As noted above, it is not uncommon for the VIN to change during the process, increasing not only administrative burden but also likelihood of error on the certificate. Because obtaining the certificates is a manual process, this would require tracking and follow-up.

Client already faces a significant burden in obtaining reseller certificates under existing rules. As noted above, Client spent an estimated 500-800 hours to obtain reseller certificates from fewer than 500 dealerships in 2015. With several thousand dealerships authorized to sell Client's taxable articles, this is a heavy burden every year. The additional information required by the proposed rule creates even more burden and in some cases may be difficult to obtain by the time of the sale under Client's current sales and ordering process. These changes would either require significant systems modifications or additional man-hours. Programming this change, if even feasible, would be both expensive and time consuming to develop. The increased workload is particularly egregious given that under Client's business model nearly every sale is a sale for resale. Accordingly, the additional information requested by the IRS would provide limited utility to an IRS excise tax examiner. There is no indication that the proposed rules would enhance tax compliance. Any potential benefit of the additional information the IRS seeks is vastly outweighed by the tremendous administrative burden that would be placed on manufacturers and dealers. In fact, it would make the IRS examiner's job much more difficult if the examiner had to review certificates from each transaction and it is unclear what, if any, useful information the examiner could gather from the exercise.

The preamble to the proposed regulations is silent with respect to changes to the model reseller certificate rule. The preamble states the "reason for these regulations" is that many of the existing regulations do not reflect current law and that the proposed regulations are intended to reflect changes to the Internal Revenue Code since 1982, address several court decisions, remove numerous obsolete regulations, and also afford the public the opportunity to comment on those provisions of the temporary regulations that are restated and unchanged. 81 FR at 18545. Indeed, the preamble describes a number of court decisions and reasons for various proposed rules. However, it does not specifically discuss the reason for the proposed change to the reseller certificate rule, which is contained currently by piecing together two existing rules: regulation sections 145.4052-1(a)(6) and 48.4052-1. Initially, the certificate in section 145.4052-1(a)(6) required an IRS registration number. In 1997, Congress enacted section 4052(g), which provides in part that IRS cannot require registration of dealers and that the certificate must be signed under penalties of perjury. As a result, the IRS modified the reseller certificate rules in 2000 by adding section 48.4052-1, which provides the certificate must include the same information as in section 145.4052-1(a)(6), except that it must be signed under penalties of perjury and need not refer to Form 637 or include a registration number. Since then, no additional statutory changes have been made to the first retail sale rules; the existing regulations reflect current law. Thus, there is no reason for Treasury and the IRS to fundamentally change the reseller certification process.

Accordingly, we respectfully request that this provision in the regulations not be adopted as written. Upon finalization of these regulations, we request that Treasury and the IRS revise proposed regulation section 48.4052-1(d)(1) to include language allowing a three year blanket certificate. Specifically, we request that Treasury and the IRS revise proposed regulation 48.4052-1(d)(1) by adding the following sentence: "If it is impracticable to furnish a separate certificate for each sale because of the frequency of sales to such purchaser, a certificate covering all orders between given dates (such period not to exceed 12 calendar quarters) will be acceptable." This language is in the current Treasury regulations at section 145.4052-1(a)(6) and should be carried over to any regulation that is finalized.

Moreover, for the reasons discussed above, we respectfully request that the model certificate in proposed regulation 48.4052-1 (d)(3) not be adopted as written. We request that Treasury and the IRS carry over the existing model certificate in Treas. Reg. section 145.4052-1(a)(6), as modified by current regulation section 48.4052-1. We have provided a sample model certificate in Appendix C.

2. Electronic Collection of Information

Regardless of whether the proposed regulations relating to the reseller certificate are adopted as proposed or modified, we believe that Treasury and the IRS should add provisions to the regulations to allow manufacturers to collect the required information in the reseller certificates using electronic methods, including an electronic signature.

Section 6061(a) generally provides that any return, statement, or other document required to be made under any provision of the internal revenue laws or regulations shall be signed in accordance with forms or regulations prescribed by the Secretary. Section 6061(b) authorizes the IRS to develop procedures for the acceptance of signatures in digital or other electronic form. See also Announcement 2013-8, 2013-1 C.B. 440 (proposing to establish five core signing requirements similar to requirements implemented under both the Government Paperwork Elimination Act and the Electronic Signatures in Global and National Commerce Act)³.

The practical reality is that the heavy vehicle industry conducts business electronically. The ordering and invoicing processes are performed electronically, communications between manufacturers and dealers are made electronically, and dealer acceptances of terms and conditions are performed electronically. In short, the records used to document the sale are electronic. Obtaining paper or scanned copies of reseller certificates is burdensome, outdated, and not in accord with Client's sustainability practices.

We respectfully request that Treasury and the IRS provide a rule allowing electronic collection of the information required to be included in reseller certificates, including electronic signatures. Electronic collection is consistent with section 6061, could be designed to meet the proposed requirements of Announcement 2013-8, and generally would foster tax compliance and ease of administration for taxpayers and the IRS. For example, one possible electronic method would be via a secured website where the signer must obtain a login and password to identify and authenticate the person as the appropriate signer, similar to Client's System. The user would certify to the information required to be included in the reseller certificate on a webpage filled in with such information and designed for that purpose by using click signature technology -- that is, clicking a button to electronically sign and certify under penalties of perjury to the statements contained on the webpage. This information would be stored in electronic code in a database maintained by the person requesting the reseller certificate. It would be possible to generate a report identifying the person that electronically signed the reseller certificate under penalty of perjury, along with any information they entered into the web form.

Regulatory clarification allowing for electronic methods for collection of the information is necessary. Absent a rule, there is too much uncertainty as to whether electronic collection of the appropriate information in the reseller's certificate would be respected by the IRS. The risk (i.e., the 12% excise tax that would be imposed on each sale of a taxable article) is material. Although the alternative is to continue the administratively burdensome manual process, manufacturers such as Client would hesitate to proceed with development of an electronic information collection system without a regulatory rule expressly providing for it.

Accordingly, we respectfully request that Treasury and the IRS provide in the regulations that the use of electronic methods is permissible for the reseller certificates, including electronic signatures. Specifically, we request that Treasury and the IRS revise proposed section 48.4052-1 (d)(1) by adding the following sentence: "Electronic methods may be used for the collection of information in this paragraph, including electronic signature."

3. Applicability Date

The proposed applicability date of the regulations provides "The regulations generally are proposed to apply on and after the date of publication of a Treasury decision adopting these rules as final regulations in the Federal Register."

There are a number of new rules and new collection of information requirements in the regulations. It will take taxpayers significant time and resources to develop procedures for the collection of this information. Accordingly, we respectfully request that the new final regulations be applicable 12 months after the date of publication of final regulations.

In addition, we request a transition rule allowing all existing three year blanket certificates executed before the effective date of the final regulations to be acceptable documentation of the sale of a taxable article for resale for purposes of proposed regulation section 48.4052-1(b)(1)(iii)(A).

Conclusion

We appreciate your consideration of our views and recommendations with regard to the heavy trucks and trailers proposed regulations. If you have any questions or would like to discuss this letter, please do not hesitate to contact either of us at the numbers listed below.

Mr. Curtis Wilson

(Check appropriate line)

_ the article or articles specified in the accompanying order, or on the reverse side hereof, (or)

_ all orders placed by the purchaser for the period commencing __________ (Date) (period not to exceed 12 calendar quarters), are purchased either for resale or for lease on a long-term basis.

I have filed Form 637 and have received registration number __________.

I understand that the fraudulent use of this certificate to secure exemption will subject me and all parties making such fraudulent use to a fine of not more than $10,000, or to imprisonment for not more than 5 years, or both, together with costs of prosecution.

_______________________

The undersigned buyer of articles listed in section 4051 ("Buyer") hereby certifies the following under penalties of perjury:

1. __________________________________________________________________

5. Buyer understands that it must be prepared to establish, by evidence satisfactory to an examining agent, how each article bought under this certificate was used.

6. Buyer has not been notified by the Internal Revenue Service that its right to provide a certificate has been withdrawn.

7. Buyer understands that if it uses or leases (in a short term lease) an article listed in this certificate, Buyer will be liable for the tax imposed by section 4051(a)(1) on the article. See 26 CFR 48.4051-1 and 145.4052-1 (c).

8. Buyer understands that Buyer may be liable for the section 6701 penalty (relating to aiding and abetting an understatement of tax liability) if this is an erroneous certification.

9. Buyer understands that the fraudulent use of this certificate may subject Buyer and all parties making any fraudulent use of this statement to a fine or imprisonment, or both, together with the costs of prosecution.

______________________________________________________________________

(Check appropriate line)

_ the article or articles specified in the accompanying order, or on the reverse side hereof, (or)

_ all orders placed by the purchaser for the period commencing __________ (Date) (period not to exceed 12 calendar quarters), are purchased either for resale or for lease on a long-term basis.

Under penalties of perjury, I declare that to the best of my knowledge and belief, the information contained herein is true, correct, and complete.

________________________________

² The model certificate in proposed regulation section 48.4052-1(d)(3) is reproduced in Appendix B of this letter.

³ The five requirements are: (1) a person (i.e., the signer) must use an acceptable electronic form of signature; (2) the electronic form of signature must be executed or adopted by a person with the intent to sign the electronic record; (3) the electronic form of signature must be attached to or associated with the electronic record being signed; (4) there must be a means to identify and authenticate a particular person as the signer; and (5) there must be a means to preserve the integrity of the signed record.