Keep 3-Year Certificate in Excise Tax Regs, Trailer Company Says

The IRS's ["Service"] recent Notice of Proposed Rulemaking related to excise taxes deprives Utility Trailer Manufacturing Company ["Utility"] and other sellers of the ability to establish an FET exemption by relying on a purchaser-signed certificate covering all orders placed by that purchaser for up to three years.¹ Instead, the Proposed Rule -- by requiring that every certificate include the trailer's Vehicle Identification Number ["VIN"] -- would replace this certificate-based, three-year exemption with a requirement that the FET exemption be certified on an order-by-order or trailer-by-trailer basis.

Reading the Notice of Proposed Rulemaking, it is not clear that the Service intended to omit the three-year, certificate-based FET exemption from the proposed new ruling. We say this because (1) there is no explicit mention of this change in the Notice of Proposed Rulemaking; (2) there is no justification given in the Notice of Proposed Rulemaking for the change; (3) the Service's 15-minute estimate of the time required to comply with the new regulation² is demonstrably false if the certificate-based, three-year exemption is removed; and (4), the Service's determination that the Proposed Rule would not have a significant economic impact would be significantly erroneous. For Utility alone, complying with the Proposed Rule would increase that time from roughly 9.25 hours over a 3-year period to between 1,750 - 2,500 hours over a 3-year period and likely would require developing and implementing an elaborate computerized certificate system to fulfill the requirements. Utility is only one manufacturer; the costs to the trailer industry would be many multiples of this.

If, on the other hand, the Service intended to change so demonstrably the process for handling FET-exempt sales, Utility urges the Service to reconsider its decision based on the immense cost of and lack of benefit or justification for such an action. The accuracy of the Service's estimated burden for each respondent and on the industry as a whole cannot possibly be said to reasonably reflect the actual impact of the pending change. The underlying cost analysis would appear to require a fundamental reappraisal that accounts for the additional information provided in light of this comment.

Utility's current practice for complying with FET regulations

Current FET regulations permit a Seller to support an FET-exempt sale by accepting a certificate from the purchaser. If the sales to a particular buyer are so frequent that it is "impractical to furnish a separate certificate for each sale," the current FET regulations permit Utility to accept a certificate covering all orders between given dates . . . not to exceed 12 calendar quarters."

Utility sells a significant portion of its trailers to its independent dealers using a 3-year tax-exempt certificate. For example, for the 12-calendar-month period of 2013-2015, Utility had 37 of these certificates on file, covering sales of more than 110,000 trailers. The Service's 15-minute estimate is reasonable, in Utility's estimation, of the time required for Utility to issue, review, track, and file each certificate. This means that Utility was able to process the FET-exemption paperwork for these 110,000 trailers in roughly 9.25 hours (37 x 0.25) for a 3-year period, or an average of about 3 hours per year. As far as Utility can tell from the Notice of Proposed Rulemaking, this process -- in combination with the paperwork completed by the dealers who then resell the trailers and pay the FET -- provides the Service with all the information it needs in connection with FET-related records.

The Proposed Rulemaking will dramatically increase the administrative burden and cost on Utility

Because the Proposed Rulemaking deprives Utility of the ability to rely on a 3-year certificate for those buyers who make such frequent purchases that it would be impractical to use a separate certificate for each order or trailer, Utility estimates that the Proposed Rulemaking will increase by roughly 19,000% - 27,000% the time and effort required to comply with the current FET regulations.

As noted previously, 15 minutes is a reasonable estimate for processing a single certificate using Utility's current procedures. The 110,000 trailers Utility sold in 2013-15 using the 3-year certificates were the result of between 7,000 and 10,000 individual orders. Even assuming that each multiple-trailer order could be processed using a single certificate, Utility would be required to spend between 1,750 - 2,500 hours over a 3-year period processing the certificates under the Proposed Rulemaking, instead of the 9.25 hours it currently spends.

Furthermore, the 15-minute estimate itself is likely low for completing the new certificate, as each certificate requires that the VIN of each trailer be listed. Utility does not know the VIN that will be assigned to the trailers in a given order until a few weeks before the order begins production. At that time, Utility either would need to complete the certificate itself and send it to the buyer with the VINs included within the order, or send the VINs to the buyer so the buyer could complete the form. In either case, the buyer then would need to complete the certificate and return it to Utility for additional processing. Utility then would need to track the certificate and make sure it matches each certificate to the invoice for the trailers listed on the certificate. The 1,750 - 2,500 hour estimate for a 3-year period, therefore, is probably very conservative.

Additionally, if there is any delay in obtaining the certificate back from the buyer, Utility will be required either to delay invoicing the buyer, or Utility's invoice must include FET even though the trailer was purchased for resale or long-term lease and otherwise would be FET exempt. Either option is inefficient and adds to Utility's transaction costs. This is not reflected in the Proposed Rulemaking.

Even if Utility were to attempt to automate the certificate process, such an effort would require significant investment in new systems and procedures and would not eliminate the need for manually handling an additional 1,750 - 2,500 pieces of paper. The Proposed Rulemaking does not in any way account for the cost of designing an elaborate computerized certificate system and coordinating implementation of a wholly new process with our buyers.

Other manufacturers are similarly situated

Although Utility is one of the largest manufacturers of semi-trailers in the United States, it is not the largest. Utility anticipates that the burden it has described in this letter would apply similarly to the major manufacturers of semi-trailers, including those who are larger and smaller than Utility. The Truck Trailer Manufacturers Association has submitted its comments opposing eliminating the ability to use a single certificate covering all orders between two dates not to exceed 12 calendar quarters. Utility is only one member of that Association, and it understands that many other members of the Association share Utility's concern about the administrative burden imposed by the change in the Proposed Rulemaking.

The Proposed Rulemaking estimates that the total recordkeeping burden is roughly 750 hours across the entire industry, based on 3,000 recordkeepers spending an average of 0.25 hours a year keeping the records required by the Proposed Rulemaking.³ As noted in detail, Utility itself will spend multiples of the cumulative estimate for the entire industry. Multiply this burden many times over, and it is easy to see that the burden on the industry as a whole is substantial and has not been properly accounted for in the Proposed Rulemaking. The Proposed Rulemaking cannot possibly be said to reflect accurately the actual impact of the pending change. The underlying cost analysis requires a fundamental reappraisal that accounts for the additional information provided in light of this comment.

Suggested modification to the Proposed Rulemaking

Remedying this deficiency in the Proposed Rulemaking is easily done. As described in more detail in the submission made by the TTMA, Jeffrey M. Sims, President, on May 20, 2016,⁴ the Service need only make two minor changes to the Proposed Rule to fix this issue:

Utility appreciates your taking the time to review this comment. Thank you for your consideration and please feel free to contact us if we can provide additional information.

²See Notice of Proposed Rulemaking; Department of the Treasury, Internal Revenue Service; 26 CFR Parts 41, 48 and 145 (REG-103380-05) RIN 1545-BE31, Excise Tax; Tractors, Trailers, Trucks, and Tires; Definition of Highway Vehicle; 81 F.R. 18544, 46-47.

³ Notice of Proposed Rulemaking; 81 F.R. 18544.

⁴ Utility joins in and supports the Truck Trailer Manufacturers Association ["TTMA"] submission. That submission has been posted as a comment submitted by John Freiler (of the TTMA), posted on 5/23/2016 and have ID: IRS-2016-0013-0006, titled TTMA Comments for IRS-FET (https://www.regulations.gov/#!documentDetail;D=IRS-2016-0013-0006).