GLIDER KITS: FEDERAL AND STATE

REGULATORY CONCERNSPresenters:

Kyle TreadwayDealer Principal, Kenworth Sales Co. Immediate Past Chair ATD Board of Line Representatives(801) 487-4161ktreadway@kwsco.com

Bradley T. MillerDouglas GreenhausLegal and Regulatory AffairsNADA/ATD703-821-7040bmiller@nada.org

Moderator:

Douglas GreenhausDirector, Environment, Health and Safety NADA/ATD703-821-7040dgreenhaus@nada.org

What We Will Cover:

• Intro to webinar and presenters

• Glider kits: past history and the current market environment

• Federal and state regulatory concerns

• FET issues

Disclaimers• Nothing in this webinar is intended to be legal

advice. Please consult your attorney, accountant, or other professional advisor.

• NADA/ATD does not provide tax advice and nothing in this webinar is intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

Poll #1

The following best describes me:

Dealer/ Dealership EmployeeAccountantAttorneyOther

Poll #2

Lines I represent (choose all that apply):

FordFreightlinerHinoInternationalIsuzuKenworthMackPeterbiltUDVolvoWestern Star

Glider Kits - Historically

• Wrecked vehicle• Salvageable components• Economic motivator = chassis cost• Insurance-carrier support

Glider Kits - Today

• Motivators– Reduce acquisition costs– Reduce operational costs– Avoid operational complexities– Circumvent engine mandates– Reduce weight– Reduce downtime

Glider Kits - Today

• Carrier-sourced components– Wrecked chassis– Existing fleet unit– Purchased unit/components

• Dealer-sourced components– Custom spec’d for intended use and year– Core exchange– Stocked

Glider Market

• Strategy shift • Finite window of opportunity• Franchised dealer role = kits +

– Assembler– Retailer– Procurer

Federal DOT Issues

• Federal safety certification: Is the vehicle newly manufactured?

• NHTSA regulates Federal Motor Vehicle Safety Standards

• “Manufacturers” must register with NHTSA, comply with applicable safety standards, and certify as such

NHTSA Glider Kit Exemption• 49 CFR 571.7(e) : Combining new and

used components. When a new cab is used in the assembly of a truck, the truck will be considered newly manufactured ….. unless the engine, transmission, and drive axle(s) (as a minimum) of the assembled vehicle are not new, and at least two of these components were taken from the same vehicle.

Purpose of NHTSA Glider Kit Exemption

• To accommodate major repairs to existing vehicles. Allows “repairer” to comply with standards applicable to “repaired” versus newly manufactured vehicle. Also avoids manufacturer I.D. and certification requirements.

• No exemption prior to 1975.

If Exemption is NOT Met, Must:

• Identify as a “manufacturer” with NHTSA: 49 C.F.R. Part 566

• Build vehicles to comply with currently applicable FMVSS: 49 C.F.R. Part 571

• Certify completed vehicles: 49 C.F.R. Part 567

Further Guidance

Extensive NHTSA information on manufacturer requirements include a Guide entitled: Requirements for Manufacturers Of Motor Vehicles and Motor Vehicle Equipment. Available on www.NHTSA.gov.

Related DOT IssuesFinal Stage Manufacturing:

Certification but often may rely on pass-through

Alteration: Changes to completed vehicles with other than readily attachable components; requires alteration certification

Modification: After first sale; maintain compliance but no certification

Emissions Compliance

• EPA and CARB certify medium- and heavy-duty engines and engine families, not trucks and tractors (yet).

• Unlike with light-duty where entire vehicle certified for emissions compliance

Emissions Compliance (continued)

• Installation of used or remanufactured engines in vehicle rebuilt with glider kit

• Subject to tampering prohibitions, but not engine-switching policy

• Engine/emission controls must meet standards in effect and applicable when first built

Emissions Compliance (continued)

• Caution: Ensure rebuilders apply applicable software updates!

• Engines subject to low-NOx rebuild program arising out of engine

• Settlement must have required software upgrades. Applies to engines originally manufactured prior to December 31, 1998 .

State Law Issues

• Include: Licensing, Titling, Registration, Taxes, CARB compliance

• Check with appropriate state authorities. ATAEs and state motor carrier associations may also be helpful.

State Law Issues (continued)• Marketing of completed vehicles versus

sale or use of kits to rebuild • State law may require (or prohibit):

– Manufacturer registration/licensing – Completed vehicles to be sold as “new”

and only by franchised dealers– Proper titling/registration: For example,

use of glider kit VIN/MY from MSO/MCO as the VIN/MY for completed vehicle

Federal Excise Tax12% tax on the

“first retail sale” of a

taxable body, chassis,

or tractor

NADA/ATD FET Guide

FET General Rule – Used Articles

• Once an article has been involved in a prior transaction that either triggered FET or was exempt from FET, any subsequent sale or use of that article will not trigger tax.

• However, this general rule does not necessarily apply when a previously used article is subsequently modified

Two Main Exceptions

• The “Six-Month” Rule – Generally applies to parts or accessories

installed within six months of sale– We will not be discussing today

• The “Further Manufacturing” Rule– At issue in the “Glider Kit” context

Further Manufacturing Rule

• When significant modifications or repairs are made to an item, the improved or changed item is treated as “new” for FET purposes.

• The new item is once again subject to tax upon its “first retail sale” (if, as modified, it satisfies the basic requirements).

“Manufacturing”

• "Manufacturer“ -- 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.

• Use of a Glider Kit is an act of manufacture, and subject to tax

What is Further Manufacturing?• IRS has identified three types of

modifications that constitute “further manufacturing”: – Modifications to a chassis, body, or tractor

that change the transportation function of a vehicle

– Modifications that restore a wrecked vehicle into a usable vehicle, and

– Modifications that extend a vehicle’s useful life

Does the 75-Percent Rule Apply?

• Must answer two questions to determine:– Was the item taxable prior to the

modifications?– Would the modified item, if new, be taxable?

• If the answers to these are YES – then apply the 75-percent rule– Note: If modified article would be taxable if new, and

was not taxable prior to modification, the 75% rule would not apply – further manufactured.

75-Percent Rule – A “Safe Harbor”

• Under the 75-percent rule, an article is NOT “further manufactured” if the cost of the modifications to the used article (including repairs) does not exceed 75 percent of the retail price of a comparable new article

• This is a “safe harbor” from the “further manufacturing” rule

75-Percent Rule Applied to Each Article

• 75-percent rule should be applied separately to each article (i.e., a tractor or a truck, trailer, or semitrailer body; or a truck, trailer, or semitrailer chassis) as opposed to applying the rule to the complete vehicle comprised of both a body and a chassis.

“Donor” Vehicle Required

• The taxpayer can't avail the use of the 75-percent rule if there is no existing "article" to repair or modify.

• If no donor, modifier would be considered a manufacturer and be liable for the tax on the completed unit.

75-Percent Rule Calculation

Is A < 75% of B?

A = “cost” of the modifications to the article

B = “retail price” of a comparable new article

Problem is:• What is “cost?” • What is “retail price?”

What is “Cost?”• There is little guidance as to how to

calculate the “cost” of the modifications– Customer owns the article – it is likely the

full cost charged by the modifier to the customer.

– If modifier owns the article being modified, “cost” could: • Include charges based on an arm’s-length

transaction (a profit percentage)? OR • Be based purely on modifier’s internal cost?

(including a percentage of overhead costs).

What is “Retail Price?”• Does not include FET• Is it retail price or taxable price?

– IRS has not yet addressed • ATD FET guide:

– “the IRS likely would look to whether the modifications to the taxable parts of the tractor, body, or chassis exceed 75 percent of the taxable price of a comparable new tractor, body, or chassis.”

The Tax and Who Pays It• FET- 12 percent of the sale price of the

modified item - not based on the cost of the modifications.– However, if end-user has its used article modified

into a taxable article - may deduct from the taxable sale price the value of a taxable item’s components if:• (1) “such component is furnished by the first user of

such article,” and (2) “such component has been used before such furnishing.” (IRC §4052(b)(3))

– “Value” = component’s “fair market value”• Cannot deduct installation costs

The Tax and Who Pays It (continued)

• Who pays the tax?• If customer furnishes the item to be further manufactured and retains

title to the item, the customer, not the modifier, may be responsible for paying FET to the IRS. – However, if the modifier discards the chassis, body, or tractor to

which the customer holds title, the IRS likely will determine that the modifier, not the customer, is liable for the FET.

• If a modifier purchases a used article and then modifies it for the modifier’s own use or for resale, then the modifier would be liable for the FET.– In addition, because the modifier would be treated as the

manufacturer of the modified vehicle, a taxable sale by the modifier generally would likely be subject to the “presumed markup percentage.”

Further Manufacturing Flow Chart

Questions?

1:00 to 2:30 pm, Wednesday, July 25

Help!

I’ve Got Family in My Business!

Hugh Roberts, PartnerThe Rawls Group

818-702-0889 x155

hbroberts@rawlsgroup.com

Next Week’s Free MarketInsight Webinar

Other legal webinars available on demand from NADA U and at no cost to members of ATD and NADA:

FET-Free Sales to Government BuyersSelling Fuel Economy and the New Federal Label

Best Spot Delivery and Desking Practices

1:00 to 2:30 pm easternWednesday, August 29

Tax Implications of Tangibles Regulations

Paul Metrey, NADA Legal DepartmentDan Thompson and Bob Murphy, Boyer & Ritter

Advanced Service Management SeminarTaught by Bob Atwood, NADA Academy Instructor

August 13-17, 2012

Advanced Parts Management SeminarTaught by Chris Bavis, NADA Academy Instructor

October 15-19, 2012

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Thank YouContact:

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Legal and Regulatory AffairsNADA/ATD

703-821-7040