Glider kit webinar presentation

Editor's Notes

1. Why fleets and owner/operators are considering glider kit options. History – wrecked vehicle with major components intact/salvageable Engine, Transmission, Rear End, Axles, drivelines, etc.Kit included frame rail, cab, drive axlePrimary economic motivator was extending the life of viable componentsInsurance carriers encouraged and participated?Volume of units was limited, with most dealers @ handful / year
2. Today – primary economic motivator is extending the life of older generation engines, i.e. postpone adoption of current technologies. J.D. Powers survey: Strong correlation between engine performance and overall buyer satisfaction, and latter has been declining under 2007 and 2010 compliant models. EPA jurisdiction is Engines, not trucks  DOT, state and local governments enforce (CARB, DERA $$). Acquisition cost $21,000 > MY2002ATD Cost study cf EPA estimates $3,419 vs. up to $9,600 H/D, $2,737 vs. up to $7,300 M/DRetrofit incentives drying up – DERA $531M thru 2011, Port restrictions on equipment useOperating requirements increase weight (less payload), complexity and ongoing expense DPF - regeneration, cleaningMaintenance practices – change and inflexibilityEPA up front equipment cost increase estimates vs. ATD studyReliability/downtime – increased maintenance and repair, sensor issues, spontaneous combustionSCR– Turbo, DEF and tank, sensorsEGR – valve servicing / replacement, soot in engine, temperature regulation, power loss, cooler failureRe-education – higher RPM, hotter running temperatures, de-rateOperatorManufacturerDealerFuel Economy deterioration – back pressure on engine
3. Pro-active response to market demand – customized orders ≈ New Trucks. Displacing both New/Used sales? 4,000 Freightliners in 2011.Used Market numbers last decade reflect the bubble demand for good used equipment. Declining opportunity as they age out.Franchised Dealer exclusive on selling kits, but Fewer OEMs/Dealers - larger ## and not limited to Dealers - Completed units being retailed by non-franchised entities.
4. Automobile truck chassis and bodies that are not suitable for use with a vehicle that has a gross vehicle weight rating of 33,000 pounds or less;3• Truck trailer and semitrailer chassis and bodies that are not suitable for use with a vehicle that has a gross vehicle weight rating of 26,000 pounds or less; • Tractors4 that are “chiefly used for highway transportation in combination with a trailer or semitrailer,” and that have a gross vehicle weight rating of more than 19,500 pounds and a gross combined weight (tractor, plus trailer or semitrailer) of more than 33,000 pounds. (The “suitable for use” concept does not apply to tractors.); • Parts or accessories sold on or in connection with a taxable chassis, body, or tractor, or subsequently installed on a vehicle in a manner that triggers the so-called “Six-
5. FIRST – let me echo what Doug said, this is not legal advice, we cannot give legal or tax advice – you should consult with your accountants and tax counsel with respect to all FET and other tax issues.Second, this is a topic where there is a lot of “gray” area, and precious little guidance from the IRS in many cases. We will try and present some of the basic issues here, as well as try to identify some areas where dealers need to be on the lookout.
6. Rev. Rul. 91-27Section 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.   Generally, the repair or restoration of a vehicle that is sufficiently exten­sive to extend the useful life of the vehicle is an act of manufacture for purposes of section 4052 of the Code and section 48.0-2 of the regulations.   Rev. Rul. 86-130, 1986-2 C.B. 179, in Situation 2 , describes the tax con­sequences of a repair of a highway tractor using a "glider kit." The revenue ruling concludes that the re­furbishing operation described is an act of manufacture within the mean­ing of section 48.0-2(a)(4)(i) of the regulations and that the owner of the tractor is subject to tax on the sale or the use of the tractor.
7. In other words – modifications that do these three things to an article are subject to FET
8. For example, if a chassis has a gross vehicle weight (GVW) rating of 32,000 pounds, it would not be a taxable article (see Section II). However, if the chassis were modified by the addition of a lift axle, and the added lift axle increased the GVW rating of the chassis to more than 33,000 pounds, then it would be a taxable chassis (assuming the other requirements for a taxable chassis were satisfied). Under these circumstances, the chassis would have been further manufactured and its “first retail sale” would trigger FET. This is the case even though the cost of the liftaxle would never exceed the 75 percent threshold.
9. See IRC § 4052(f).  The 75 Percent Rule became effective  on January 1, 1998. (f) Certain repairs and modifications not treated as manufacture (1) In general An article described in section 4051(a)(1) shall not be treated as manufactured or produced solely by reason of repairs or modifications to the article (including any modification which changes the transportation function of the article or restores a wrecked article to a functional condition) if the cost of such repairs and modifications does not exceed 75 percent of the retail price of a comparable new article.Rev Ruling 91-27“Under the safe harbor, if the cost to repair or refurbish a truck is 75 percent or less of the price of a comparable new truck, no tax is imposed on the sale or use of that truck.”
10. For example, assume a modifier is asked to repair a vehicle, and the vehicle’s body will need extensive repairs, but the vehicle’s chassis will need only minor repairs. In determining if the 75 percent threshold has been exceeded, the modifier may not compare the cost of the modifications to the vehicle (e.g., the chassis and the body) to the retail price of a comparable new vehicle (e.g., a new chassis and body). Instead, the modifier separately must determine if the modifications to the chassis exceed 75 percent of the retail price of an equivalent new chassis, and if the modifications to the body exceed 75 percent of the retail price of an equivalent new body.
11. This is a real concern and because the market for gliders has changed for all the reasons we have discussed, this is something dealers must be aware of and understand. Based on informal conversations with the IRS - you must have a donor vehicle. The problem is – what exactly does that mean? It is unclear.Rev. Rul. 63-128, 1963-2 C.B. 476, holds that where a company restores a customer-owned semitrailer to serviceable condition by completely dismantling the body and fabricating a body from new parts and materials, a new body results that is taxable under 4061(a)(1) (the manufacturers tax predecessor to the 4051 retailers tax). This conclusion is based on the fact that the old semitrailer body has lost its identity for purposes of the excise tax. The resultant new body is a different article for excise tax purposes and is treated as a newly-manufactured semitrailer body that is taxable as an article discrete from the chassis even if used components from the discarded body are used.[16] As indicated in Rev. Rul. 63-128, if during the restoration of a semitrailer the body is dismantled and a new body is fabricated from new parts and materials, a new taxable body results. This conclusion is based on the fact that the old semitrailer body is discarded in its entirety and thus loses its identity for purposes of the excise tax. The resultant new body is a completely different article for excise tax purposes and is treated as a newly manufactured semitrailer body that is taxable as an article discrete from the chassis.
12. The problem in the real world is how exactly do you calculate A and B? Unfortunately, there is little guidance.
13. Until the IRS provides additional guidance on this issue, the conservative approach for determining the “cost” of modifications for purposes of the 75 Percent Rule is for a modifier to use the amount it would have charged a customer for the same modifications – that is, the “cost” amount should include the modifier’s profit .
14. For example, the equipment on a tractor, chassis, or body that does not contribute to the transportation function of that tractor, chassis, or body generally is not subject to FET, but may account for a significant portion of the price of the tractor, chassis or body. Accordingly, whether further manufacturing has occurred may depend on whether the 75 percent calculation considers the price of nontaxable parts of the modified tractor, chassis or body. The IRS has not yet addressed this issue.
15. If a new taxable item is produced by using new and used components to overhaul a vehicle, cannot deduct the value of the used components from the taxable sale price because the retail customer would be the first user of the new taxable item, and the retail customer did not furnish the used components.IRC 4052(b)(3):b) Determination of price (1) In general In determining price for purposes of this subchapter - . . . (B) there shall be excluded . . .(iii) the value of any component of such article if - (I) such component is furnished by the first user of such article, and (II) such component has been used before such furnishing . . .The idea is to prevent double taxation of a used component – assumes that the end user already owns (and has paid tax on) that component