Understanding Federal Excise Tax
Over the last several months, NATM staff has received a significant number of questions regarding the Federal Excise Tax (F.E.T.). The F.E.T. applies only to a trailer with a gross vehicle weight rating (GVWR) over 26,000 lbs. Importantly, however, the calculation of a trailer’s GVWR for purposes of the F.E.T. is defined by the Internal Revenue Service (IRS) and rarely matches the GVWR determined by the manufacturer under 49C.F.R. § 571.3 and 567.4 for purposes of compliance with NHTSA regulations.
Calculating the GVWR of a Trailer for Purposes of F.E.T.
Under 49 C.F.R. § 571.3, many manufacturers use the “weakest link” principle to set the GVWR of a trailer. For example, if the coupler is rated at 21,000 lbs., and all other components (i.e. chains, tires, axles, etc.) are at or above 21,000 pounds, then the GVWR could be set at 21,000 lbs.
The IRS, on the other hand, uses the following formula to calculate the GVWR of a trailer for purposes of the F.E.T.:
GVWR = (Axle Rating) x (Axle Quantity) / (X/Z)
X = distance from trailer hitch to center of the load bed
Z = distance from the trailer hitch to the center of the axle group
For example, a trailer containing the following measurements:
X = 342 inches
Z = 438 inches
Axles = 3
Axle rating = 7,000 pounds
Has a GVWR for purposes of the F.E.T. as follows:
GVWR = (7,000 x 3) / (342/438)
= 21,000 / .78082
= 26,895 lbs.
In this example, the total axle capacity is 21,000 lbs., which might lead a manufacturer to set a GVWR of 21,000 lbs. for that trailer. As seen in the above calculations, for purposes of the F.E.T., the IRS will calculate the trailer’s GVWR as 26,895 lbs., and as a result, the F.E.T. would apply to the sale of that trailer. This demonstrates why calculating the GVWR for each trailer using the IRS’s method is extremely important; even if the manufacturer has rated the trailer well below 26,000 lbs., the F.E.T. may nevertheless apply to that trailer under the IRS’s GVWR methodology.
Given its importance in determining the GVWR for purposes of the F.E.T., manufacturers should ensure they clearly and consistently define the load bed of a trailer in their literature, drawings, specifications and the like. For example, when describing the trailer length of a gooseneck trailer, most manufacturers measure it as the length from the gooseneck drop wall to the rear of the trailer. For example, an 8’ x 30’ trailer would be 8 feet wide and 30 feet long (as measured from the gooseneck drop wall to the rear of the trailer), and as a result those measurements are used for defining the load bed for that trailer.
However, if a manufacturer includes in its literature or other material describing the product, a trailer length that is measured from the nose (coupler) of the trailer to the rear of the trailer, the IRS may use such length as the length of the load bed in its calculation of the GVWR for purposes of the F.E.T. All else being equal, the GVWR will be greater when the length between the nose (coupler) and the drop wall is included in the length of the load bed, and that additional weight in the rating could be the difference and trigger the F.E.T. with respect to that unit. As such, manufacturers should clearly and consistently identify and document through accurate and thorough records the portion of the trailer that will carry the load.
Paying the F.E.T.
Before a trailer qualifying for the F.E.T. is sold, the retail seller, which could be the manufacturer or dealer, must obtain a registration number from the IRS by completing Form 637. Then, if a trailer is determined to have a GVWR over 26,000 lbs. as calculated using the IRS’s GVWR formula, then the first retail seller is responsible for collecting the 12 percent F.E.T. This tax should be remitted to the IRS with a completed Form 720. These forms and other information can be found on the IRS website at https://www.irs.gov/businesses/small-businesses-self-employed/ excise-tax.
The F.E.T. does not need to be paid on repairs when the cost of the repairs does not exceed 75 percent of a new comparable trailer sold at retail. However, modifications to a previously non- taxable chassis or body which results in the chassis or body being taxable will remain taxable.
In response to the questions NATM has received, the Association adjusted its compliance verification program, which now includes a brief overview of the F.E.T. during normal compliance consultations. For further information, see pages C1-1 to C1-6 of the NATM Guidelines.