A consistent theme in federal excise tax compliance is the need to maintain proper documentation. This past year, numerous federal excise tax cases have hinged on this issue. In some cases, lack of documentation has led to the disallowance of claims for refunds. In other cases, transactions that would otherwise have been tax-free were held to be taxable. Moreover, no remediation or self-help after the fact was allowed by the courts or the IRS. Accordingly, taxpayers engaging in transactions involving federal excise taxes should be mindful of the documentation requirements, including timing requirements, and confirm compliance before engaging in the transaction.
The federal government collects more than $100 billion each year in excise taxes affecting virtually all taxpayers, directly or indirectly, regardless of industry segment. This includes taxes imposed on heavy vehicles such as highway trucks, trailers, and tractors; motor fuels such as gasoline, diesel, and jet fuel; air transportation services; telecommunications services; certain alcohol and tobacco products; certain imported electronics and foam furniture; and other products such as coal, firearms, vaccines, bows and arrows, and sport fishing equipment. In addition to contributing to the general fund, a number of these taxes fund trust funds for special purposes such as for highways, airports and airways, leaking underground storage tanks, oil spill liability, sport fishing restoration and boating, black lung disability, vaccine injury compensation, and inland waterways.
Federal excise taxes tend to be transaction taxes; that is, depending on the specific rules, the taxable event may be the payment for services rendered or the sale, use, lease, or entry into the United States of a specified taxable article. The person liable for the tax may be the person paying for the taxable service or the manufacturer, importer, seller, or user of a taxable article. In some cases, the person responsible for remitting the tax to the government is a "collector" that is not the taxpayer. In other cases, the taxpayer often passes on the economic burden of the tax in its pricing or invoicing practices. For example, the end user may bear the economic burden of the tax through increased prices because the tax is passed on along the distribution chain.
To add to the complexity, transactions may be subject to certain statutory exemptions or credits or even be tax-free in a number of situations. In some cases, the exemption or credit is designed for the taxpayer, while other times, credits may be claimed by persons further down the distribution chain, such as a consumer using the taxed product in a nontaxable use. Congress developed statutory rules to ensure that the only person with standing to make a claim for refund either bears the economic burden of the tax or receives a waiver from the person that did. These rules were designed to avoid "unjust enrichment" by a taxpayer acting only as a passthrough and to avoid "whipsaw" situations in which more than one party in the distribution chain could claim a refund of tax paid with respect to the same transaction. In addition, IRS regulations specify the documentation required to satisfy these statutory rules relating to claims for refund and tax-free sales.
Many of these regulations focus on the form of the transaction and often have strict documentation requirements to effectuate the desired result. For example, a taxpayer claiming a fuel credit must have an executed certificate from its customer in the exact form and manner prescribed in the regulation. As another example, to qualify for a nontaxable sale of a heavy vehicle in certain cases, the manufacturer of a taxable truck must have a reseller certificate from its dealer in advance of the sale.
The outcomes of several recent federal excise tax cases turned on whether these specified documentation requirements were met. In many cases, a failure to obtain or maintain the required documentation resulted in multimillion-dollar mistakes that taxpayers could not subsequently remedy.
In J.J. Powell, Inc., 125 Fed. Cl. 73 (2016), the Court of Federal Claims denied a fuel seller's diesel fuel refund claims on sales to otherwise tax-exempt customers when the seller did not strictly comply with applicable federal excise tax regulations requiring exemption certificates. The fuel seller generally passed on the federal excise tax to its customers; however, it sold fuel to certain exempt customers at a tax-excluded price. The seller obtained certificates from these exempt customers that substantially complied with the model certificate, but with one fatal flaw: The certificates obtained were on their face valid for three years, but the regulations specifically required certificates of no more than 12 months' duration. Accordingly, the court denied hundreds of thousands of dollars of refund claims for tax paid on diesel fuel because the documentation did not strictly comply with the regulations.
The court did allow the seller's refund claims for gasoline sold for nontaxable uses. The difference, however, was that the IRS has not promulgated regulations for gasoline refunds; these rules were provided by IRS notice and a nonprecedential IRS memorandum issued four years after the seller's refund claim was filed. The failure of the seller to obtain the specific IRS registration prescribed by the notice was not fatal to the seller's refund claim. Because the IRS did not issue the guidance as regulations, the court found the seller had substantially complied with the applicable IRS rules for gasoline claims. This result has implications for deference considerations.
In denying its refund claim, the court specifically rejected the fuel seller's argument that it had attempted good-faith compliance with the regulations and simply had made an administrative error.
In Worldwide Equipment of TN, Inc., No. 14-108-ART (E.D. Ky. 12/12/16), a retail truck dealer, Worldwide, brought a refund suit challenging the IRS's denial of a $4 million refund claim, alleging the 12% federal excise tax should not have been imposed on its sales of certain heavy-duty dump trucks because the trucks were not highway vehicles and therefore were not subject to the tax. When Worldwide filed the claims for refund with respect to tax paid on the vehicles, it did not provide to the IRS the documentation required under Sec. 6416(a) that it either bore the economic burden of the tax or had waivers from its customers, so the IRS denied the refund claims. The court held that it lacked jurisdiction to hear the case because Worldwide had not complied with the procedures of Sec. 6416(a) and the regulations.
Worldwide argued to the court that it could produce the necessary written consents at trial; however, citing case law, the court found that in order to bring a refund suit under Sec. 6416(a), a taxpayer is required to provide the written consents to the IRS during the administrative process. Because Worldwide had not done so, the government had not waived sovereign immunity to the refund suit, and the court did not have jurisdiction. Accordingly, the court granted summary judgment to the IRS without considering the underlying merits of Worldwide's claim.
In 8x8, Inc., 125 Fed. Cl. 322 (2016), appeal docketed, No. 16-1959 (Fed. Cir. 5/3/16), the Court of Federal Claims held that a provider of Voice over Internet Protocol services was not eligible to claim a refund of more than $1 million of federal excise taxes on communications services. The court reasoned that 8x8, the provider and a collector of the taxes, had not obtained the required Sec. 6415 written consents from its customers. Because 8x8 had not borne the economic burden of the tax and did not have the proper documentation from its customers consenting to claims of refunds on their behalf, the court held 8x8 was not the proper claimant for the refunds.
Although not precedential guidance, the positions being taken by the IRS Office of Chief Counsel with respect to federal excise taxes are important to note. In a Chief Counsel memorandum issued Sept. 19, 2016 (Program Manager Technical Advice 2016-15), the IRS concluded that neither the purchaser nor the manufacturer was entitled to a refund of the 12% Sec. 4051 federal excise tax paid on the sale of a truck chassis that was converted from a highway vehicle to a nontaxable vehicle under the mobile machinery exemption in Sec. 4053(8). The regulations allow the tax-free sale of an otherwise taxable chassis if the chassis is sold for use as a component of a nonhighway vehicle and the purchaser furnishes the manufacturer with a statement in support of the tax-free sale. In this situation, however, the required reseller certificate was not provided within the required period. The IRS concluded that because the purchaser did not provide the exemption certificate, the manufacturer had properly paid the Sec. 4051 tax on the first retail sale of the chassis, so there was no overpayment of tax to be refunded.
Regardless of the particular federal excise tax, these recent developments reinforce the importance of obtaining required documentation within the period mandated by regulations because this documentation may be key to supporting tax-free treatment of a transaction or a substantive requirement for a claim for refund. In the cases described above, the taxpayers and claimants lost because of failures to properly document their transactions.
In addition to the fuel, heavy vehicle, and communications excise tax cases described above, documentation requirements are prevalent for many excise taxes. These include:
- Maintaining, and in some cases submitting with the claim, proper documentation for refund claims for manufacturers and exporters of sporting goods, firearms, and medical devices;
- Obtaining manufacturer letters related to ozone-depleting chemicals for importers of electronics, vehicles, and foam furniture;
- Obtaining notification certificates from buyers and sellers of motor fuel to engage in tax-free sales/transactions;
- Submitting timely error reports to the IRS with respect to the branded prescription drug fee;
- Claiming renewable fuel credits, such as the requirement to obtain biodiesel certificates;
- Obtaining written consents from customers for refund of collected taxes, such as refunds of air transportation tax collected by airlines or communications tax collected by service providers;
- Obtaining certificates for sales of otherwise taxable chassis for use in nonhighway vehicles;
- Obtaining reseller certificates for sales of heavy vehicles such as trucks, tractors, and trailers; and
- Obtaining detailed certificates and waivers related to claims for nontaxable uses of fuel.
It is also important for taxpayers to be aware of new and proposed IRS documentation requirements. For example, in proposed regulations published April 18, 2016 (REG-103380-05), the IRS proposed changing the heavy-vehicle reseller certificate from a blanket certificate covering all transactions during a three-year period to requiring a certificate for each transaction. Because of the severe tax consequences and difficulty in obtaining and maintaining this documentation for each transaction, commenters advocated that the IRS withdraw the proposed rule and allow the blanket certificate rule to remain the status quo (see, e.g., comment letters submitted by the Truck Trailer Manufacturers Association, Truck and Engine Manufacturers Association, American Truck Dealers, and KPMG LLP).
While the best practice is to obtain documentation in the exact form and manner prescribed by the IRS, it is interesting to note that the courts have given some deference to taxpayers in cases in which the only available IRS guidance is nonprecedential. Nevertheless, given the nature of the federal excise tax rules, the most prudent approach would be to have policies and procedures in place to maintain the correct documentation in a contemporaneous fashion.
Mary Van Leuven is a director, Washington National Tax, at KPMG LLP in Washington.
For additional information about these items, contact Ms. Van Leuven at 202-533-4750 or firstname.lastname@example.org.
Unless otherwise noted, contributors are members of or associated with KPMG LLP.
The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG LLP. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. ©2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.