FET Tax Overview
Back in the day, paying FET taxes (the federal excise tax), along with tariffs, was the cornerstone of the federal government’s revenue stream. Although the income tax, and especially source withholding of income taxes, changed the picture dramatically, the FET tax is still around, it is still high, and the Treasury Department is still very serious about collecting it.
This post will examine some FET basics, and also touch on some commonly-attempted workarounds, and outright scams, that almost always end badly for the taxpayer.
Paying FET Taxes: Where the Money Goes
The large truck federal excise tax is essentially an additional 12 percent sales tax on the first sale of a tractor and trailer heavier than 33,000 pounds or a trailer heavier than 26,000 pounds. That one extra adjective (first sale) causes a great deal of confusion for taxpayers who wrongfully believe that they can purchase items just under the weight limit, increase the weight capacity or load with an after-market add-on, and avoid the tax. That’s not the way it works.
Depending on sales volume, the large truck FET accounts for about 9 percent of the Highway Trust Fund; the HTF, which draws most of its funds from gasoline taxes, is the money that the government uses to keep the highways in reasonably good condition. For various reasons, mostly because the gasoline tax simply doesn’t fetch as much money anymore and absolutely no one wants to hike it, there are concerns that the HTF may become insolvent, and in fact, Congress has moved about $65 billion from the general fund to the highway fund since 2008 just to keep the HTF afloat. So, the federal government needs every penny of highway money that it can find, and guess who pays that bill.
Properly paying FET taxes means submitting Form 720. As of 2014, some tax credits may be available for bio-diesel and renewable diesel fuel users.
The Taxman Cometh
Here in the Detroit area, and probably in other parts of the country as well, it’s quite common to see a large truck body shop just a few blocks from a large truck dealership. Many buyers take their lightweight trucks from the dealer to the body shop, where the mechanics add an extra axle and the buyers pat themselves on their backs because they believe they aren’t responsible for paying their FET taxes.
This workaround actually has some basis in legal fact. In May 2017, the Supreme Court reaffirmed the first sale doctrine, which allows buyers to do whatever they like to the goods they purchase and the original patent holder can’t say boo about it.
Alexander Pope once wrote that “a little knowledge is a dangerous thing,” and in this instance, he was spot-on. The first sale doctrine applies in patent law, but not in tax law. Furthermore, there is no six month grace period or window. It doesn’t matter if you modified the truck six minutes or six years after you purchased it. So, if you own a truck and/or trailer that is above the weight limit, you owe the excise tax.
In 2015, the IRS started cracking down on unpaid 720 FET taxes, usually by comparing weigh station data to 720 filers. If there is no match, an IRS audit is probably forthcoming, and that is not something that you want to face alone.