Navigating the Highway Transportation Excise Tax – Houston Tax Attorneys

Many of our tax laws are written in very broad language. This provides a significant advantage to the IRS, as the IRS can issue interpretive guidance to clarify these rules in a way that is easier to administer and, often, in ways that maximize tax revenue for the government.

This flexibility also aids IRS auditors in proposing adjustments during examinations. Even diligent taxpayers attempting to comply fully with the law can find themselves caught in this interpretive web.

Those who are new to working tax disputes often wonder why the IRS settles tax debts. The answer is often that the IRS has to be careful with disputes that could clarify the law. Tax disputes that result in more precise guidance can help taxpayers understand their obligations, but it also creates opportunities for taxpayers to restructure to minimize their taxes or even avoid the tax altogether.

The federal excise tax system provides a prime example of this dynamic. Excise taxes are specialized levies designed to either discourage certain activities or impose costs on specific types of transactions. There are a number of different types of excise taxes, such as the tire import excise tax. In this article, we’ll consider the highway transportation excise tax. The recent Rockwater, Inc. v. United States, No. 23-11893 (11th Cir. 2024), provides clearer guidance on when this excise tax applies.

Facts & Procedural History

The taxpayer in this case is a manufacturer of specialized trailers designed to dry and transport peanuts from farm fields to buying points. According to the court case, the trailers have unique design elements for peanut processing, including a perforated floor system for drying and specialized unloading mechanisms. The vehicles also incorporate standard highway equipment, such as DOT-compliant lighting and brakes.

This case started like most other tax disputes. The IRS conducted an audit. The IRS determined the trailers the taxpayer sold were subject to a 12% excise tax on their first retail sale. The taxpayer paid the taxes and filed a refund suit to recover the payment. The case addresses whether these particular types of trailers qualify as “off-highway transportation vehicles” that are exempt from the excise tax.

About the Transportation Excise Tax

The highway vehicle transportation excise tax is similar to a sales tax that is paid by the seller. It is a 12% tax on the first retail sale of truck trailer and semitrailer chassis and bodies.

This tax only applies to vehicles designed to perform a function of transporting a load over public highways, whether or not they are also designed to perform other functions. The term “public highway” includes any road, whether a federal highway, state highway, city street, or otherwise, that is not a private roadway. Given these rules, these vehicles are likely those that would already qualify the end-user for favorable tax treatment as qualified non-personal use vehicles.

Congress created an exemption for “off-highway transportation vehicles.” To be an off-highway vehicle, the vehicle has to meet two key requirements. First, the vehicle must be specially designed primarily for transporting loads other than over public highways. Second, due to this special design, the vehicle’s capability to transport loads over public highways must be “substantially limited or impaired.” The statute specifically states that a vehicle’s design is determined solely based on its physical characteristics.

Court Interpretations and Analysis

So this sets up the tax dispute in this case. So what is a highway transportation vehicle versus a non-highway transportation vehicle? For taxpayers who could be subject to this tax, avoiding the tax would result in a 12% tax savings. For some taxpayers, this amount could dictate whether the taxpayer is profitable or not.

The courts have considered several cases that touch on these tax rules. In these cases, the courts have focused on the physical characteristics of vehicles rather than their intended use. For example, in Worldwide Equipment v. United States, the Sixth Circuit examined coal-hauler dump trucks. The trucks had special engines, transmissions, and off-road tires that would overheat at highway speeds. The court found the trucks were non-highway vehicles given these physical limitations. In Florida Power & Light Co. v. United States, the Court of Federal Claims emphasized that the design for frequent off-road use alone was insufficient. The court concluded that the vehicle must be primarily designed for off-road use.

That brings us to the current court case. In Rockwater, the court found that the peanut trailers’ special features were specific to peanut drying rather than transportation. The presence of standard highway equipment and the absence of specific off-highway transportation features showed that the trailers were not primarily designed for off-highway use. The appellate court noted that the ability to operate at normal highway speeds without special permits further undermined the taxpayer’s claim that the vehicles were non-highway transportation vehicles.

While the taxpayer in this case lost the case, this court case creates a more concrete rule that taxpayers can follow and apply.

Avoiding the Excise Tax

Given that this excise tax only applies to vehicles that can travel unimpeded on highways at highway speeds, one can easily envision ways to avoid this excise tax.

For specialized equipment like the peanut trailers in this case, the manufacturer might be able to incorporate design elements that create legitimate highway limitations and thereby avoid this 12% tax. For example, using specialized off-road tires that are incompatible with extended highway travel, or designing weight distributions that require special permits for highway transport, could help qualify for the exemption. One could envision other arrangements that would also create genuine physical limitations that the end users may find acceptable.

Another approach might be to separate functions between different vehicle types. The manufacturer could create two vehicles instead of one–with one vehicle consisting of the peanut processing components and the other being the highway transportation part of the rig. Companies could use specialized equipment solely for off-highway operations and then transfer loads to separate highway-specific transport vehicles. This operational structure naturally separates highway and off-highway transport functions while potentially qualifying the specialized equipment for the exemption. Perhaps the manufacturer could go even further and charge a high price for the peanut processing components and provide the highway transportation part of the rig at minimal or no cost. Or alternatively, the taxpayer may have a different entity handle the sale of the highway transportation component.

Takeaway

Excise taxes like the highway transportation excise tax have the effect of preventing taxpayers from engaging in certain activities. With this tax, it is the sale of specialized equipment that includes components that, collectively, are able to travel down highways without significant limitations. As noted by this court case and in this article, the tax may be relatively easy to sidestep with enough creative tax planning. Creating genuine physical limitations on highway use through vehicle design, not just operational constraints, may be sufficient given the holding in this case.