Methods to determine substantial use threshold for trailers

Special application to trailers: Motor carriers must keep appropriate records in order to determine the use tax exemption for each individual truck and tractor. Motor carriers are encouraged to keep similar records for each individual trailer, but the Department recognizes that some carriers do not have a system for tracking or documenting the travel of their trailers. When records are maintained to document the use of individual trailers, use tax liability for trailers must be determined on the basis of those records. However, when separate records are not maintained for trailers, the motor carrier may determine the use tax liability based on the actual use of the tractors.

When using the “actual use” method to determine use tax due on a trailer or trailers, it is assumed that there is a direct correlation between the use of tractors and the use of trailers. Whenever use tax is due on a tractor because of the failure to maintain the twenty-five percent interstate usage, use tax will also be due on one or more trailers. The number of trailers subject to use tax under this method will correspond to the fleetwide trailer to tractor ratio. (Round up if the trailer to tractor ratio results in a fraction.)

Example: If the fleet wide ratio of trailers to tractors is two and one quarter to one and one tractor fails to maintain the substantial use threshold in a given year, the motor carrier will incur a use tax liability on three trailers. If two tractors fail to maintain the substantial use threshold in a given year, the motor carrier will incur a use tax liability on five trailers.

The trailer or trailers subject to use tax under this method will be those acquired nearest to the purchase date of the tractor triggering the use tax liability for those trailers meeting the following conditions:

1. The trailer or trailers are compatible for towing with the tractor upon which use tax is incurred.
2. The trailer or trailers have not previously incurred a retail sales or use tax liability.
3. The trailer or trailers have been actively used in hauling for hire in the year tax liability is incurred.

Under this reporting method, use tax is generally due on one or more trailers whenever a tractor is subject to the use tax. If a tractor is purchased with the intent that less than twenty-five percent of the hauls will be across state borders, it will be presumed the tractor will be pulling a trailer or trailers on which use tax is also due.

Example: ABC Trucking has eight tractors and fifteen trailers in its fleet. The tractors and trailers met the exemption from retail sales tax and use tax at the time they were purchased, and it was determined during previous annual reviews that the tractors continued to be substantially used on interstate hauls. However, at the time of the annual review for the just-completed calendar year it was determined that one tractor was not used at least twenty-five percent in interstate hauls. Use tax is due on this tractor. Under this method, use tax is also due on two trailers. The two trailers on which use tax must be reported are the two purchased most nearly to the purchase date of the tractor.

Valuation: The value of the motor vehicle or trailer subject to the use tax is its fair market value at the time of first use within the review period for which the exemption cannot be maintained. The use tax is due and should be reported on the last excise tax return for that review period.

Example: A motor carrier who has previously met the exemption requirements for a particular truck determines this truck no longer was substantially used in interstate hauls during calendar year 2006. Use tax should be reported on the last tax return filed for 2006 with the taxable value based on the value of the truck at January 1, 2006.

To determine values the Department of Revenue will accept the following:

• Independent publications containing values of comparable vehicles if those values are generally accepted in the industry as reflecting the value of used vehicles.
• Notarized valuation opinions signed by qualified appraisers and/or dealers.
• If no other valuation is available, the Department of Revenue will accept a value based on depreciation schedules used by the Department of Licensing to determine the value of vehicles for licensing purposes.

Example: ABC Trucking purchased five trailers for use in both interstate and intrastate for hire hauls on January 1, 2006. All the conditions for exemption were met; delivery was made in Washington, and the trailers were purchased without payment of the retail sales tax. The taxpayer uses the “line crossing” method for determining interstate use.

ABC Trucking keeps a journal showing the origin and destination for each haul that identifies each truck/tractor and trailer used on a per unit basis. The journal is reviewed at the end of each calendar year to verify that motor vehicles and trailers are substantially used for transporting persons or property for hire across the boundaries of the state. During the first year of use, all five of the trailers met the “substantial use” threshold. However, in reviewing the journal for the 2007 calendar year, ABC Trucking determined that two of the trailers failed to meet the twenty-five percent “substantial use” threshold. ABC Trucking must remit use tax directly to the department on its December 2007 excise tax return, based on the fair market values of the two trailers as of January 1, 2007. Since the taxpayer maintained specific usage records for each trailer, the “substantial use” in interstate hauling must be met by each trailer for which exemption is claimed. If detailed records for usage of trailers had not been kept, use tax liability of the trailers would have been based on the tractors. In any event, use tax liability may not be determined based on the overall experience of a fleet of vehicles.

Example: DB Carriers is a motor carrier engaged in both intrastate and interstate for hire hauls. DB purchases and first uses a truck in Washington on January 1, 2007. All the necessary conditions for exemption were met; delivery was made in Washington, and the truck was purchased without payment of the retail sales tax. DB Carriers uses the “line crossing” method for determining interstate use.

DB Carriers keeps a journal showing the origin and destination for each haul which identifies each truck used on a per unit basis. This journal is reviewed at the end of the 2007 calendar year, and DB determines that the truck failed to meet the twenty-five percent “substantial use” threshold. DB Carriers must remit use tax directly to the department on its December 2007 excise tax return, based on the fair market value of the truck as of January 1, 2007. DB Carriers may not compute the use tax liability based upon the December 31, 2007, fair market value as the vehicle never satisfied the substantial interstate use provision.

Leased vehicles: Use tax exemption requirements are the same for leased vehicles as those for purchased vehicles. Motor vehicles and trailers, leased without an operator, are exempt from use tax if the user is, or operates under contract with, an ICC or MC permit holder. The vehicle must be used in substantial part for transporting persons or property for hire across the boundaries of the state. This requires that the leased vehicle be used a minimum of twenty-five percent (25%) in interstate hauls.

TIP: The taxpayer may elect to use either the fiscal year of the business or a calendar year to determine if the leased vehicle meets the substantially use minimum required for interstate hauls for hire.

If the leased vehicle does not meet the substantial use requirement during for the “view period,” use tax applies only to the portion of the lease payment which is for use in Washington during the “view period.”

Mileage is an acceptable basis for determining instate and out-of-state use for leased vehicles or trailers. When use tax is determined to be due all miles traveled in Washington by the leased vehicle is instate miles. In order to claim that a portion of any lease payment was exempt of use tax because of out-of-state use, the motor carrier must maintain accurate records of actual instate and out-of-state use. For example, if a truck was leased for the years 2006 and 2007 and failed to meet the substantial use requirement in 2006, but met the requirement in 2007, use tax would only be due for the usage in Washington which occurred in 2006.

The following examples show how this method would be applied to typical situations. These examples should be used only as a general guide. The tax status of each situation must be determined after a review of all of the facts and circumstances.

Example: BG Hauling is a for hire carrier that entered into a lease agreement for a truck without operator on January 1, 2006. All the necessary conditions for the retail sales and use tax exemptions for the first year of the lease were met. BG Hauling verifies compliance with the twenty-five percent substantial use threshold on a calendar year basis.

BG determines that this truck failed to meet the twenty-five percent substantial use threshold for calendar year 2007. Use tax will be due beginning with the period for which the exemption was not met, in this case beginning with January 2007. However, BG Hauling will report use tax only on the portion of each lease payment attributable to actual instate use, provided accurate records substantiating the trucks instate and out-of-state activity were maintained. Only mileage incurred while actually outside Washington will be considered out-of-state mileage. If BG Hauling continues to lease this truck in 2008, usage will again be reviewed for that period and use tax may or may not be due for the 2008 lease payments, depending on whether the vehicle was used substantially in interstate hauls during that year.

Example: MG Inc. is an equipment distributor which, in addition to hauling its own product to customers, is engaged in hauling for hire. MG is a holder of an ICC or MC permit. MG enters into a lease agreement for a truck without operator on January 1, 2006. All conditions for retail sales and use tax exemption are satisfied for the first year of the lease.

Based upon the truck’s for hire hauling activities during the 2007 calendar year, MG determines that the use of the truck failed to meet the twenty-five percent substantial use threshold. MG must remit use tax on the amount of lease payments made during 2007 at the time it files its last tax return in 2007. MG may remit use tax only upon that portion of each lease payment attributable to actual instate use if accurate records were maintained to substantiate instate and of out-of-state use. While only the hauling for hire activities are reviewed when determining whether the truck satisfies the substantial interstate use threshold, once it is established that the exemption cannot be maintained, the use tax liability is based upon all instate activity, including the motor carrier’s hauling of its own product.

Component parts: A use tax exemption also applies for the use of tangible personal property which becomes a component part of any motor vehicle or trailer used for transporting persons or property for hire. This exemption is available for motor vehicles or trailers owned by, or operated under contract with, a person holding an ICC or MC permit. Since carriers are required to obtain these permits only when the carrier is hauling for hire, the exemption applies only to tangible personal property purchased for vehicles which are used in hauling for hire. The exemption for component parts will apply even if the parts are for use on a motor vehicle or trailer which is used less than twenty-five percent in interstate hauls for hire, provided the vehicle is used in hauling for hire.

Vehicles taken directly outside the state: For vehicles purchased in Washington, there is a use tax exemption for the use of any motor vehicle or trailer while being operated under the authority of a trip permit and moving from the point of delivery in this state to a point outside this state.