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You have requested legal assistance and research on the question of whether the federal excise tax on specified motor vehicles should be included in a user's tax base in computing the amount of use tax due when the vehicle is offered for registration. 423.7, Code of Iowa, 1975. The question is not cut-and-dried and it has not been without conflict in the courts over the years. The legal pronouncements on the subject of whether to include a federal manufacturer's excise tax in a taxpayer's gross receipts have customarily arisen in the context of state retail sales tax cases as opposed to use tax matters. But it is generally conceded that while the two taxes are separate, the use tax laws cannot be given any broader interpretation than the sales tax statutes, and therefore the principles set forth in the various sales tax decisions would appear to be applicable to a similar set of facts in a use tax context. Halliburton Oil Well Cementing Co. v. Reily, 373 U.S. 64, 83 S.Ct. 1201, 10 L.Ed.2d 202 (1963). You have requested similar research on the question of inclusion of the federal manufacturers excise on tires and tubes in gross receipts for purposes of computing Iowa sales tax. It should be noted that the Internal Revenue Code of 1954 also imposes a manufacturers excise tax on gasoline, lubricating oil and other petroleum products. In my estimation the operation of all these taxes are quite similar as far as the question at issue is concerned and authorities relating to all of them will be cited in this memorandum.

The Internal Revenue Code of 1954 imposes a 10 per cent excise tax on all truck bodies and chassis sold by the manufacturer, producer or importer. I.R.C. 4061. The Internal Revenue Code also imposes an excise tax on all tires and tubes sold by the manufacturer, producer or importer. I.R.C. 4071. A similar tax is imposed on the sale by a producer or importer of all gasoline and lubricating oil. I.R.C. 4081, 4091.

The State of Iowa imposes use tax on all trucks at the time they are offered for registration. The measure of the tax is the purchase price of the vehicle. 423.7, Code of Iowa, 1975. "Purchase price" is defined at 423.1(3), Code of Iowa, 1975 as:

"... the total amount for which tangible personal property is sold, valued in money, whether paid in money or otherwise; provided that cash discounts and trade-in allowances taken on sales shall not be included."

The sale at retail of tires and tubes is subject to the Iowa sales tax. 422.43, Code of Iowa, 1975. The measure of the sales tax is the gross receipts derived from the sale, which is defined by 422.42(6), Code of Iowa, 1975 as:

"... the total amount of the sales of retailers, valued in money, whether received in money or otherwise; ...."

The authorities from various jurisdictions have long been in conflict over the question of whether the federal excise taxes should be included or excluded from the tax base for state sales and use tax purposes. Cases supporting the inclusion of the excise tax in the sales tax base have been found in connection with the tax on trucks (I.R.C. 4061), and gasoline and lubricating oil (I.R.C. 4081). Cases excluding the federal tax from the sales tax base have been found only with regard to the tax on gasoline and lubricating oils. No decisions could be found either way with regard to the federal tax on tires and tubes. However, in view of the similarity in nature of these taxes, I believe the existing cases are equally applicable to the tax on tires and tubes.

The conflict among the courts appears to have been resolved by the United States Supreme Court in a decision rendered on May 12, 1975. Gurley v. Rhoden, 43 U.S.L.W. 4549 (U.S. May 12, 1975)considered whether federal and state excise taxes on gasoline should be included in measuring the Mississippi sales tax. The Court held that the excise tax was properly included in the sales tax base. Taxpayer operated a gasoline distributorship in which he purchased gasoline from other states and brought it to Mississippi where it was sold from his own service stations. Within the definitions provided by federal law, taxpayer was a producer for excise tax purposes. Taxpayer would add federal excise tax of 4 cents per gallon to his pump price. He also added a 9 cent per gallon state excise tax to the pump price. The State of Mississippi computed its 5 per cent sales tax without any deduction for either of the foregoing excise taxes. Taxpayer paid the sales tax under protest and brought suit in state court for a refund. The Mississippi Supreme Court upheld the tax and the U.S. Supreme Court affirmed.

The pivotal issue was the question of where the legal incidence of the federal excise tax lay. The taxpayer contended that it was merely a collection agent for the federal government and that the legal incidence of the tax was upon the consumer. Proceeding on this theory he argued that the federal tax and the state sales tax attached simultaneously upon the sale to the consumer and that the federal tax was not a part of his gross receipts, but rather was the gross receipts of the federal government. The taxpayer also contended that since it was merely a collection agent, inclusion of the federal tax in the sales tax base amounted to a tax on the United States. The Court held that the legal incidence of the federal excise tax falls upon the statutory producer. The Court pointed out that by making the producer the sole party from whom the government could enforce collection of the tax, Congress manifested its intent to place the legal burden for the tax on such producer. The Court in effect held that payment of the federal tax by a producer is simply an additional cost of doing business like insurance or utility costs. The fact that the producer recovered this tax by passing it on to the consumer did not make it a tax on the consumer.

Therefore, under the Supreme Court decision in Gurley v. Rhoden, supra, the federal excise tax on gasoline and petroleum products should be included in the tax base for sales tax purposes. This tax does constitute part of the producer's gross receipts. The decision supports a number of state court decisions which included the excise tax in state sales tax bases. See, People v. Werner, 364 Ill. 594, 5 N.E.2d 238 (1936); Martin Oil Service, Inc. v. Dept. of Revenue, 273 N.E.2d 823 (Ill. 1971); State v. Thoni Oil Magic Benzol Gas Stations, Inc., 121 Ga. App. 454, 174 S.E.2d 224 (1970); Sun Oil Company v. Gross Income Tax Division, 238 Ind. 111, 149 N.E.2d 115 (1958). Gurley v. Rhoden overrules other state court decisions that had held that the federal excise tax was really a tax on the consumer and hence was not part of a retailer's gross receipts for sales tax purposes. Standard Oil Co. v. State, 283 Mich. 85, 276 N.W. 908 (1937); Standard Oil Co. of Indiana v. State Tax Commission of North Dakota, 71 N.D. 146, 209 N.W. 447, 135 A.L.R. 1481 (1941); Esso Standard Oil Co. v. City of Danville, 45 C.L.O. 358 (Corp. Court of Danville, Va., 1950); Socony-Vacuum Oil Co. v. City of New York, 247 App. Div. 163, 287 N.Y.S. 288 Aff'd 272 N.Y. 668, 5 N.E.2d 385; Kesbec, Inc. v. Taylor, 253 App. Div. 353, 2 N.Y.S.2d 241; Gulf Oil Corp. v. McGoldrich, 256 App. Div. 207, 9 N.Y.S.2d 544; Tax Review Board of Philadelphia v. Esso Standard Division of Humble Oil and Refining Co., 424 Pa. 355, 227 A.2d 657.

Although this memorandum is directed primarily to the federal manufacturers excise taxes on trucks and tires, one further point about the federal gas tax should be made. It involves our administrative rule 15.12(1) which states:

"Federal manufacturer's excise tax may not be deducted from the sale price of tangible personal property as a base for computing Iowa sales or use tax, except when the manufacturer sells directly to the user or consumer."

It is clear that when a producer or manufacturer sells gasoline to a retailer, the producer collects the tax. When the retailer sells to the public, he passes the tax on and this recoupment of the tax is includable in the retailer's gross receipts for state sales tax purposes. But do you get the same result when the producer is also the retailer? This was the case in Standard Oil Co. of Indiana v. State Tax Com'r of the State of North Dakota, supra, and Standard Oil Co. v. State, supra, where the courts held that the federal excise tax collected by the producer- retailer did not become an integral part of the sale price of the merchandise. Rather, the courts held that the federal tax and the state sales tax attached simultaneously, with neither tax including the other in its base.

In Gurley v. Rhoden the taxpayer was both producer and retailer. As in the two Standard Oil cases, the federal excise tax and the state sales tax both attached at the same time; i.e., the time of sale to the consumer. Nevertheless, the Supreme Court still included the federal tax in the sales tax base and refused to give different treatment to producer-retailers than would be given to retailers who were not producers. The theory of the older cases was that when a retailer sells gas to the consumer, he had already paid the federal tax to the producer and thus the payment of the tax became a cost of his doing business. His subsequent recoupment by building the tax into his retail price was thus considered a part of his gross receipts. On the other hand, the producer-retailer had not yet incurred liability for or paid the federal tax until he made his first sale (remember, the tax does not arise until a producer sells the gasoline). Thus the excise tax was not considered to be built into his retail price at the time of sale, but rather was a separate charge. Consequently, the excise tax was not includable in the measure of the state sales tax.

Gurley v. Rhoden did away with this disparity. Although not specifically saying so, the Court adopted Martin Oil Service, Inc. v. Dept. of Revenue, supra, on this point. In that case the taxpayer alleged that even though the legal incidence of the federal excise tax is on the produce, a producer-retailer is distinguishable from one who is only a retailer. Illinois had previously allowed this distinction by rule, but a later rule disallowed the distinction. In response to the taxpayer's assertions the Illinois Supreme Court held:

"We consider that the rule of the Department which permitted producer-retailers as Martin to deduct the Federal gasoline tax from its gross receipts on sales to retail customers represented an erroneous interpretation of the Retailers' Occupation Tax Act. The superseding and existing rule prohibiting the deduction correctly interprets the statute. One effect of this rule is to place Martin as a producer-retailer in the same position, so far as the retailers' occupation tax is concerned, as that occupied by retailers who are not also producers."

Our rule 15.12(1) appears to be similar to the rule disapproved in Martin Oil Co., supra. That is, we include the federal tax in the sales tax base in the case of retailers. But if the retailer is also a producer, we allow him to deduct the federal excise tax from his gross receipts. I believe we should be treating retailers and producer-retailers the same. Therefore, I would recommend that rule 15.12(1) be changed accordingly. Application should be prospective.

The position taken by the Supreme Court in Gurley v. Rhodenwith respect to the manufacturer's excise tax on gasoline should be equally applicable to the federal taxes on trucks and tires. The taxes all operate the same way. That is, each is a tax upon the manufacturer which attaches at the time the manufacturer makes a sale. The only case I could find involving the excise tax on trucks is Undercofler v. Capital Automobile Company, 111 Ga. App. 709, 143 S.E.2d 206 (1965). There the taxpayer was an automobile dealer.The federal excise tax on automobiles has been since removed. But the principles of that tax are equally applicable to the tax on trucks. In computing Georgia sales tax the taxpayer deducted from its gross sales the federal manufacturer's excise tax. A deficiency assessment was made to include the excise tax in the sales tax base. The Georgia Court of Appeals sustained the assessment, holding that:

"The manufacturer's excise tax upon automobiles ... is a tax liability resting directly upon the manufacturer, ... and amounts to an expense of his incidental to the sale or lease ... or the manufacturer's own use ... of the manufactured article; it is not a tax liability either of the intermediate dealer or of the ultimate purchaser. ... To the dealer it is an element of 'the cost of the property sold' ... and hence, to the purchaser, a part of the sales price, just as much as the manufacturer's cost of raw materials and labor as elements figuring in the 'sales price' as defined by this Code section. The manufacturer's excise tax, but for separate billing to avoid payment of the Georgia sales tax pro tanto, has at the time of retail no separate identity as a tax. While this excise tax is in practical effect 'passed on' to the purchaser, first by an increase in cost of the property to the dealer, then by an increase in the purchase price, yet this circumstance does not shift legal liability for payment of the federal tax and does not change the essential character of the tax, which is part and parcel of the sales price and not an extraneous addition to it. Thus ... there is no exclusion of the manufacturer's excise tax from the sales price upon which the purchaser must pay sales tax to the dealer. The same reasoning is applicable to dealer. The same reasoning is applicable to all these federal excise taxes liability for which occurs prior to the point of retail sale or other consumer transaction. It is clear, also, that under this section the purchaser is not liable for sales tax upon a sales price including those federal excise taxes for which no liability accrues until a retail sale or consumer transaction occurs where the federal tax is not included as part of the sales price agreed upon but is billed to the purchaser separately."

Undercofler did not take up the problem of the producer- retailer, but in view of Gurley v. Rhoden and Martin Oil Service, Inc. v. Dept. of Revenue, it appears that producer-retailers of trucks and tires should also include the manufacturer's excise tax in their sales tax base.


It is the opinion of this writer that the legal incidence of the federal manufacturer's excise taxes on gasoline, trucks, and tires is directly upon the manufacturer and not on the consumer. As such, the tax merely represents an additional cost of doing business, and its recovery by passing it on to the consumer does not make it a direct consumer's tax. Accordingly, the U.S. Supreme Court has held that that portion of the retail price which represents recovery of the excise tax is properly included in the retailer's gross receipts for purposes of computing state retail sales taxes. Furthermore, the excise tax should be included in the measure of the sales tax whether the seller is strictly a retailer or whether the seller is a producer-retailer. Consideration should be given to changing rule 15.12(1) to equalize treatment of retailers and producer-retailers.

Interstate Commerce Exemption on Use Tax for Vehicles

You are requesting an exemption from Iowa use tax on your vehicle because of interstate commerce exemptions. You should be aware of the requirements to make the exemptions valid.

For interstate commerce exemptions you are required to maintain sufficient records to show that the vehicle is entitled to the exemption. The Iowa Department of Revenue may audit your records within 5 years from the date of registration to verify that the exemption is proper. If a taxable moment is found or the records are insufficient to audit, you will be assessed the tax, penalty and interest.

Minimum records required are:

1.          Purchase invoice and delivery receipt.

2.          Drivers' logs and dispatcher's records.

3.          Maintenance records and parts purchases.

4.          Trip sheets or settlement sheets.

5.          Lease agreements, if under lease.

6.          Fuel purchase tickets.

The first exemption is for a vehicle whose sole use is in interstate commerce. No taxable moments may exist in the State of Iowa and the delivery of the vehicle upon purchase must be outside Iowa. This exemption, when claimed, should be listed on line 13 of the form, UT510, with the reason given as being delivered outside Iowa and sole use in interstate commerce.

The second exemption would apply to vehicles such as: motor trucks, truck trailers, road tractors, trailers, and semi-trailers which are not designed primarily to carry passengers if the three following conditions all exist:

1.          The vehicle is purchased for lease.

2.          It is actually leased to a lessee for use outside the State of Iowa.

3.          The sole subsequent use in Iowa is in interstate commerce or interstate transportation (no taxable moments).

The Department of Revenue makes a distinction between a true lease and a contract to haul. While your agreement may be a lease for I.C.C. purposes, this does not mean it is a lease for Iowa use tax purposes. A true lease exists when the owner gives another exclusive possession of their property for a limited period. A contract to haul (no lease, thus no exemption) exists when an owner contracts to do a piece of work retaining control of their vehicle and methods except as to the result of the work.

The exemption, when claimed, should be listed on line 13 of the form, UT510, with the reason given as being leased for use outside of Iowa, and the sole use in Iowa will be in interstate commerce or interstate transportation.

As noted above, a vehicle will not be allowed any exemption if the vehicle has a taxable moment in Iowa. A taxable moment exists when a vehicle has a "use" in Iowa as defined in Iowa Code Section 423.1(1), 1983. This happens when a vehicle comes to rest in Iowa and the owner of the vehicle exercises any right to or power over it while the vehicle is outside the flow of interstate commerce or interstate transportation.

Example: A trucking company who would pick up a load in Iowa and deliver the same load to another point in Iowa would not be entitled to this exemption.

Example: A trucking company who would pick up a load in Iowa and deliver it to another state, or pick up a load in another state and deliver into Iowa would be entitled to this exemption.

Other nonexclusive examples of a taxable moment include:

1.          Any intrastate trip.

2.          Taking delivery in Iowa of the newly acquired vehicle unless it was purchased for lease and used exclusively in interstate commerce.

3.          Performing nonessential maintenance and installing nonessential equipment. Performing required maintenance and installing required safety equipment is not considered a taxable moment.

4.          Any delay not required for interstate commerce purposes or necessary in the performance of the load, but which is solely for the convenience of the lessor, lessee or owner is considered a taxable moment.

Anytime a "taxable moment" should occur while you are owner of the vehicle, the exemption is lost and use tax is due at that time. If this should happen, contact the Department of Revenue and arrangements will be made to collect the tax.

All UT510 exemption certificates are forwarded to the Iowa Department of Revenue for review.

If you have any questions concerning this matter, please call the Iowa Department of Revenue local area office.