Does your fleet qualify as a transportation company? Save on sales tax.
Many states’ sales tax laws (including Wisconsin) exempt companies from paying sales tax on vehicles, leases, and maintenance if they use their own fleet of trucks to deliver goods to their customers. Exemptions are statutory, not loopholes, and are closely regulated but can save companies significant costs. In order to take advantage of this exemption, a company needs to create a transportation company.
Regulations vary state-by-state. Under Sec. 77.54(5)(b) of the Wisconsin tax code, exempt purchases are defined as follows:
“Motor trucks, truck tractors, road tractors, buses, trailers and semitrailers, and accessories, attachments, parts, supplies and materials therefor, sold to common or contract carriers who use such motor trucks, truck tractors, road tractors, buses, trailers and semitrailers exclusively as common or contract carriers…”
The Ohio sales tax law provides a sales tax exemption for vehicles primarily used in highway transportation for hire in R.C. 5739.02(B)(32) This provision states:
“The sale, lease, repair, and maintenance of, parts for, or items attached to or incorporated in, motor vehicles that are primarily used for transporting tangible personal property belonging to others by a person engaged in highway transportation for hire, except for packages and packaging used for the transportation of tangible personal property.”
Criteria for Vehicles to be Exempt
Vehicles need to be licensed as trucks to qualify for the exemption. Automobiles do not qualify.
Second, vehicles need to be used exclusively for hauling goods for others. The exemption applies if you are hauling goods exclusively for related entities or for both related entities and third parties. Therefore, if you have a fleet of vehicles that haul goods to your customers as part of your business, you may be able to form a transportation company and be exempted from paying sales tax on vehicles, leases, and maintenance.
Finally, these vehicles must be used exclusively in this activity.
What Is and Is Not Exempt?
As the tax code states, purchases such as trucks, vans, tractors, trailers and semitrailers qualify for the exemption so long as they are used exclusively for hauling goods for others. Truck accessories and uplifting that become part of the truck also qualify. For example, for a moving company, load holding chains and equipment that secure the vehicle’s load qualify for the exemption. However, packaging materials used by moving companies would not qualify, as these supplies are not part of the truck. Self-propelled vehicles, such as forklifts, employed for off-highway use do not qualify for tax savings.
Repairs and maintenance for the qualifying trucks also qualify for sales tax exemption. Equipment and tools that are used for the repair and maintenance of a vehicle do not qualify, including welding torches, grinding discs, battery chargers, and other miscellaneous repair tools.
Example of Tax Savings
How much can you save by establishing a transportation company? This depends on your sales tax rate. If your annual lease payments on qualified trucks are $120,000, for example, and you incur $20,000 in annual repairs and maintenance, you would save $7,840 at a sales tax rate of 5.6% each year. Adjust the figures for your company’s situation, costs, and tax rate.
Evaluate your Operations
To stay in compliance with the rules, you must continually evaluate your operations. Make sure your vehicles only engage in common carrier operations. To stay within boundaries of a transportation company, use the trucks exclusively to haul goods for hire for others and avoid any personal use of the vehicles. Otherwise, your business risks forfeiting your transportation company status and the exemption it affords.
Forming and Operating the Transportation Company
Establishing a transportation company can be an excellent way to save on sales tax. In part 2 of this blog we discuss how to structure a transportation company.
*Disclaimer – Doering does not offer tax or legal advice and is not a CPA firm or law firm. Please consult your tax advisor or contact Doering for a referral to a tax advisor that specializes in transportation company tax accounting.