As we begin the new year, I always recommend that our dealer clients take time to reflect and reassess the prior year and try to determine any areas where efficiencies could be achieved, and perhaps more importantly, revisit policies and procedures that could help prevent or mitigate future risks. One of the areas where I consistently see heavy-duty truck and trailer dealers struggle with, and in some cases pay little attention to, is their Federal Excise Tax (FET) function.
Perhaps FET has become such a routine task over the years and the comfort of having not been audited, or the lack of notices from the Internal Revenue Service, has led to complacency. However, we all know that things change as new staff, new locations, new products, new parts & accessories, along with other variables within the transportation industry evolve.
As such, it’s important that dealers continuously evaluate these changes and understand how they may impact FET before it’s too late and the silent risk of complacency is unfortunately realized upon a visit from the IRS. To help your dealership stay in compliance with the laws and accurately assess FET, I’ve listed some key areas that should be reviewed on a yearly basis at minimum, to ensure your FET compliance function is sound.
- Exemption Certificates – the lack of an exemption certificate or the wrong exemption certificate is an area that I continue to see dealers have exposure with. On select exempt sales, dealers should make sure there is a valid and properly executed exemption certificate in the deal file to support the FET-exempt sale. Sales for resale and sales to state and local governments are the most common. Plus, if you accept blanket certificates, understand that these expire after 12 calendar quarters. Therefore, it’s important that blanket certificates be reviewed on a continuous basis and a best practice would be to incorporate their review in the monthly closing process.
- New Parts, Products, Services – if your dealership has offered new products, parts and/or services, it’s important that these be analyzed to determine their tax status and properly set up in your system from day one. As such, strong communication between the sales, service, and operations staff with the finance team when new products and services are developed and offered, can play a key role to ensuring FET compliance as these sales are made.
- Personnel – employee turnover, promotions, and changes in job duties can create significant gaps within any organization. It’s important that those who are new to FET are properly trained to manage this function to ensure compliance and accuracy. In addition, I would suggest that select accounting and finance personnel be cross-trained on FET to ensure “coverage” as vacations, unexpected absences, and other losses of key personnel occur.
- Training – in my experience, FET compliance for some dealers follows a consistent method of “this is the way we’ve always done it.” While this mindset is common, it can sometimes lead to compliance issues as changes in the law occur. Consistency is good but, consistently wrong is not. I suggest that those who work with FET on daily basis and those who oversee its stewardship for the organization, seek opportunities to continuously learn and “brush up” on their FET knowledge as they interact with customers and/or prepare the requisite IRS forms each quarter.
- IRS Exams/Notices – there is no doubt that IRS exams and notices can be a major source of anxiety, frustration, and in many cases, a financial issue for dealerships. However, exams can also be an opportunity to learn and leverage going forward if your organization is clearly not in compliance with the laws. As such, take the time to fully understand the issues and rectify any gaps within your organization of the issues identified within the exam as quickly as possible. This will ensure compliance going forward and help mitigate future exposure.
- Closing Checklist – a key control that I strongly encourage dealers to implement during the sales process is a closing checklist that requires documentation to be added to every deal file to support the amount of FET being charged on the sale or, any position taken in connection with FET-exempt sales. A checklist will help ensure nothing gets missed and any FET calculations, exemptions, and conclusions in connection with the sale are fully documented and supported in case the dealer is ever examined by the IRS.
- Deal File Review – a best practice that I recommend dealers perform (at least annually) is a deal file review on select sales to ensure calculations are accurate and any required documentation to support tax-free sales is present. Also, if you have multiple locations, it’s critical that you review each location’s deal files to ensure FET is being applied on a consistent basis throughout your organization. A deal file review can prove beneficial in connection with identifying errors, omissions, and can be conducted internally with accounting and finance personnel, or performed by an outside agency such as your CPA, to validate the quality of the deal files.
There are other measures that dealers can take to ensure the accuracy of their FET function inclduding solid record keeping and organization. However, the aforementioned ideas and controls are some primary ways to help ensure that your FET function is accurate, well documented, and in great shape if ever examined by the IRS.
To learn more about FET or to discuss how we can assist your dealership, please contact Tim Reynolds at 828.322.2070 or firstname.lastname@example.org.