Eleventh Circuit Reverses District Court; Excise Tax Applies to Peanut-Drying Trailers

(Parker Tax Publishing December 2024)

The Eleventh Circuit reversed in part a district court decision and held that a company's specially designed peanut-drying trailers are not off-highway transportation vehicles that are exempt from the 12 percent excise tax under Code Sec. 4051(a)(1) that applies to the first retail sale of a truck trailer and semitrailer chassis and truck trailer and semitrailer bodies. The court remanded the case back to the district court with instructions to enter final judgment for the government for taxes and statutory interest but, since the government did not appeal the penalties, the court affirmed the district court's ruling that the company is not required to pay penalties. Rockwater, Inc. v. U.S., 2024 PTC 411 (11th Cir. 2024).

Background

Peanuts contain over 25 percent moisture at harvest and must contain no more than 10.49 percent moisture to be safe and salable. To finish drying the peanuts, most commercial farmers use mechanical peanut-drying trailers and wagons that transport the peanuts off-site to be dried with fans. Peerless Manufacturing Company (Peerless) designed the first mechanical peanut-curing system, which consisted of a drying box affixed on wheeled axles and connected to a drying fan. Peerless was subsequently acquired by Rockwater, Inc. (Rockwater). In 2017, Rockwater began manufacturing and selling 45- and 48-foot peanut-drying trailers. The trailers contain a drying box and a drying fan that connects and blows warm air that rises through the peanuts and out the open top.

Code Sec. 4051(a)(1) imposes a 12 percent tax on the first retail sale of a truck trailer and semitrailer chassis and truck trailer and semitrailer bodies. While the Code does not define those terms, Reg. Sec. 145.4051-1(a)(1)(ii) and (a)(2) clarifies that a chassis and body are taxable under Code Sec. 4051(a) only if such chassis or body is sold for use as a component part of a highway vehicle. Further, Reg. Sec. 48.4061(a)-1(d)(1) defines "highway vehicle" as "any trailer or semitrailer, designed to perform a function of transporting a load over public highways, whether or not also designed to perform other functions." A "public highway" includes "any road (whether a federal highway, state highway, city street, or otherwise)" which is not a private roadway. Off-highway transportation vehicles, as defined in Code Sec. 4051(a)(1)(C), (D), and Code Sec. 7701(a)(48)(A), are exempt from the 12 percent excise tax.

The IRS audited Rockwater for failing to file a quarterly federal excise tax return for its sale of three trailers in the second quarter of 2017. After the IRS determined that the 12 percent tax applied to the trailer sales, Rockwater paid $37,032 in excise taxes, penalties, and interest. Rockwater then filed a claim for a refund with the IRS, challenging the application of the excise tax to its trailer sales and requesting a refund and attorney's fees. In its complaint, Rockwater alleged that its trailers were exempt from the excise tax on the first retail sale of highway vehicles because the trailers are "off-highway" transportation vehicles.

In Rockwater, Inc. v. U.S., 2023 PTC 88 (M.D. Ga. 2023), a district court concluded that the peanut-drying trailers were off-highway transportation vehicles that are exempt from tax under Code Sec. 7701(a)(48)(A)(i) and granted summary judgment in favor of Rockwater as to the taxes. The district court also ruled that even if it were determined that Rockwater owed the tax, it still had reasonable cause not to pay it initially and so neither statutory interest nor penalties were appropriate. The government appealed to the Eleventh Circuit as to the taxes and statutory interest but not as to the penalties. On appeal, the government argued that the peanut-drying trailers do not qualify as vehicles exempt from the excise tax.

Analysis

The Eleventh Circuit reversed the district court and held that the court erred in concluding that Rockwater's peanut-drying trailers are "off-highway transportation vehicles" exempt from the tax under Code Sec. 7701(a)(48)(A)(i). However, given that the government did not appeal the penalties, the Eleventh Circuit affirmed the district court's ruling that Rockwater was not required to pay penalties.

The initial issue the court addressed was whether Rockwater's trailers met the first requirement in Code Sec. 7701(a)(48)(A)(i) of being "specially designed for the primary function of transporting" peanuts "other than over the public highway." This requirement, the court observed, asks whether the vehicle is specially designed for the primary function of transporting a load off public highways. The court noted that the trailers are outfitted with standard highway equipment that allows the trailers to operate at 55 miles per hour. Although the trailers are specially designed to facilitate the drying of peanuts, the court said their special peanut-drying design has nothing to do with off-highway transportation. The court also noted that Rockwater's advertisements reveal that the trailers' ability to transport peanuts from fields to buying points, which almost always requires travel over public roads, is the primary goal of its transportation design.

The Eleventh Circuit also cited the First Circuit's rejection of an argument like Rockwater's in Hostar Marine Transportation Sys., Inc. v. U.S., 592 F.3d 202 (1st Cir. 2010), when it held that hydraulic boat trailers were not off-highway vehicles. The First Circuit explained that although the hydraulic boat trailers exhibited some special design features, those features either were irrelevant to their "on-versus off-highway function" or supported their "on-highway function."

The court then addressed the issue of whether trailers' capability to carry cargo over the public highways is substantially limited or impaired. Code Sec. 7701(a)(48)(A)(iii), the court noted, provides several factors to consider in assessing whether a vehicle's capability is substantially limited or impaired, including the size of the vehicle, its safety and licensing features, and its ability to travel over 25 miles per hour. All these factors, the court concluded, weighed in the government's favor. First, the trailers were not designated as oversize or overweight, meaning that the trailers do not require special permits to operate and, second, the trailers go through Department of Transportation (DOT) inspections before sale and have DOT-compliant brakes, lights, and reflective stripes. Second, the trailers also are marketed as safe to handle loads of peanuts from the fields to the buying points, which Rockwater acknowledged almost always requires travel on public roads.

For a discussion of miscellaneous excise taxes, see Parker Tax ¶238,500.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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