Whether your business is in the production of feed, the manufacture of pet foods or milling operations, you must be able to deliver your product to the customer. If a producer does not engage an outside carrier to haul its product, then chances are that one of the most material and burdensome parts of its operation is the maintenance and operation of its transportation fleet.
Improved safety, compliance and tax savings
Running a transportation fleet means managing logistics and dispatch, complying with regulatory controls, and maintaining licenses, registrations and safety files — all on top of tremendous capital expenditures associated with the repair, maintenance and replacement of transportation assets. Across a wide spectrum of industries, companies have benefited by organizing those operations into separate transportation subsidiaries.
Many companies realize greater control over compliance, safety and other fleet operations concerns after dedicating them to a separate entity. Companies attempting to keep registrations current, manage dispatch operations, monitor compliance with motor carrier safety and other regulations, maintain driver safety files, and keep tractors, trailers, lifts, rolling stock, barges and an assortment of other logistics equipment in good working order, without housing those tasks in a separate entity dedicated to transportation operations, frequently experience such efforts falling into disarray. Moreover, separating transportation operations into a different entity provides protection for a company’s remaining assets from liabilities arising from transportation activities.
Better compliance and safety and protection of assets from liability make the creation of a transportation subsidiary highly worthwhile. However, the greatest benefit of transferring fleet operations to a transportation subsidiary may be the tax savings.
A transportation company dedicated to transporting property for hire whose annual capital outlays for transportation equipment amount, for example, to $1 million, can benefit from sales tax savings in the tens of thousands of dollars by taking advantage of sales tax exemptions. Transportation fleets often represent one of the greatest concentrations of capital. The sales tax alone on purchases of power units, trailers and other equipment is enough to make anybody observing cash flows shudder. A company attempting to squeeze extra years out of its equipment in a difficult economy may find room in its capital budget by becoming eligible for sales tax exemptions.
Varying exemptions offered
Approximately half of states recognize exemptions from sales and use tax applicable to certain purchases made by common carriers, or public or for-hire transportation companies. Exemptions may apply to purchases of power units and trailers, repair and replacement parts, and the equipment used for repairs, tires, rolling stock, barges, and other equipment and supplies.
States also vary in their application of exemptions. Some states require that the equipment be used in interstate transport, meaning it must physically cross state lines in ordinary usage to qualify. Other states apply exemptions to equipment used only within the state as long as the goods being transported originate or end up in another state. Other states apply equally to intrastate and interstate uses of transportation equipment. And finally, some states require a transportation company to transport goods for multiple companies, while others grant exemption to a carrier hauling product for a single customer.
What all states offering exemptions share in common, however, is the requirement that a carrier claiming the exemption demonstrate that it is a public transportation company for hire. This means the transportation company must transport property belonging to another entity in exchange for consideration. A company hauling its own property will not qualify for sales and use tax exemptions in any state. The transportation company must carry goods for another company for a fee.