Whether your business is in the production of feed, the manufacture of pet foods, milling operations — or any other manner of production or processing — you must be able 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 occurs in 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 familiar with the onus of fleet operations have benefited by organizing those operations into separate transportation subsidiaries.
Many companies have realized greater control over compliance, safety and other concerns associated with managing fleet operations 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, where some of the greatest exposure often exists.
Better compliance and safety and protection of assets from liability are fine benefits that make the creation of a transportation subsidiary highly worthwhile. However, the greatest benefit from transferring fleet operations to a transportation subsidiary may be realized by the effect it can have on a company's tax bill.
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. A company's transportation fleet often represents one of its greatest concentrations of capital. The sales tax alone on purchases of power units, trailers, rolling stock, barges 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 could find much needed capacity in its capital budget by taking steps to become eligible for sales tax exemptions.
Varying exemptions offered in many states
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. Depending on the state, 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 used by the transportation company. States also vary in their application of exemptions based on the use of the equipment. Some states require that the equipment be used in interstate transport, meaning that the equipment must physically cross state lines in its ordinary usage to qualify for exemption. Other states apply exemptions to equipment used only within the state as long as the goods being transported originate or ultimately end up in another state. Yet other state exemptions apply equally to intrastate and interstate uses of transportation equipment. And finally, some states require that a transportation company transport goods for multiple companies to qualify for exemption, while others would grant the exemption even to a carrier hauling product for just 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 that 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. Instead, the transportation company must carry goods for another company and do so for a fee.
A transportation subsidiary can benefit from tax exemptions offered in most states even where its operations are concentrated in providing transportation services to its parent. It first must be sufficiently separated from its parent, both in its organization and its operation.
Sufficient separation of the transportation subsidiary
Separate organization and operation of the transportation subsidiary requires a good deal of effort. Drafting and filing organizational documents, complying with state filing requirements in the states where the transportation company will do business, and registering tax identification numbers are just a few of the steps involved in creating the new entity. The transportation company also will have to establish its own U.S. Department of Transportation number and register operating authorities with the Federal Highway Administration and state regulatory agencies.
Having established an existence, the company must begin the real work of demonstrating that it operates as a public transportation company. States vary regarding the factors considered in determining whether an entity operates as a public transportation company and thus qualifies for sales tax exemptions, especially where the company primarily transports product for its parent. But all states make this fact-sensitive determination, in large part, based on the degree of separation of the transportation company from the business shipping the product and whether the transportation service is provided for consideration. Some of the factors may include whether the subsidiary is sufficiently capitalized, maintains its own books, records and bank accounts, issues its own W-2s, and deals with its parent on arm's-length terms. States also observe whether charges are invoiced for transportation services to the parent and whether the transportation subsidiary carries appropriate operating authorities and insurance.
Achieving the degree of separation from the parent sufficient to qualify as a public transportation company also requires adoption of and commitment to a new mindset. Fleet operations previously performed in-house by the parent company now reside in the new subsidiary. The transportation subsidiary must be in all respects an independent provider of transportation services. Essential to the creation of this distinction is the transportation subsidiary's effort to hold itself out to the public as an available for-hire transporter of property, taking affirmative steps to create a public identity and in many cases seeking opportunities to haul product for unrelated companies.
Efforts to achieve separation payoff in tax exemptions
Clearly the effort and upfront costs involved in creating a transportation subsidiary that will pass the scrutiny of state taxing authorities can be substantial. Nevertheless, with benefits ranging from increased control over compliance and safety and isolation of liability exposure to significant sales and use tax savings, a new transportation subsidiary is worthy of consideration. Projecting the potential tax savings that may be achieved by the transportation company illustrates this point.
Take, for example, a company that budgets $1 million annually in purchases of major transportation equipment — power units, trailers, trucks, barges and rolling stock. If just half of those purchases qualify for exemption, based on the states where the purchases are made and the use of the equipment in those states, then the potential sales and use tax savings would be about $30,000, assuming an average tax rate of 6 percent. Exemptions from sales tax on purchases of repair and replacement parts, tires, fuel and lighter equipment available in many states will add even more tax savings. Within just a few years of creating the transportation subsidiary, the taxes saved should outweigh the initial outlay.
A company currently managing its own fleet operations should talk to a tax professional, who can gather data and assess the potential for tax savings based on the nature and location of the company's transportation-related purchases and activities. The steps to create a transportation subsidiary and transfer fleet assets and operations to the new company should be identified, and the effort to maintain adequate separateness from the parent should be evaluated. Then, once the company determines the filings and registrations required to claim exemptions where the company qualifies for them, let the purchasing begin. The company just might discover the benefits of a transportation subsidiary enjoyed by many others before it.
