Setting up transportation subsidiaries.

Most people, when they think about trucking companies, think big--big trucks, big companies, big government regulation. However, in reality, this is not necessarily the case; many smaller companies that own just a few trucks are setting up their own transportation subsidiaries. There are several valid business reasons for this--to isolate liabilities, to more easily manage the transportation segment of their organizational structure and to earn additional revenue through carrying goods for others (such as through "back-hauling").Yet another reason is to save state sales and use taxes.

A number of states provide an exemption from sales tax for trucks, repair parts and maintenance services purchased by a common or contract carrier. Wisconsin, for instance, states that "motor trucks, truck tractors, road tractors, buses, trailers and semi-trailers, and accessories, attachments, parts, supplies, and materials sold to common or contract carriers who use such motor trucks, truck tractors, road tractors, buses, trailers, and semi-trailers exclusively as common or contract carriers ... are not subject to Wisconsin sales/use tax."

Qualifying for Exemption

In some states, a transportation company qualifies for the exemption even if it hauls only related companies' goods, as long as the transportation company has exclusive possession, control and use of the vehicles (through ownership or leasing agreements) and is responsible for the employees. The goods do not necessarily have to be finished products being transferred from a manufacturing plant to a retailer's warehouse. They can be finished merchandise transferred between stores or warehouses, construction equipment hauled from a garage or lot to the construction site or retail deliveries.

In all states, the subsidiary must hold itself out "for hire" to related companies and receive fair market compensation for its services. In some states, it is necessary for the transportation company to hold itself out for hire to third parties as well. Additionally, some states will grant the exemption only if the company is engaged in interstate commerce (i.e., it delivers property from one state to another).

Less Stringent Federal Requirements

The use of this tax-saving planning opportunity has become more frequent since 1994. Prior to that year, the Federal regulations were somewhat onerous. However, with deregulation, the states have assumed most of the responsibility for regulation and the requirements are much less severe.

Transportation agencies in 38 states register interstate carriers under the single state registration system (SSRS). Under the SSRS, interstate motor carriers may register their operations by contacting their base state and, for one fee, register for all states in which operations will be conducted. This also allows a motor carrier to be licensed in one state for the purpose of fuel tax reporting, rather than having to file in every state in which the carrier operates.

Creating a transportation subsidiary can also save state income taxes or, in some cases, increase a group's overall tax liability. These tax savings (or detriments) vary, depending on the facts and circumstances of each company, and may largely depend on the states in which the company or affiliated group files its tax returns. In some cases, it can be very advantageous.

Transportation subsidiaries are not just for the large multistate corporations equipped to deal with complicated regulations. Potentially, any company operating in a state with a sales and use tax exemption and owning trucks to haul its own goods may find that the use of a transportation subsidiary is "easy money" for not a lot of additional paperwork or cost.

FROM BRIAN MURPHY, CPA, CHICAGO, IL