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Luxury excise tax.

Luxury Excise Tax

The Internal Revenue Service has recently issued guidance concerning the new 10% luxury tax. The Revenue Reconciliation Act of 1990 imposed this tax on the sale of passenger vehicles with a price exceeding $30,000, boats with a price exceeding $100,000, aircraft with a price exceeding $250,000 and furs and jewelry with prices exceeding $10,000.

The IRS has announced that the seller of the article must pay the tax, which is imposed on the amount by which the sales price exceeds the aforementioned threshold amount. The tax applies to the first retail sale of the taxable article, adding that using or leasing a taxable item generally will be considered a sale. Thus, the use of an article prior to sale will generally be deemed to be a sale of that article with the tax computed on the price at which similar articles are generally sold in the ordinary course of trade or business.

The use of articles as a material in the manufacture or further production of another article or the display of an article in a showroom does not trigger the tax. The use of a passenger vehicle as a demonstrator when potential customers are in the vehicle, for example, does not constitute a "use" under these rules and would not trigger the tax.

With regard to the general implementation of the tax, the IRS states that the tax is reduced by the amount of a manufacturer's rebate but is not reduced by trade-ins. Imported articles are also subject to the new tax, which is imposed upon the first retail sale or the first use after importation. However, the tax does not apply to imported articles used before January 1, 1991.

For passenger vehicles, the tax does not apply to those having an unloaded weight exceeding 6,000 pounds, except for limousines which are subject to the tax regardless of their weight.

There are also several exemptions for items used for certain business, governmental or other purposes specified in the statute or proposed rules. For example, the luxury tax does not apply to vehicles used exclusively in the business of transporting persons or property for compensation or hire. However, a boat used by an owner for business entertainment would not be exempt from the tax. Similarly, while passenger vehicles, boats and aircraft purchased by federal, state or local governments for use exclusively in law enforcement, public safety or public works are excluded, articles purchased by governments for transport of or recreational use by government employees are not exempt.

Also exempt are those articles that are purchased by any person for use exclusively in providing emergency medical services, along with items for which there was a binding contract on September 30, 1990, where the contract was in effect up until the sale.

According to the Service, luxury taxes should be reported on Form 720, "Quarterly Federal Excise Tax Return." This form is currently being revised to include the reporting of the taxes and is expected to be available soon.

(IRS PS-94-90)
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Publication:The National Public Accountant
Date:Mar 1, 1991
Previous Article:Congress changes EITC for '91.
Next Article:Capital investments.

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