Trucking Companies: Adhering to a Complex Network of State Taxes

Date April 8, 2022

Trucking companies with vehicles that commonly cross state lines face a wide range of state and local taxes and requirements that vary substantially from state to state. Adhering to tax obligations requires you to know the ins and outs of each state’s regulations, not only where you pick up or deliver, but even states your vehicles simply pass through.

Adhering to regulations, which begins with registering with secretaries of state, especially in states where you have customers, has been complicated by state-specific economic nexus rules. As well, many states require companies transporting goods to, from, or through their territories to register with their state, file income tax reports, including withholding taxes if you have employees based in the state and pay franchise and limited liability taxes. A few even require payment of state highway use taxes for heavy highway vehicles.

Sales Taxes & Exemptions

The transportation industry is a magnet for state taxing authorities based on its very nature. Transporting goods among and through states with differing sales and use tax rules creates confusion and opportunity. Transportation companies need to be aware of the rules in their home state and any states where they do frequent business. There are opportunities to save tax dollars with appropriate planning but also pitfalls for the uninformed.

Many states have carved out exemptions for the transportation industry, but the rules vary. States with transportation exemptions commonly allow providers to purchase or lease their vehicles exempt from sales tax when the vehicles are directly used in their transportation services.

Sales and use tax exemptions are statutory and closely regulated but can save companies a significant amount of money. To take advantage of the exemptions, a company must first adhere to the state’s definition of an eligible transportation company. In many cases, this simply means being a common carrier with a Department of Transportation or similar government agency registration.

While vehicles are the most expensive purchase made by transportation companies, repairs and maintenance to vehicles are a material cost of doing business. For that reason, some states exempt qualifying maintenance, repairs, and repair parts. A number of states exempt items that are installed on the vehicle if the vehicle qualifies for exemption.

Understanding sales and use tax rules in every state where your company does business can be burdensome. Many firms do not have the time or personnel to remain current on tax developments and regulations in a multistate setting. As a result, trucking companies may miss out on significant cost savings or, worse, may incorrectly interpret sales tax rules resulting in a tax assessment under audit.

As you review the following transportation exemptions for certain states, address these questions to determine how to apply each state’s rules:

  • Does our transportation activity qualify under state rules for the exemption?
  • What are the state’s specific rules and regulations?
  • What are the criteria vehicles must meet to be exempt from sales taxes?
  • What purchases, including services, related to vehicles are or are not eligible for exemption?
  • Are we familiar with the rules in states where our vehicles may be maintained or repaired?
  • Have we provided our vendors, in all states, with the appropriate exemption certificate?

  • Florida offers a partial exemption on the purchase of motor vehicles by a licensed common carrier based on a comparison of the purchaser’s Florida highway miles with total highway miles. The partial exemption also applies to the installation of parts on vehicles in Florida.
  • New Jersey offers an exemption on the sale, lease, or rental of commercial trucks, tractors, and other vehicles with a gross weight exceeding 26,000 pounds and operated exclusively in interstate freight under a permit issued by the Interstate Commerce Commission. The exemption also applies to repair and replacement parts.
  • New York exempts qualifying tractors, trailers, or semitrailers, defined as vehicles used in combination that also exceed 26,000 pounds. The exemption also applies to installation, maintenance, and repair services on a qualifying vehicle.
  • Ohio exempts vehicles used to transport property owned by others by an individual engaged in highway transportation for hire. The exemption applies to the sale or lease of vehicles as well as maintenance, parts, and items attached to vehicles.
  • Pennsylvania exempts vehicles “used directly in rendering a public utility service.” The exemption generally applies to common carriers and includes maintenance, repairs, and consumable items related to the vehicle.
  • The examples exhibit fairly consistent treatment of large transportation equipment purchases from state to state, but they also highlight differences that can be a planning opportunity for multistate transportation companies when adding new vehicles. Today’s transportation companies employ big rigs and smaller vans or trucks that may not qualify for exemption from tax at purchase. It is challenging for companies to determine the taxability of all vehicle-related purchases, such as repairs or consumables, in multiple states. HBK SALT can be your tax resource to ensure your company correctly applies each state’s rules.

    Income Tax Nexus

    Forty-five states currently have some form of state income tax. A business that has inventory, fixed assets, rents an office, warehouse, has employees, or has some other type of physical activity or connection in a state could create nexus, which may require the taxpayer to file an income tax return and pay income tax based on some allocation of income to the state. To relieve some of this burden, Congress passed Public Law 86-272 in 1959 to establish when a state could impose its income tax on nonresident companies and their owners.

    The federal provision is still the law and allows companies to perform activities in a state without creating income tax nexus. However, activities that exceed so-called “safe harbor” activities will create income tax nexus. Examples include:

    • Selling services and not personal property
    • Providing services in the state
    • Accepting orders in the state
    • Delivering property into the state on company vehicles
    • Accepting deposits in the state
    • Repossessing property in the state
    • Having inventory in the state

    For example, consider a trucking company based in one state, meaning it only operates in its home state. However, the company-owned trucks may pass through many states to deliver goods to their ultimate destinations. Based on nexus standards and PL 86-272, is the company only required to file a business tax return in its home state? Delivering to a state, picking up goods in a state, and merely passing through a state may create income tax nexus.

    Nexus is created in more than half of all states if company-owned trucks are used to deliver or pick up goods, including AK, AZ, AR, CA, CO, DE, DC, HI, IN, KS, KY, LA, MD, MI, MN, MO, MS, MT, NC, ND, NE, NH, NJ, NM, OK, RI, TN, TX, and WV.

    The potential for nexus exists if company trucks are passing through the state without delivering or picking up goods in the following states: CO, FL, ID, IL, IA, LA, MD, MA, MI, MO, MT, OK, OR, UT, and VA.

    Many states also establish nexus based on the number of times the truck passes through the state a year. For example, a truck would need to pass through Missouri 12 or more times in a year to create nexus. But how likely is the state to know that nexus has been created? There are several ways for a state to discover truck presence. A state may use the information from a truck weigh station or check its records to determine if the company is registered to do business in that state or to file a tax return. The state may then send a nexus questionnaire in an attempt to determine if a company has nexus. Because states have several sophisticated methods for determining if nexus has been created, a company should carefully consider if it has established nexus and if it must file an income tax return.

    Once a company determines it will file a business tax return in a state or states outside its home state, the company should register to do business in each of those states. A company must also consider how a state will require the company to apportion its income. AR, CA, CT, FL, IL, IN, IA, KS, LA, MD, MS, MO, NJ, NY, NYC, NC, OR, PA, RI, SC, TN, VA, WV, and WI require trucking companies to file a form of special apportionment, often based on mileage driven, to determine taxable income.

    For example:

  • In New Jersey and Pennsylvania, trucking companies must apportion their business income using a fraction, the numerator being the taxpayer’s revenue miles within the state during the tax period, the denominator being the total revenue miles of the taxpayer during the tax year.
  • Florida requires revenue miles in the state to be divided by the revenue miles everywhere then multiplied by total sales. Florida defines a revenue mile as the transportation of one net ton of freight one mile.
  • Determining taxable income for trucking companies is often complex; you might discover greater tax exposure for prior years than anticipated. In such a predicament, consider a Voluntary Disclosure Agreement (VDA). A VDA is an agreement between a business and a state taxing jurisdiction. It is offered in many states. Under a VDA, a business may be granted a limited look-back period for a state to assess tax. In addition, many states may waive a penalty if a VDA is granted and the company is afforded the opportunity to become compliant.

    Highway Use Taxes

    In addition to paying federal highway use taxes, transportation companies must comply with highway use tax requirements in a handful of states, including:

  • Kentucky requires a Highway Use License (KYU) for vehicles with a gross weight of 60,000 pounds or more. You can buy a one-time temporary KYU permit per truck if you are not making regular trips through the state.
  • New York has a Highway Use Tax on vehicles over 18,000 pounds. The highway use tax is computed by multiplying the number of miles traveled on New York State public highways—excluding toll-paid portions of the New York State Thruway—by a tax rate, which is based on the weight of the motor vehicle and the method, gross weight or unloaded weight; you choose to report the tax.
  • New Mexico imposes a weight-distance tax on owners, operators, and registrants of intra and interstate commercial vehicles with a declared gross vehicle weight in excess of 26,000 pounds. The tax is based on vehicle weight, and miles traveled on New Mexico roads.
  • Oregon requires motor carriers operating a vehicle with a gross weight of over 26,000 pounds in commercial operations on public roads within Oregon to report and pay highway-use taxes.
  • Solutions

    The transportation industry is subject to complicated state and local tax rules and compliance obligations. The HBK SALT Advisory team can help your business address any of its state and local tax challenges. Whether you have an unresolved tax liability, a state audit, or simply need tax advice, we can be your resource.

    For more information on our services or to schedule a meeting to discuss your state and local tax matters, contact one of our HBK SALT professionals (email addresses included below in our profiles).

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