Internal Revenue Service
Revenue Ruling
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smRev. Rul. 76-59
1976-1 C.B. 346
Section 4221 -- Excise Tax Exemptions
IRS Headnote
School bus sales; other uses. A manufacturer may make tax free sales of buses, as exclusively for school bus use, to an operator who has a contract with a school district for the present school term providing that buses no more than 3 years old will be used for transporting students and, after the 3-year period, either uses the buses in other school districts, uses them commercially, or sells or trades them.
Full Text
Rev. Rul. 76-59
Advice has been requested whether buses sold under the circumstances described below are considered to be sold exclusively for use as school buses for purposes of the exemption from the manufacturers excise tax provided by section 4221(e)(5) of the Internal Revenue Code of 1954.
A company manufactures and sells buses that are otherwise subject to the manufacturers excise tax imposed by section 4061(a) of the Code when sold by the manufacturer. The company sells certain buses to a bus operator who has a contract, which is in effect during the present school term, to transport students of a municipal school district. Under the terms of the contract, the bus operator in transporting students is not permitted by the school district to use buses that are more than three years old. After using the buses to transport students for a three-year period under the contract in question, it has been the practice of the bus operator to use the buses for transporting school children under other contracts, trade the buses in on new buses, sell the buses, or use them in commercial charter service. The bus manufacturer at the time of sale has knowledge of the contract between the purchaser and the school district. Both the manufacturer and purchaser are registered under the provisions of section 4222.
Section 4061(a) of the Code imposes a tax on certain enumerated motor vehicle articles when sold by the manufacturer, producer, or importer. Among the articles enumerated are bus chassis and bodies.
Section 4221(e)(5) of the Code provides that under regulations prescribed by the Secretary of the Treasury or his delegate, the tax imposed by section 4061(a) does not apply to a bus sold to any person for use exclusively in transporting students and employees of schools operated by State or local governments or by nonprofit educational organizations.
Section 145.3(d) of the Temporary Regulations in connection with the Excise Tax Reduction Act of 1965 provides that the exemption from the tax provided by section 4221(e)(5) of the Code shall apply only if both the seller and the purchaser are registered. That section further provides that a manufacturer making a sale for use as described in section 4221(e)(5) must exercise reasonable diligence to satisfy itself that the tax-free sale is warranted. Under the regulations, where the manufacturer of a bus has knowledge, at the time the bus is sold, that the purchaser has a contract with a school operated by a State or local government, or by a nonprofit educational organization, for the transportation of students or employees of the school during the school term during which delivery of the bus is to be made to the purchaser (or during the next school term if delivery is to be made between school terms), the seller will be considered as having exercised reasonable diligence in satisfying itself that a tax-free sale is warranted.
On the other hand, the regulations further provide that if the manufacturer of the bus has knowledge at the time of its sale that the purchaser does not intend to use the bus as prescribed in section 4221(e)(5), the manufacturer is liable for the tax and is not relieved of the liability by reason of the registration of the purchaser.
In order for the exemption provided by section 4221(e)(5) of the Code to apply, a bus must be sold by the manufacturer to a purchaser for exclusive use as a school bus within the meaning of that section. A purchaser buys a bus for exclusive use as a school bus when, at the time of sale, the intention is to use the bus exclusively for school transportation for as long as the purchaser can, even though circumstances beyond the purchaser's control may subsequently result in the use of the bus other than for transporting students.
The bus manufacturer is relieved of liability for the manufacturers excise tax if reasonable diligence has been exercised in satisfying itself that a tax-free sale is warranted. Under section 145.3-1(d) of the regulations, a manufacturer is considered to exercise reasonable diligence if it knows, at the time the bus is sold, that the purchaser has a contract with a school operated by a State or local government, or by a nonprofit educational organization, for the transportation of school students or employees during the school term in which delivery of the bus is to be made, or during the next school term if delivery is to be made between school terms.
Accordingly, in the instant case, notwithstanding the three-year restriction in the student transportation contract, the buses are sold for exclusive use as school buses within the meaning of section 4221(e)(5) of the Code and, therefore may be sold tax free. Because the bus operator has a contract to transport students, which is in effect during the present school term, the manufacturer has exercised reasonable diligence in satisfying itself that a tax-free sale is warranted. Furthermore, the subsequent use or disposition of the buses by the bus operator after the three-year period will not affect the exemption nor, in the absence of other facts or circumstances, subject the bus operator to penalties under the regulations, such as the revocation or temporary suspension of registration to purchase buses tax free.