Court of Appeals Holds "Parts or Accessories" Under IRS Code Not Ambiguous

01.28.2019

CASE SUMMARY

The Eighth Circuit Court of Appeals recently held that the term “parts or accessories” is not ambiguous as used in the Internal Revenue Code § 4051(a)(1). Thompson Truck & Trailer, Inc. v. United States, 901 F.3d 951 (8th Cir. 2018). This decision is significant within the transportation industry as as the Court validated an excise tax on the value of a filter accompanying semi-trucks, holding that the filter was a “part or accessory” under the Code.

This case rises out of an appeal by Thompson Truck & Trailer, Inc. (“Thompson”) based on the district court’s decision to dismiss their complaint due to the district court’s construction of the Code. The district court, applying a Chevron-based review, held that the Code had directly addressed whether filters qualified as a “part or accessory.” The district court found that the filters were, in fact, a part or accessory subject to the twelve percent excise tax under the Code. The Court of Appeals, after interpreting the statute under de novo review, affirmed the district court’s decision. The Court of Appeals found that the phrase “parts or accessories” was not ambiguous and that the statute compelled the result with respect to the filters at issue. Furthermore, the Court reasoned that had Congress wanted to exclude such filters from the twelve percent excise tax, it could have expressly exempted them under the Code.

BACKGROUND
Thompson is a semi-truck dealership based out of Cedar Rapids, Iowa who had requested a refund from the Internal Revenue Service (“Service”) in the amount of $387,840, claiming that the diesel particulate filters attached to each truck sold by Thompson should not have been subject to the twelve percent excise tax under the Internal Revenue Code § 4051(a)(1). Trucks sold by Thompson are equipped with such filters which increases a trucks sales price by $8,000. Between April 2011 and September 2011, Thompson paid the excise tax on the full retail sales price of each truck sold by them, including the $8,000 value of each filter. Thompson argued that the filters, which are used to turn matter contained in a truck’s exhaust into a less harmful substance, should not have been taxed as they are not a “part” nor an “accessory” under § 4051 of the Code. Section 4051 (a)(1) of the Code states, in pertinent part: “[t]here is hereby imposed on the first retail sale of the following articles (including in each case parts or accessories sold on or in connection therewith or with the sale thereof) a tax of 12 percent of the amount for which the article is so sold . . .” Internal Revenue Code § 4051(a)(1) (emphasis added). The trucks sold by Thompson are covered by this section. However, the Service denied Thompson’s refund claim.

THE ARGUMENT
The district court ultimately found that the filters were a “part or accessory” under the statute and therefore dismissed Thompson’s complaint. The district court applied a Chevron-based review, giving deference to the Service’s construction of the statute. Thompson challenges the district court’s decision, arguing that Section 4051(a)(1) of the Code is ambiguous as to whether the filters qualify as a “part or accessory.” Thompson contends that the district court incorrectly held that Congress had directly addressed whether filters were a “part or accessory,” finding in the affirmative and thus are subject to the excise tax.

ANALYSIS
The Court began its analysis by noting that when reviewing a motion to dismiss and a district court’s interpretation of a statute, it applies a de novo standard of review. Nonetheless, without giving much deference to the district court’s decision, the Court ultimately affirmed the motion to dismiss and the interpretation of the statute using a Chevron-based review. The Court noted that a Chevron-based review asks two questions: “whether Congress has ‘directly addressed the precise question at issue,’” and “if Congress has not directly addressed the question at issue, whether the agency’s rule is “arbitrary or capricious in substance, or manifestly contrary to the statute.”

The Court found that based on the text of the statute, Congress had directly addressed whether the filters at hand were subject to the excise tax. The Court reasoned that when a statute does not define a particular term, the term will be construed according to its ordinary or natural meaning, or its dictionary definition. Applying this reasoning, the Court defined the term “part” as “[a]ny of the manufactured objects that go to make up a machine or instrument, now esp. a motor vehicle; a component; and the term ‘accessory’ as “[a] subordinate or auxiliary thing; an adjunct; an accompaniment; (now) esp. a minor fitting or attachment.” In a footnote, the Court also noted that The Revenue Act of 1918 which introduced the phrase at hand covered items sold with trucks, including tires and inner tubes.

The Court concluded that given the ordinary or natural meaning of the terms in the phrase “parts or accessories,” the phrase was not ambiguous and that filters qualified as parts or accessories as they are “components of the trucks or minor fittings or attachments included with the trucks.” The Court further noted that Congress has the ability to exclude the filters, yet have not done so.

Moreover, the Court reasoned that because the phrase “parts or accessories” involves no absurdity or contradiction when considering the statute as a whole, the phrase should be interpreted by applying its ordinary or natural meaning.

Finally, the Court distinguished another decision relied upon by Thompson and held there was a single reasonable interpretation: filters are parts or accessories, both of which are subject to the tax.

Contact John F. Fatino for more information about trucking and transportation matters at 515-288-6041. Jennifer Chavez-Rivera, J.D. Candidate, Drake University Law School assisted in the preparation of these materials.

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