SCHNEIDER NATIONAL LEASING, INC., Plaintiff-Appellant, v. UNITED STATES OF AMERICA, Defendant-Appellee.
No. 20-3354
United States Court of Appeals For the Seventh Circuit
ARGUED MAY 13, 2021 — DECIDED AUGUST 25, 2021
William C. Griesbach, Judge.
Appeal from the United States District Court for the Eastern District of Wisconsin. No. 1:17-cv-00672
Before SYKES, Chief Judge, and SCUDDER and KIRSCH, Circuit Judges.
I
We begin with the statutory framework and then turn to whether Schneider National Leasing‘s overhaul of nearly 1,000 highway tractors fell within the safe harbor from the federal excise tax.
A
Congress has taxed the sale of trucks by manufacturers, producers, and importers for over 100 years. See
There 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:
. . .
(E) Tractors of the kind chiefly used for highway transportation in combination with a trailer or semitrailer.
In a neighboring provision,
What this all means in nontechnical terms is that a company that manufactures a big rig semi-tractor and then sells, leases, or uses the tractor, incurs a 12% tax on the first sale or lease. The IRS requires a company like the taxpayer here, Schneider National Leasing, to file a Form 720 on a quarterly basis to report any federal excise taxes due.
Front and center in this appeal is the safe harbor, also in
An article described in section 4051(a)(1) shall not be treated as manufactured or produced solely by reason of repairs or modifications to the article (including any modification which changes the transportation function of the article or restores a wrecked article to a functional condition) if the cost of such repairs and modifications does not exceed 75 percent of the retail price of a comparable new article.
Notice how Congress drafted the safe harbor. Recall that the underlying excise
Note, too, that Congress made the safe harbor conditional. By its terms,
Complicating matters is the absence in the excise tax and the safe harbor of any definition of the terms “repairs,” “modifications,” or “retail price of a comparable new article.” Nor has the IRS promulgated any implementing regulations defining these terms. Much of this appeal hinges on the meaning (and limits) of these terms.
B
Schneider National Leasing purchases truck tractors and trailers and leases them to its parent company, Schneider National, Inc., one of the nation‘s largest trucking companies. At any one time, Schneider National Leasing owns several thousand tractors and tens of thousands of trailers and containers. To keep up with demand from drivers for updated rigs and to maintain the health of its fleet, the company purchases more than 3,000 semi-tractors each year.
From 2011 through 2013, rather than retiring a large set of older tractors and purchasing all new replacements, Schneider took a different tack. It bought 61 new tractors, the Freightliner Cascadia 125 model, but also decided to overhaul 982 of its existing tractors using new and refurbished parts packaged together in so-called glider kits. This decision made strategic business sense. For one, Schneider‘s older tractors were lighter and realized better fuel economy than newer models subject to more stringent environmental regulations. By refurbishing older models, Schneider could keep these more fuel-efficient tractors in its fleet. For another, Schneider‘s tax advisors counseled that the company would have to pay the 12% excise tax if it bought new tractors but could avoid the tax by refurbishing tractors in the existing fleet.
Following this advice, Schneider purchased 982 glider kits—bundled assemblies of new and remanufactured tractor components—from Daimler Trucks North America LLC. At a minimum, each glider kit came with a cab, chassis, radiator, front axle, front suspension, front wheels, front tires, front brakes, brake system, and trailer connections. 912 of these kits were so-called powered glider kits because they included a remanufactured engine. Daimler assembled these parts together, as shown below, in a manner resembling a tractor cab and chassis and shipped the kits to Schneider‘s outfitters.
Schneider contracted with third-party outfitters to perform the refurbishments from January 2011 to December 2013. That process entailed the outfitters matching Schneider‘s old tractors with a glider kit and combining the parts to create overhauled tractors. The refurbishing process generally involved dismantling the old tractors, stripping non-usable parts, reassembling the reusable components of the old tractor with the glider kit parts, and giving the rebuilt tractor a new vehicle identification number matching the serial number on the glider kit. The precise parts from the old tractors that were combined with each glider kit varied, but in many instances the outfitter reused the transmission, driveline, rear axle, rear suspension, and rear wheel hubs—and sometimes the fuel tank, fifth wheel, and rear brakes—in the refurbished tractors. Schneider sent the old engines to Daimler in exchange for a rebate on the refurbished engines included in the glider kits. Whatever components of the old tractors that remained were either kept as replacement parts for future repairs or sold for salvage value.
Schneider had paid the 12% excise tax when it first purchased these 982 trucks as required by
The IRS disagreed, determining that only six of the 982 total tractors qualified for the safe harbor. In the Service‘s view, Schneider triggered the 12% excise tax obligation in
The IRS found the safe harbor unsatisfied for an alternative reason. Even if the refurbished tractors qualified as having been repaired or modified, the Service determined that the cost of repairs exceeded 75% of the retail value of a comparable new tractor, disqualifying nearly all of Schneider‘s refurbished tractors from
Schneider paid the excise tax on 12 tractors—one for each quarterly tax period at issue—and then filed an administrative claim for a refund of that amount. The IRS denied the refund claim, paving the way for Schneider to pursue a tax refund action in federal court.
In May 2017 Schneider initiated a federal lawsuit pursuant to
C
Schneider and the government stipulated to nearly all pertinent facts and the district court held a one-day bench trial in February 2020 on the remaining issues. By the time of the trial, the government conceded that the safe harbor applied to 64 of Schneider‘s refurbished tractors—those upgraded using non-powered glider kits that did not contain engines—if the cost of repairs fell below the 75% limit in
The district court began with the text of
With respect to the 912 powered glider kits, the district court concluded Schneider could not satisfy the first step. The safe harbor, the court reasoned, did not encompass situations where a company combines a glider kit with only a few parts from a used tractor, resulting in the creation of an effectively new tractor. The district court did not explain its understanding of the terms “repairs or modifications,” nor did it offer guidance about how many repairs can be made, or how extensively a tractor can be modified, before the changes qualify as the manufacture of a new tractor. Instead, the court looked at the facts and determined that Schneider‘s refurbishments using powered glider kits resembled the creation of new tractors—not repairs or modifications to existing tractors. The safe harbor therefore did not apply, so Schneider owed the 12% excise tax on these 912 tractors.
After ruling in the government‘s favor on both issues, the district court instructed the parties to calculate the total amount that Schneider owed to the IRS. The court entered final judgment one month later, ordering Schneider to pay $9,017,513.15 in unpaid excise taxes plus interest and costs.
Schneider now appeals.
II
As in any statutory interpretation dispute, the “proper starting point lies in a careful examination of the ordinary meaning and structure of the law itself.” Food Mktg. Inst. v. Argus Leader Media, 139 S. Ct. 2356, 2364 (2019). Once more, Congress established the safe harbor in these terms:
An article described in section 4051(a)(1) shall not be treated as manufactured or produced solely by reason of repairs or modifications to the article (including any modification which changes the transportation function of the article or restores a wrecked article to a functional condition) if the cost of such repairs and modifications does not exceed 75 percent of the retail price of a comparable new article.
Our own examination of this language leads us to two conclusions: first, the safe harbor does not contemplate a measurement for “repairs or modifications” apart from the 75% test Congress expressly incorporated into the statutory text; and second, the appropriate measurement for the “retail price of a comparable new article” is the market price in ordinary, arms-length transactions.
A
Several initial observations are plain from the text of
Although the statute does not explicitly define “repairs or modifications,” it gives some meaning to these terms by offering a parenthetical to confirm what those terms include. The “repairs or modifications” within the safe harbor, Congress made clear, “includ[e] any modification which changes the transportation function of the article or restores a wrecked article to a functional condition.”
The substance of the parenthetical also confirms the broad sweep of “repairs or modifications.” We know from the parenthetical that a tractor that has been wrecked can be restored to working condition without the refurbishing constituting the manufacture of a new tractor, so long as the cost of restoration falls below the 75% threshold. See
We also know from the parenthetical that “repairs or modifications” encompass alterations “which change[] the transportation function of the article.”
These examples demonstrate that “repairs or modifications” can be extensive and substantial, and yet still qualify for the safe harbor if they satisfy the 75% test. The limiting condition for the safe harbor‘s protection, then, is not found in definitions of “repairs or modifications” versus “manufacture,” but rather derives from the 75% threshold.
The conditionality of the safe harbor works in the other direction as well. Some repairs and modifications will be significant enough to constitute manufacture of a tractor subject to the 12% tax—when the cost of repairs surpasses the 75% limit. See
The takeaways are clear. Congress‘s establishment of the 75% limit as a condition for qualifying for the safe harbor means that the question whether a repair or a manufacture occurred is not answered by looking at what replacement parts—which ones or how many—were used as part of refurbishing. What marks the line between “repairs or modifications” and “manufacture” is the 75% cost measurement. That Schneider elected to refurbish its tractors using powered glider kits does not disqualify those tractors from the safe harbor. What would disqualify them, though, is if the cost of refurbishments exceeds 75% of the retail price of a comparable tractor.
B
The government begs to differ with these conclusions. First, it urges us to focus on the reality of what Schneider‘s refurbishment process looked like: a used tractor was dismantled, a few parts were recovered and combined with ones from a new glider kit, and any components left behind were scrapped. In practical terms, the government contends, Schneider‘s process resembled the production of a new tractor, and calling it a repair or modification is to read absurdity into the statute.
At one level we agree. No doubt the terms “repair” and “modification” have
But we cannot interpret these words divorced from the statute, so any initial intuition that the terms bear distinct meanings must account for how Congress used them in the text of
By its terms,
What most stands out from the government‘s position is what is missing. The government offers no principled test (for that matter, no test of any kind) for deciding when changes to a tractor cross the line from repairs to new manufacture—it only insists that the facts here fall on the manufacturing side of the line. Such an undefined standard offers no standard at all, and indeed is antithetical to the nature of a safe harbor, which is intended to offer clear and certain guidance to taxpayers. See Asher v. Baxter Int‘l Inc., 377 F.3d 727, 729 (7th Cir. 2004), as amended (Sept. 3, 2004) (recognizing that ambiguity in the meaning of a statutory requirement to claim a safe harbor is problematic because, “[u]nless it is possible to give a concrete and reliable answer, the harbor is not ‘safe’“); see also Carter v. Welles-Bowen Realty, Inc., 736 F.3d 722, 729 (6th Cir. 2013) (emphasizing that Congress enacted a safe harbor to eliminate legal uncertainty and used “precision in defining the boundaries,” and rejecting an interpretation that “would reintroduce much of the uncertainty the safe harbor meant to eliminate“).
What the government too discounts is that Congress prescribed the dividing line through a measurement of cost, not on some less-than-objective assessment of whether the overhauling and refurbishing process visually resembled the creation of a new tractor. The best reading is that the
The government fares no better in its alternate argument that the critical limiting term in the statute is the phrase “the article.” The safe harbor instructs that “[a]n article described in section 4051(a)(1) shall not be treated as manufactured or produced solely by reason of repairs or modifications to the article.”
Here, too, the government offers no test for determining whether the same identifiable article survived the refurbishment process. When pressed at oral argument, the government posited that the immutable core of a single, identifiable tractor is comprised of the parts that make it a self-propelled vehicle. But this position finds no basis in the language of
The government‘s inability to offer any competing interpretation of the terms “repairs” and “modifications” is telling. Only one part of the statute addresses how many changes to a tractor are too many to constitute mere repair and thus result in the manufacture of a new tractor: the 75% limit on the cost of repairs. The plain text of the safe harbor does not contemplate any measurement apart from this 75% test.
C
Our construction and interpretation of
Before Congress first proposed a statutory safe harbor, the task of determining whether modifications to a tractor qualified as the manufacture of a new vehicle triggering the excise tax fell to the courts, with the analysis proceeding on a case-by-case basis. See, e.g., Ruan Fin. Corp. v. United States, 976 F.2d 452, 455 (8th Cir. 1992); Boise Nat. Leasing, Inc. v. United States, 389 F.2d 633, 634 (9th Cir. 1968).
In Boise National Leasing, for example, the Ninth Circuit approved a qualitative test that involved looking at the extent and nature of changes to a vehicle to decide whether they crossed the line from repair to manufacturing. See 389 F.2d at 636. The court acknowledged that the “dismantling of an old truck, with a repairing, reconditioning, replacing of some parts, and a reassembling of the truck elements” might not “constitute the manufacturing of another truck.” Id. But modifications did qualify as manufacture when “what was done constituted on its form, substance, and result, not a repairing or reconditioning of the old truck structures or entities
But Congress moved away from this qualitative approach in 1988, when a committee first proposed a bright-line safe harbor set at the 75% cost mark for repairs or modifications that extended a vehicle‘s useful life. See H.R. 4333, 100th Cong. (1988). The proposal failed, but the IRS reacted in 1991 by adopting the congressional committee‘s proposed safe harbor in Revenue Ruling 91-27. The advisory ruling considered two distinct scenarios: one involving a “worn” vehicle that is extensively restored to extend its useful life, and the other involving a “wrecked” vehicle that incurred damage after a collision and required extensive repairs to restore it to a functional condition. See Rev. Rul. 91-27, 1991-1 C.B. 192. In the former situation only—where restorations extend the useful life of a worn tractor, even through the use of a glider kit—the IRS expressly instructed that no excise tax would apply if the cost of restoration did not exceed 75% of the price of a comparable new vehicle. See id. (explaining that “[t]his holding will also apply in cases where the owner uses a glider kit to repair the vehicle, so long as the cost of the repair does not exceed 75 percent of the price of a comparable new vehicle“). As the IRS itself recognized, this Revenue Ruling replaced the subjective, fact-specific approach characterized in Boise National Leasing with a bright-line rule set at 75% of the cost of a comparable new vehicle. See id.
Both parties agree (and the government further confirmed during oral argument) that when Congress enacted
Right to it, then, whether Schneider‘s refurbishments resembled manufacturing as a practical matter is not dispositive to the applicability of the safe harbor. Section
III
Remember, though, that it is not enough that Schneider‘s refurbishments using glider kits constituted repairs or modifications. The safe harbor is conditional, and only exempts repaired tractors from the excise tax “if the cost of such repairs and modifications does not exceed 75 percent of the retail price of a comparable new article.”
Congress did not define the “retail price of a comparable new article” in the
The plain meaning of the noun “retail” is “the sale of commodities or goods in small quantities to ultimate consumers,” and the adjective form of “retail” means “of, relating to, or engaged in the sale of commodities at retail.” Retail, MERRIAM-WEBSTER‘S COLLEGIATE DICTIONARY 999; see also Retail, BLACK‘S LAW DICTIONARY 1573 (defining retail as “[t]he sale of goods or commodities to ultimate consumers, as opposed to the sale for further distribution or processing“). We also know that the term “price” is “the amount of money given or set as consideration for the sale of a specified thing.” Price, MERRIAM-WEBSTER‘S COLLEGIATE DICTIONARY 924; see also Price, BLACK‘S LAW DICTIONARY 1439 (defining price as “[t]he amount of money or other consideration asked for or given in exchange for something else; the cost at which something is bought or sold“).
Reading the two words together, then, “retail price” reflects the amount at which an article is sold in individual, arms-length transactions to end consumers on the open market. Accord Oshkosh Truck Corp. v. United States, 123 F.3d 1477, 1480 (Fed. Cir. 1997) (“When a manufacturer sells directly to the end-user, i.e. at a retail sale, the price at which it sells is the ‘retail price’ as that is the price at which these items are being sold in the marketplace.“).
This construction finds reinforcement in the fact that Congress used different language in other parts of the excise tax statute when referring to the price the taxpayer actually paid. In the provision imposing the excise tax,
The broader context in which the safe harbor operates further reinforces our interpretation of “retail price.” See Merit Mgmt. Grp., LP v. FTI Consulting, Inc., 138 S. Ct. 883, 893 (2018) (explaining that statutory context can be probative). The provision imposing the excise tax,
The government‘s contrary position would leave practical questions unanswered. Schneider happened to have purchased comparable tractors during the tax periods at issue, so we know the price it actually paid for the Cascadia tractors. But that will not always be so. In the precise situation contemplated by the safe harbor—where a company chooses to modify or repair a worn or wrecked tractor instead of purchasing a new one—the taxpayer would necessarily need to look at the price paid by other buyers in the open market by, for example, consulting the Truck Blue Book.
Another aspect of the government‘s position warrants a response. By the government‘s reading, the term “retail price” must refer to the price paid at the “first retail sale” as that term is defined in
We do not read the statutory language in
Congress used the term “retail” in various places throughout the statute. See, e.g.,
The “fundamental canon of statutory construction” — that “unless otherwise defined, words will be interpreted as taking their ordinary, contemporary, common meaning” — resolves this issue. Sandifer v. U.S. Steel Corp., 571 U.S. 220, 227 (2014) (quoting Perrin v. United States, 444 U.S. 37, 42 (1979)). The statute offers no definition for the “retail price of a comparable new article,” so we presume that the ordinary meaning of the language expresses Congress‘s intent. See Park ‘N Fly, Inc. v. Dollar Park & Fly, Inc., 469 U.S. 189, 194 (1985). What that means here is that the “retail price” referred to in
For these reasons, we REVERSE and REMAND for further proceedings consistent with this opinion.