Green Fleet

Strategies for Hybird Vehicle Purchase Tax Incentives

November 2007, Government Fleet - Feature

by Mike Scott - Also by this author

Public sector fleet managers may be able to take advantage of a hybrid vehicle tax credit that could save departments thousands of dollars per year.

The problem is the entities that legally can take advantage of such a tax credit generally aren’t interested in doing so. As a result, many public sector fleet managers either aren’t aware of the credit or don’t know how to take advantage of it.

Tax Credits are Available
Hybrid vehicles purchased or placed in service after December 31, 2005 may be eligible for a federal income tax credit up to $3,400 for individual automobile owners and businesses. Section 1341 of the Energy Policy Act (EPAct) of 2005 provides this federal tax credit for qualified light-duty vehicles and trucks. The credit is based on fuel economy and the vehicle’s potential for fuel conservation.

Credit amounts begin to phase out for a given manufacturer once it has sold more than 60,000 eligible vehicles. If a tax-exempt organization buys such a vehicle, the retailer may take the credit. With leased vehicles, the lessor may claim the credit.

For public fleets, the tax credits could amount to savings of thousands of dollars a year. However, the process hasn’t always been seamless for those who claimed the credits. The credits actually go to automotive dealers who, in theory, would then pass the savings down to public fleets, according to Pat O’Connor, legislative counsel for the National Association of Fleet Administrators (NAFA) in Princeton, N.J. O’Connor works for NAFA out of a Washington, D.C. office.

“EPAct as written relies on (automobile) dealers to help fleet managers (share) in the savings,” O’Connor said. “When the law was first written, we assumed there would be some major issues with this process and those concerns have proven to be justified.”

Indeed, government entities do not pay income or business tax, therefore they cannot claim this tax credit. The EPAct 2005 law was written stating dealers selling the vehicles could take this credit if they inform the government or the public entity they are selling the vehicle to.

That is the key element, according to O’Connor. If dealers are planning on taking advantage of this credit, they must, by law, inform public agencies of their intent which would then open the door for negotiated discounts. In some cases this happens, but some dealers are unwilling to deal with the credits. By offering discounts on top of those credits there isn’t enough incentive for them to do so, O’Connor said.

Another issue for dealers is that being subjected to high amounts of tax credits may not be beneficial if they are already subjected to the corporate alternative minimum tax (AMT), O’Connor said. “There just aren’t enough incentives out there for dealers to make them want to be proactive about it.”

Public Sector Must Be Aware
As a result, many government fleet managers are not aware of the potential tax credit or how they can work with dealers to negotiate lower prices. When done properly it can offer significant financial benefits said Doug Weichman, CAFM, director, fleet management division, Palm Beach County, Fla.

In the 2006 model-year when Palm Beach County Sheriff’s Department purchased its Ford Escape Hybrids and Toyota Prius vehicles, Weichman took the approach to write letters to the Toyota and Ford dealerships with different results.

“The Ford dealership co-operated and gave us back a part of the credit that totaled well over $10,000,” Weichman said. “The Toyota dealership claimed that due to losses from hurricanes the previous years — Frances, Jean, and Wilma in Florida — they did not have any tax liability and did not work with Palm Beach County.”

For the 2007 model-year, Palm Beach County Sheriff’s Department purchased vehicles as part of a Florida Sheriff’s Association contract for several hybrids, which included a rebate clause.

“We have contacted the Ford dealership and they have told us we will be getting the money as spelled out in the contract,” Weichman said. “We have just completed receiving our last Ford Escape Hybrid and they are saying they will be processing a check in the near future.” He expects the check to be a few thousand dollars to reflect a large portion of the savings the dealership will realize from the tax credit.

Officials Look to Lessen Impact
At the Palm Beach County fleet management department, officials are exploring all possibilities to lessen the impact of the proposed property tax law. Palm Beach County fleet management has ordered, received, and paid for 28 Toyota Prius vehicles, at the current tax credit of $1,575 per vehicle. The department expects more than $44,000 in credit money in 2007.

The Florida Sheriff’s Association, Florida Association of Counties, and Florida Fire Chiefs’ Association have developed a language that helps their members better understand the benefits of this EPAct law, said Lynn Meek, manager of bid services with the Florida Sheriff’s Association.

In a document available to all members, the association said dealers are required to provide written documentation to the purchasing agency regarding the availability of the tax credit, apply for the tax credit, and pass it along to the purchasing agency when appropriate.

“These credits are available to purchasers of hybrids, advanced lean burn, and fuel cell vehicles except when the purchaser is a tax exempt entity,” Meek said. “With public agencies the tax credit goes to the seller, provided the seller clearly discloses to the purchaser in a document the amount of any credit allowable.”

Updating the Law
NAFA is working on having the law changed for government entities to allow them to apply the credit to their federal payroll tax obligation. This would be one way that would allow public agencies to be directly impacted by tax credits given their status as a non-profit department.

Such legislation is currently being introduced to the U.S. Congress by O’Connor and other NAFA staff but is being met with skepticism and politics in many circles, he said. Some lawmakers appear hesitant to extend the hybrid vehicle credits directly to public agencies in what they perceive to be a liberal tax policy.

“There are some significant hurdles we would have to overcome to allow agencies to receive a tax credit on their federal payroll taxes,” O’Connor said. “There could be other strategies we would consider if (payroll taxes) aren’t accepted but the bottom-line is finding a way that directly impacts our public safety departments and (local governmental) agencies so that the intent of the original EPAct law is covered.”

Until then, O’Connor encourages fleet managers and publicly employed personnel to proactively work with automotive dealers in garnering these hybrid tax credits. Many dealers that would be willing to use such tax credits are unaware of the provisions or have had no incentive to spend the time pursuing business with those credits. “One suggestion I would make is for public agencies to make the use of the tax credit a part of their request for quote (RFQ) or bid process,” O’Connor said. “That would be ideal because you would be on the same page (with the dealer) from the start and both parties would be working toward a goal of increased revenue and decreased costs.”

The U.S. Congress is considering comprehensive energy legislation expected to include tax incentives that will encourage the purchase and use of alternative fuel and advanced technology vehicles through encouragement levied at them from NAFA and other organizations and lobbyists. Federal tax incentives are intended to encourage the acquisition of AFVs and hybrids by helping to reduce the upfront additional cost of these vehicles. As tax-exempt entities, however, government agencies and other nonprofits are not able to take advantage of these tax incentives.

Many government and nonprofit fleets are in a unique position to lead the way in promoting the use of alternative fuel and hybrid vehicles by virtue of being centrally refueled and operating in urban areas. Many considered it a serious flaw in the country’s energy policy that they are expected to bear the substantial incremental costs associated with adopting new technologies because they are not allowed tax incentives, O’Connor said.

NAFA is asking congressional leaders to consider allowing government and nonprofit entities to claim the tax incentive as a credit against federal payroll tax liability. Such a credit would be applied against the employer payroll taxes (e.g., federal income tax withholding) remitted to the U.S. Treasury.

Some of the hesitancy of public entities utilizing the tax credit has nothing to do with the credits themselves, and more with the concept of using hybrids as part of a community’s public fleet.

A 2006 survey compiled by Kelley Blue Book indicated that despite the effects of Hurricane Katrina in 2005 and the rising gas prices that followed, both consumers and businesses were somewhat skeptical about the service expense and longevity of current gas-electric hybrids.

Hybrid Interest Low
More than 50 percent of consumers surveyed said they have no interest in hybrids or need to know more about them before they would consider a purchase according to Kelley Blue Book.

Meanwhile 61 percent of the consumers had serious concerns about expenses related to repairs and more than half of those surveyed were wary of a limited battery-pack life. Those two items overshadowed the concerns generated by reports of poor driving performance and failure to meet promised fuel economy.

Integration requirements that include mechanical and electrical components within software design make hybrid vehicles a complex automotive design. Yet simulation-based design integration of the drivetrain has improved hybrid vehicle reliability, according to Michael Jensen, technical marketing engineer for the Saber Simulation Product Line at Synopsis, a California-based leader in delivering semiconductor design software, intellectual property (IP), design for manufacturing solutions and professional services to automotive and other industries. The comments were made in a July 2007 article in Automotive Design Line magazine.

As reliability increases, more public entities are expected to consider hybrid vehicles as part of their fleet needs. If government-backed hybrid vehicle tax credits indeed are directly or indirectly passed down to these departments, the likelihood is that they will increasingly comprise larger percentages of public fleets around the U.S.

Standard Hybrid Electric Vehicle (HEV) Tax Credit
What vehicles qualify? Hybrid vehicles that use less gasoline than the average vehicle of similar weight and that meet an emissions standard. “Lean-burn” diesel vehicles could also qualify, but currently-available diesel vehicles do not meet the emissions standard. There is a similar credit for alternative-fuel vehicles and for fuel-cell vehicles, but these are not widely available. The vehicle must be in the U.S.

How much is the credit? The tax credit amount could range from $250 to $3,400 depending on the fuel economy and the weight. If you buy more than one eligible hybrid vehicle, you can get a tax credit for each vehicle.

The U.S. Department of Energy has established resources that allow public fleet managers and others to compare the costs, benefits, and emissions of hybrid electric vehicles (HEV) with those of conventional vehicles. It has two parts:

  • Single Vehicle Tool: Users can select one HEV and one conventional vehicle for comparison. Factoring in purchase price, fuel costs, repair and maintenance costs, resale value, and applicable tax incentives, the tool calculates expected lifetime costs for both vehicles, as well as cost and emissions savings associated with purchasing the HEV.
  • Fleet Tool: Users can compare two fleets of up to five vehicles — one composed of HEVs and the other made up of conventional vehicles. The tool calculates lifetime costs and emissions for each vehicle fleet.

    Outputs are provided per vehicle, per year, and per mile.

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