Fuel and Far Between: Fuel Tax Recovery

Blog post by
Geoff Garber BS, JD

Many companies may be missing out on significant state and federal excise tax refunds and credits available to consumers of tax-paid motor fuels. For federal purposes, taxpayers may be eligible for refunds of tax paid on gallons of certain fuels used in vehicles and equipment off-road, such as in farm equipment, compressors, generators, and bulldozers. Many states offer a wider range of refund opportunities than the federal government, extending exemptions to vehicles licensed for on-road use, such as cement mixers and garbage trucks. Some industries tend to have more fuel consumption and, hence, more refund opportunities, such as companies in the transportation, distribution, refuse collection, construction, and oil and gas industries. This article aims to educate companies consuming fuel on whether they could be claiming such refunds, if they are not doing so already.

Fuel Tax Overview

In most states, fuel suppliers and distributors collect the federal and state motor fuel tax upstream and remit the tax to the various taxing authorities. These fuel sellers pass the tax along to retailers and, ultimately, to end users or consumers of the fuel. Because end users shoulder the tax burden, the vast majority of fuel tax refunds are directed to end users of fuel.

On average, one gallon of gasoline or diesel fuel purchased by an end user will have about 50 cents of federal, state, and other tax included in the purchase price. The federal tax on gasoline and diesel fuel are 18.4 cents/gal and 24.4 cents/gal, respectively, and have not changed in over 20 years. As of January 2015, Pennsylvania sports the highest state gasoline tax of 50.5 cents/gal, while Alaska allows the cheapest travel at a cool 8 cents/gal.

Federal Refunds

Surprisingly, few taxpayers know that a portion, and in some cases basically all, of the state and federal motor fuel excise tax may be refundable. For example, federal statutes and regulations allow for refunds of tax paid on diesel fuel when the fuel is used by any person in a nontaxable use, including diesel fuel used in:

  • Off-highway business uses (other than in a highway vehicle registered or required to be registered for highway use, such as generators, construction equipment, etc.)
  • Diesel particulate filter (DPF) regeneration process
  • Certain school bus services
  • Qualified local buses
  • Heating equipment as heating oil
  • Motorboats
  • Refrigerated trucks and trailers
  • Auxiliary power units (APUs)
  • Highway vehicles owned by the United States and used off-highway
  • Vehicles exclusively used by a state, political subdivision of a state, or the District of Columbia

For example, say that AAA Oilfield Service Co. consumes 100,000 gallons of undyed tax-paid[1] diesel fuel in frack trucks used to pump sand into the ground on private property for hydraulic fracturing and the trucks are not licensed for highway use. The refund calculation would look something like this:

Refund = 100,000 gallons x $0.243[2]/gal excise tax x 100% exemption

Refund = $24,300

AAA would be eligible for a full federal refund of its fuel tax paid because the fuel was used for an off-highway business use in a vehicle not required to be registered for highway use.

Taxpayers should maintain all fuel purchase receipts, invoices, and records, including the name and address of the fuel seller, date of purchase, and number of gallons purchased during the year for each type of qualified business use. Some refund claims require that the taxpayer provide such information, while others may request support during an audit of the claims.

State Refunds

States vary in terms of the fuel tax refunds offered, but those states offering refunds normally direct the incentives toward specified industries and uses of the fuel. Exempt uses can include fuel consumed by:

  • Vehicles operating off of public highways, such as on private streets and parking lots
  • Off-road equipment, such as in the construction and oilfield service industries
  • Power takeoff equipment, such as cement mixers and compactors on refuse trucks
  • Vehicles while idling
  • Refrigerated trucks and trailers
  • Auxiliary power units (APUs)
  • Federal, state, and local government agencies and their contractors
  • Emergency vehicles

For example, say that ABC Waste Collection Co. consumes 1,000,000 gallons of clear diesel in compacting garbage trucks over the course of the year in California. The refund calculation would look something like this:

Refund = 1,000,000 gallons x $0.10/gal excise tax x 35% exemption

Refund = $35,000

The exemption percentage is the percentage of fuel consumed in the compacting equipment as compared to all fuel consumed, meaning that 65% was used to propel the vehicle or for other purposes. The most critical aspect of a fuel tax refund claim for PTO usage is determining the exemption percentage and supporting it with appropriate data for presentation to the state taxing authority.

In closing, these refunds can be significant for companies that consume large quantities of fuel, especially when both federal and state refunds are available. If you or your client consumes fuel in any of the above manners, contact BRAYN Consulting for a no-cost estimate of the potential benefits available.

[1] In some instances, companies can purchase diesel fuel tax-free, also known as “dyed diesel” because of the reddish hue, if the fuel is intended for business use in certain off-road or farming equipment.

[2] The Leaking Underground Storage Tank (LUST) tax of $0.001/gal is not refundable from the total federal tax on diesel of $0.244/gal.

Leave a Reply

Your email address will not be published. Required fields are marked *