Bringing clarity to fuel excise taxes and credits.

• Author: Pashley, Steve

The federal excise taxes, tax credits, and exemptions for various types of fuel constitute a terribly confusing area of the tax law, involving several Internal Revenue Code sections and overlapping provisions. This item is intended to provide clarity as to how these various provisions interact and to clear up much of the confusion faced by taxpayers and advisers alike when attempting to claim these tax credits.

The U.S. government imposes excise taxes on a variety of liquid fuels. Along with heavy-vehicle use taxes and truck/ trailer sales taxes, these excise taxes are collected by the IRS and placed in the federal Highway Trust Fund. The Highway Trust Fund contains three accounts: a highway account that funds road construction; a mass transit account that funds transit-related projects; and a leaking underground storage tank (LUST) account that, as the name implies, funds the remediation of leakage issues involving underground storage tanks. Once deposited into the Highway Trust Fund, the taxes are distributed to individual states based on a legislatively determined formula.

Since the taxes fund road and transit projects, the transactions subject to fuel excise taxes generally involve fuels used to power trains, cars, boats, and aircraft. When using a fuel for a different purpose, a taxpayer is likely to be exempt from the fuel excise tax. As discussed below, while a taxpayer may use fuel for a "nontaxable use" for excise tax purposes, the same fuel may qualify for federal income tax credits (see discussion of Sec. 6427 below). This is an important point for taxpayers that may erroneously believe they are ineligible for federal credits unless they incur a fuel excise tax liability. While a fuel excise tax obligation may be offset by available federal credits, a fuel excise tax obligation is not a prerequisite to claiming the associated federal income tax credits.

After a fuel leaves a refinery, it can pass through many intermediate channels before reaching the ultimate consumer. However, any gallon of fuel should be taxed only once. If a purchaser pays the excise tax on a fuel and can substantiate that another taxpayer has already paid the excise taxes due, the purchaser may be eligible to submit a claim for refund of fuel excise taxes paid.

This item addresses the fuel excise taxes contained in Secs. 4041 and 4081. The Sec. 4042 tax on fuels used in commercial transportation on inland waterways is outside the scope of this discussion.

Sec. 4041

Sec. 4041 levies an excise tax on the following fuel types:

* Diesel;

* Kerosene;

* Alternative fuels;

* Compressed natural gas; and

* Fuels used in aviation.

The rate varies between 18.3 cents and 24.3 cents per gallon, depending on the fuel type. In general, Sec. 4041 imposes excise taxes on fuels used for specific purposes, including powering highway vehicles, trains, motor vehicles, motorboats, and aircraft. The person selling the fuel to the owner, lessee, or other operator of the vehicle is responsible for the tax.

Sec. 4081

Sec. 4081 imposes an excise tax on:

* The removal of a taxable fuel from any refinery or terminal;

* Entry into the United States of any taxable fuel for consumption, use, or warehousing; and

* The sale of a taxable fuel to any person who is not registered under Sec. 4101 unless there was a prior taxable removal or entry of the fuel.

The "taxable fuels" referred to above are gasoline, kerosene, and diesel. The rates of tax are 18.3 cents per gallon for gasoline and 24.3 cents per gallon for kerosene and diesel. When considering a fuel excise tax issue, practitioners should be aware that while both Secs. 4041 and 4081 are fuel excise taxes, they appear in separate chapters of the Code. The Sec. 4041 excise tax is a "retail excise tax" under Chapter 31 of the Code, while the Sec. 4081 tax is a "manufacture excise tax" under Chapter 32. This is significant, as many provisions of the Code apply only to the Code sections contained within the same chapter. While a detailed analysis of this issue is beyond the scope of the current discussion, practitioners should take note when a provision of the Code contains the phrase "under this chapter" or similar limiting language.

Registration Requirement

Sec. 4081's reference to Sec. 4101 highlights an important point. Sec. 4101 requires certain taxpayers to register with the IRS by filing Form 637, Application for Registration (for Certain Excise Tax Activities), when they are engaged in activities subject to excise taxes. The penalty for failing to register is $10,000 for the initial failure and $1,000 for each day thereafter. Given the large penalties for failing to register, taxpayers with substantial fuel transactions should take the steps necessary to determine whether they are required to register. Generally, the following "persons" are required to register:

* Blenders;

* Enterers (usually the fuel importer);

* Pipeline operators;

* Position holders;

* Refiners;

* Terminal operators;

* Vessel operators; and

* Bus and train operators.

A person may, but is not required to, register if the person is a:

* Feedstock user;

* Gasohol blender;

* Industrial user;

* Throughputter that is not a position holder;

* Ultimate vendor; and

* Ultimate...