Diesel fuel excise tax: farmers, state and local governments, and "registered ultimate vendors" face tax refund problems.

• Author: Culp, David P.

Under rules that went into effect Jan. 1, 1994 for the Federal excise tax on diesel fuel, the only person allowed to claim a refund or credit of tax on undyed diesel sold to farmers for use in farming or to a state or local government for its exclusive use is a "registered ultimate vendor." Although the rules are designed to permit these users the unique ability to purchase undyed diesel fuel tax free, they are potentially troublesome.

The Revenue Reconciliation Act of 1993 (RRA) substantially modified the collection scheme for the 24.4 cent per gallon Federal excise tax on diesel fuel. Effective Jan. 1, 1994, the tax generally is collected as the fuel leaves the terminal rack instead of, as under prior law, generally when it was sold by a producer or wholesaler. Under prior law, a number of users--including farmers and state and local governments--were able to purchase diesel fuel free of tax (or at a reduced tax rate) if they provided proper certification of the fuel's intended use. Under the new scheme, taxexempt sales are still permitted, but only if the fuel is dyed in accordance with IRS regulations. If these tax-exempt users now purchase undyed diesel fuel, they purchase it at a tax-inclusive price. Most of these tax-exempt users can then claim a refund or credit of the tax directly from the Service.

However, state and local governments and farm users, whild entitled to the benefit of the tax exemption, are not permitted to file their own refund claims with the IRS for the tax included in the price of undyed diesel fuel. Rather, the only person permitted to claim a tax refund when such users purchase undyed fuel is a "registered ultimate vendor." The drafters of this arrangement apparently envisioned that registered ultimate vendors would sell to government and farm users without charging them the tax; thus, these users would purchase their diesel fuel free of tax as under prior law. While it can work this way, as far as the vendors are concerned such an arrangement is not exactly a continuation of the way things used to be. Under the new scheme, a vendor will have already paid the tax on the diesel fuel in the price it paid to its supplier, before it is purchased by the government or farm user. Thus, a vendor will be left with the cash flow burden of waiting for an IRS refund (a situation that could often be avoided under pre-RRA law because many of these vendors could register as wholesalers). In general, diesel fuel tax refunds...