Gasoline wholesalers should consider opportunities presented by special gasoline tax refund procedure.

• Author: Culp, David

Letter Ruling (TAM) 9505001 addresses a statutory procedure that permits a gasoline wholesaler to sell gasoline at a price exclusive of the Federal gasoline tax to certain exempt users - such as state and local governments and nonprofit educational organizations - and claim a refund of the Federal excise tax on that gasoline. Although the ruling concluded that, in the particular facts addressed, this procedure could not be used, taxpayers engaged in wholesale gasoline distribution might consider this procedure as an opportunity to expand sales to various exempt institutional purchasers.

Generally, the 18.4 cents-per-gallon Sec. 4081 Federal excise tax on gasoline is imposed when gasoline is removed from a "terminal rack" - the end-point of a refinery/pipeline/tankfarm system. The amount of the tax is usually included in the price of the fuel in any sales "downstream" in the distribution system, through to the ultimate sale to a retail customer. Sec. 6421 allows certain persons ("tax-exempt users") who use gasoline in certain uses to claim a credit or refund of the tax paid "upstream" on the fuel. As an alternative, Sec. 6416 allows "the person who paid the tax" to claim a refund or credit for the tax if there are assurances that the benefit of the tax exemption is passed on to the fuel's ultimate tax-exempt user. The "person who paid the tax" is generally the person who had the liability for the tax at the terminal rack.

Sec. 6416(a)(4) provides a special procedure that treats a "wholesale distributor" of gasoline, on which tax has been paid upstream, as the "person (and the only person) who paid such tax" when the wholesale distributor sells the gasoline to certain tax-exempt ultimate users. The practical effect of this special procedure is to allow the wholesale distributor to claim the tax refund when the gasoline is sold to a state and local government, non-profit educational organization or certain other exempt users; thus, the wholesale distributor can sell the gasoline at a price that excludes the Federal excise tax, or can reimburse the tax-exempt user after receiving the tax refund.

(The existence of the Sec. 6416(a)(4) procedure does not forbid a tax-exempt user that purchases tax-inclusive gasoline from instead claiming its own gasoline tax refund or credit using the procedures in Sec. 6421. A tax-exempt user would normally claim a credit on a Form 4136, Credit for Federal Tax Paid on Fuels, attached to its annual income tax...