Throughout the year, Sokolis Group must update its records for all of the changes made to fuel taxes. It’s a tedious task to sift through the information scattered across the internet for each state. Even though there are web sites that consolidate fuel tax rates in one place, identifying potential exemptions takes more research than just glancing at summarized data. That usually means a visit to a state’s site and digging into their tax regulations.
Since most of you typically don’t get involved in this type of research, we wanted to pass along some information that might save you money. However, this is not an all-inclusive guide because that’s just not possible considering tax rates and exemptions are complicated by multiple jurisdictions, fuel types, industries, and other factors. Specific situations require additional research, but when you purchase fuel and pay Federal and state excise taxes, always consider whether there could be an opportunity to submit a claim for a tax refund if the fuel is used for exempt purposes.
Probably the most widely available excise tax exemption is when fuel is used for off-road purposes. Construction equipment, farm machinery, and generators are all good examples of off-road fuel usage. Less obvious usage occurs with equipment mounted to an on-road vehicle such as a pump, mixer, compactor, or reefer unit.
In order to claim the refund, it’s important to keep in mind that fuel purchased to operate the exempt equipment needs to be tracked separately from the fuel used to propel an on-road vehicle. This may typically require a separate fueling transaction with a separate receipt. However, in some situations, equipment mounted to an on-road vehicle that draws fuel from the same tank as the vehcile’s engine may also qualify. That equipment must have its own motor and supporting calculations must be made to estimate the amount of fuel used. Operationally, it could be a challenge to ensure your drivers take the time to separate their fueling activity or do the calculations to identify exempt usage, but these are important requirements that should not be ignored in order to claim a refund.
Companies that purchase substantial quantities of fuel for off-road usage often make arrangements to purchase dyed fuel so they can avoid paying the taxes up front. The dye in the fuel simply indicates that it was purchased tax-free so there is no need to file a claim for a refund. For other companies with smaller amounts of exempt usage who don’t purchase dyed fuel, they may feel it’s not worth the time and effort to claim the refund. However, with combined Federal and state taxes averaging over 50 cents/gallon for diesel fuel, they may missing out on a significant refund.
IRS Form 8849 is used for obtaining refunds of Federal excise tax on a quarterly basis. Form 4136 can also be used on an annual basis. Almost all states have similar forms to claim refunds for their state excise tax. As far as time and effort goes, these forms are actually not very complicated to prepare. The hardest part is making sure you have the proper procedures and documentation in place to support your claim.
It’s important to mention again that every situation needs to be looked at closely because, in most states, excise taxes and sales taxes are mutually exclusive for fuel. That means if you are able to claim fuel is exempt from excise tax, then the fuel may become subject to sales tax. Depending on the price of fuel and the state’s sales tax rate, the offsetting taxes may net to zero. You might even owe more state sales tax than you could get back in state excise tax. In those cases, no action should be taken to claim a refund for the state excise tax. Don’t let that discourage you because there is still an opportunity to claim a refund for Federal excise tax. At just over 18 cents per gallon for gasoline and 24 cents for diesel fuel, the refund dollars can still add up quick.
If you have a fuel tax situation that you would like to discuss further, please feel free to contact Conor Proud at Sokolis Group, firstname.lastname@example.org or 267-482-6159. We are the nation’s leading independent fuel management consulting team and can help you avoid overpaying taxes on fuel.