Federal Excise Tax Information

Federal Fuel Tax Rebates: Do You Qualify?

Many contractors don't take their sweeper fuel deduction.

Private contractors may be eligible for a refund of a portion of the excise taxes they pay on their fuel. Currently, the federal excise tax is 24.4 cents per gallon on diesel, and 18.4 cents per gallon on gasoline, so this can be a significant amount. Here is an overview on available fuels, and what factors need to be considered when filing for an excise tax credit or refund on fuel.

Both diesel and gasoline are taxed when they leave a fuel storage facility. Generally speaking, this means the tax is applied prior to the wholesale level. It is then passed on to each purchaser, eventually winding up as a tax on the end-user. However, there are provisions that allow state and local governments to purchase fuel tax-free, if it's for their exclusive use. So, a municipality operating a sweeper would be able to purchase fuel that was already tax-free at the time of purchase. A private contractor operating a sweeper would not.

Since January 1^st, 1994, there have been two types of diesel fuel available - undyed and dyed. Undyed diesel fuel is designed for a taxable purpose. The tax is imposed when the fuel initially leaves its terminal. However, if it ends up being used for a tax-exempt purpose, the end-user can file for a refund. If the fuel is sold to a state or local government for its exclusive use, the person making the sale to the government entity is the one who applies for the refund. Dyed diesel fuel, by contrast, is indelibly dyed at the point it leaves the terminal. This permanently dyed diesel fuel is intended strictly for non-taxable usage, and it has no excise tax attached to it at any point along the distribution chain.

There is also a side issue that encompasses the sulfur content of diesel fuel. All high-sulfur diesel fuel is dyed, and all low-sulfur diesel hasn't been. However, to reduce emissions, the Environmental Protection Agency (EPA) doesn't want high-sulfur diesel to be used in motor vehicles. This has led to a demand for a dyed low-sulfur diesel, which may now become available.

The next consideration is the fuel used by the chassis, or propulsion, engine of a sweeper. The definition of a non-taxable fuel is contained in Internal Revenue Code Section 6421. Although the code section is labeled 'gasoline,' the same definition is also used for diesel fuel. The first part covers fuel used by the chassis engine. It says that any fuel used in an off-highway business use is exempt from tax. Then, when you get into the definition of what qualifies as an off-highway business use, it's defined as any use other than as a fuel in a highway vehicle that is registered, or required to be registered, for highway use under the laws of a state or foreign country.

The question becomes: "Does a particular parking lot or street sweeper qualify as a highway vehicle?" The definition of a 'highway vehicle' is a motor vehicle that is intended to carry any type of a load over the public roads, whether or not it also performs any other function.

In 1979, there was an IRS Revenue Ruling (#79-192) that determined that because a sweeper not only sweeps, but also lifts the sweepings into the vehicles and transports them to a destination over a public road, a street sweeper then qualifies as a highway vehicle.

That means that any fuel used in the sweeper's propulsion engine is considered to be used in a highway vehicle, and is subject to tax. This is true, regardless of whether the sweeper is operating on a public road or in a private parking lot, as long as it is registered as a motor vehicle.

On the other hand, if state law in a particular state does not require registration, and if the sweeper is subsequently not registered as a motor vehicle, then a sweeper would not be considered to be a highway vehicle. If that is the case, then all fuel used by the sweeper, in both the propulsion and auxiliary engines, should be exempt from excise taxes. And, again, there's an overriding tax exemption for any fuel used by any state or local agency (state, city, county, regional, etc.), whether it's used on or off a road.

Next, let's cover the regulations pertaining to fuel used by a registered sweeper's auxiliary engine, whether or not it is separate from the engine operating the chassis. The way the regulation reads, for both gasoline and diesel, is that any fuel used by the propulsion engine of a vehicle is subject to tax, even if it is being used to operate other equipment, as well, by means of a power takeoff from the main engine. So, registered sweepers using a single engine to operate both propulsion and sweeping functions must pay excise tax on the fuel used.

On the other hand, if a given sweeper model has a separate auxiliary engine that operates the sweeper functions, then the fuel used by that engine is exempt from excise taxes, both on and off a highway. If there is a separate fuel tank for each engine, then calculating the excise tax exemption is as easy as keeping track of how much fuel is put into the auxiliary engine's fuel tank. If the fuel is coming from the same tank - which is the case with most sweepers - then an allocation needs to be made by the owner.

The regulations say that this allocation "must be based on operating experience and supported by records." It goes on to say that "a device to measure the number of miles [a hubometer] may be used to make a preliminary determination of the number of gallons used to propel the vehicle." And, in order to make a final determination, you are required to add the number of gallons used while idling or warming up.

I would say that a valid method [for determining sweeper engine fuel usage] would be to use the auxiliary engine manufacturer's rated fuel usage per hour, at normal operating rpm, then come up with a number of gallons used based upon the auxiliary engine's hourmeter reading. Documentation would need to be made of the number of hours the engine was used in each time period for which an excise tax rebate was being sought.

Any method used needs to be reasonable, as well as being supportable objectively. The use of miles per gallon and miles driven off-road has been shown to be a valid method of computation, as long as the estimated miles per gallon includes a factor for idling and warming up the engine. As far as I can see, using the sweeper manufacturer's figures for fuel usage, combined with an hourmeter tally, would be an acceptable method of record-keeping.

The question also arises regarding the taxability of chassis fuel used by a contractor who is sweeping the streets of a municipality under contract with the municipal agency. Generally speaking, if the municipality is using its own sweepers to sweep its streets, it would not pay excise taxes on the fuel it used. The fuel used by the contractor would be subject to excise tax, however there is an exception to this rule.

You should now be able to determine whether you qualify for an excise tax rebate on the fuel you use. If you do, you can use one of two methods to apply for it. One is to file for a refund on a quarterly basis. Until recently, a minimum tax refund amount of $1,000 on gasoline, and $750 for diesel, was required in order to be able to file quarterly.

However, as of October of 1998, the qualifying amount for quarterly filing was dropped to a total refund amount of $750 for gasoline and diesel purchases combined. (For details on both claims and refunds, see IRS Publication #378, Fuel Tax Credits and Refunds. Quarterly refund requests require IRS Form #8849.) The quarterly refund is based on your tax year, not the calendar year. Thus, a company with a fiscal year ending in a month other than December would need to take that into account when filing claims.

You may also choose to use IRS Form #4136 to claim a fuel tax credit. This is then attached to your income tax return. If you choose to file for a credit at the end of the year, instead of on a quarterly refund basis, you may still deduct the estimated refund from your quarterly tax prepayment amounts. If you don't meet the minimum amount for filing a quarterly claim, your refund must be claimed by taking a credit on your income tax return.

Even though there are some types of business credits that don't require a tax liability in order to deduct them, the excise tax refund is not one of them. For example, if you have a $500 fuel tax credit in a year that your business lost money (i.e., you can't use any more deductions), you will still be able to receive a $500 refund back.

If you were eligible for the excise tax rebate on fuel for previous years, but neglected to claim it, you can still file an amended tax return to get your refund. Typically, you can go back a maximum of 3 years for this type of claim. Information on this process is also contained in IRS Publication 378, which explains much of the information covered in this article.

This article is reprinted from American Sweeper magazine, Volume 7 Number 1, 1999.

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