Former Supreme Court Justice, Oliver Wendell Holmes, said “I like to pay taxes. With them I buy civilization.” Although many could argue whether this is true for all taxes, it certainly applies to motor fuels excise taxes. These taxes are the primary revenue source for road and bridge projects – the lifeblood of transportation and interstate commerce in the United States.
Motor fuels excise taxes are indirect taxes, which means they are collected by one party from another party and then remitted to the government. A supplier, for instance, collects the excise tax from a jobber who lifts fuel from a terminal; the supplier then remits those taxes to a state agency by a certain due date. In some cases, it’s not only states, but also counties and municipalities that levy this tax.
Of all the taxes levied, motor fuels excise taxes tend to be the most complex with different rates, rules, and forms for every jurisdiction. They also tend to change frequently, which can affect all fuel supply chain participants including buyers, distributors, and suppliers. With so much change and complexity for a tax that nationwide averages 48.9 cents per gallon for gasoline and 54 cents per gallon for diesel (includes state and federal excise taxes and fees), it’s important that you understand where there are opportunities for savings and what the macro trends are in this space.
Licensed Distributor Equals Fuel Cost Savings
The responsibility for collecting and remitting motor fuels excise taxes to the government has substantial opportunities for fuel savings. Suppliers and licensed distributors are the ones on the hook for these indirect taxes. Every retailer and distributor who has a sufficient volume though should consider becoming licensed in the states in which they operate and begin to collect these taxes. Allowances for shrinkage in 36 states, float opportunities from 21 to 62 days, availability of rack-based pricing, and lower overall freight costs can add up quickly into real savings.
For example, a company lifting and delivering 1,000,000 gallons in the state of Nebraska can save over $166,000 on shrinkage allowances alone. In fact, one customer that FuelQuest helped become a licensed distributor saved $700,000 in their first year. As a rule of thumb, if you are doing over 4,000 gallons per day, you are a good candidate for a licensed distributor.
The Only Constants are Change and Complexity
Motor fuels excise taxes are complex and ever-changing. How complex? Well a single load lifted in Alabama and delivered in Tennessee requires completion of 23 tax schedules and 13 forms. Although this may be an edge case for many, mainstream cases are not far off. In terms of change, through the first half of the year, there were over 1,800 changes to tax rules and rates across the U.S. With the added pressure of state budget shortfalls, more changes are expected as lawmakers scramble for additional revenue.
State tax authorities tell FuelQuest that 25% of excise motor fuels tax filers are either under-reporting their taxes or filing in error. It is no wonder with the level of complexity and fluidity of change. To avoid this situation, which can result in significant fines, fees, and penalties, licensed distributors need to consider adopting tax compliance automation software that handles motor fuels.
States Legislate, Automate, and Mandate
All states collect motor fuels excise taxes, but they each have their own rates, rules, and forms. They also differ in how they collect those taxes. The overwhelming trend for states is to require filers to submit their returns electronically. In fact, at the beginning of 2011, 26 states had an electronic filing mandate in place. FuelQuest knows of at least 4 other states that are taking similar steps to mandate as well. Mandating is typically a slow process as most states require legislative approval, which can experience delays from vocal opposition groups. Once it is legislated, the states go through a process of implementing systems that will automate the receipt and processing of those returns.
Soon, all states will require electronic filing. What does this mean for the average filer? To ensure compliance, filers will need to adopt filing automation software if they have not done so already.
Alternative Fuels Cannot Escape
States already have tax regulation in place for alternative fuels such as biodiesel. Many also have laws in place for nascent fuel types such as CNG. Every state has a different approach, and filers should look carefully at the rules on the books in the jurisdictions in which they operate.
Even electricity is considered a taxable fuel in some states. If it goes into a car to power the engine, then it is a fuel and can be taxes. As electric cars gain more traction in the U.S. in terms of adoption – something that will take years to happen – expect to see more states adopt electricity-specific tax codes and for enforcement to begin.
At the Rack Jack
States with multiple points of motor fuels excise taxation within the supply chain are attempting to simplify their approach by moving the point of taxation to the rack or terminal. New Jersey is one of the most recent states to take this approach; Alabama is scheduled to do the same later this year. By simplifying when the tax is applied; compliance, accounting, and enforcement become less costly to perform for all parties.
If your company does collect and remit motor fuels excise taxes, then it is important you consider your risk exposure if processing those taxes manually or via spreadsheets and back-office system reports. Tax automation can reduce your cost of compliance and increase accuracy and reliability in the face of continuing tax complexity and change. With more regulations and states scrambling for additional revenue (translation = increased audits), it is imperative to look for such a solution.
If your company does not process motor fuels excise taxes, then consider the benefits of doing so by becoming a licensed distributor. Depending on where you do business and what your volume is in certain jurisdictions, the savings can be significant. These are savings that ultimately drive straight to your bottom line.