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

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."

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 are limited to one per calendar quarter, and the Service pays no interest on them; a fourth quarter claim is made on the claimant's tax return (treated as a refundable credit against income tax; thus, interest might be paid if there is an overpayment not timely refunded).

To alleviate this situation, the RRA also provides a special refund procedure allowing regitered ultimate vendors to file a claim for any period of at least one week in which the amount of refund claimed is at least $200. The IRS must pay interest on such refunds if the claim is not paid within 20 days after being filed. A new Form 8849, Claim for Refund of Excise Taxes, has been released to be used for these special refunds, as well as refunds of other excise taxes whose payment is reported on Form 720, Quarterly Federal Excise Tax Return.

The temporary diesel fuel excise tax regulations (TD 8496, 11/30/93) provide that an "ultimate vendor" registered under pre-RRA law as a diesel fuel producer (including a wholesaler--registration category "U") on Dec. 31, 1993 is able to use this special refund procedure through Dec. 31, 1994 without reregistering. A new registration category "UV" has been established for ultimate vendors. Ultimate vendors that were not registered diesel fuel producers need to register on Form 637, Registration for Tax-Free Transactions Under Chapter 32 of the Internal Revenue Code, to be granted "UV" status by the Service. The IRS says current category "U" registrants should wait until they are contacted by the Service to take steps to register as an ultimate vendor.

There have been some concerns with this tax collection and refund mechanism. One is a general concern about the availability of tax-free dyed fuel; some vendors do not want the burden of maintaining duplicate storage facilities. The IRS appears to believe this issue will be resolved over time, as the fuel distribution industry adapts to the new tax rules. A more immediate concern is uncertainty among ultimate vendors that were not previously Category "U" registrants and have not yet received confirmation of their Category "UV" registration (or have not yet applied) about how to treat current sales of undyed diesel for farm use or state or local government use.

An attorney at the IRS National Office has explained, informally, that the Category "UV" registration is relevant only to make the refund claim. Thus, an unregistered vendor can make tax-free sales of undyed diesel fuel to farm and state and local government users and file a refund claim for the tax after registration has been confirmed. Also, Sec. 6427(1)(5)(B) provides that, even if the vendor charged tax to the user at the time of the sale, a refund claim can be filed for that tax if the vendor first repays the tax to the exempt user or obtains and files with the IRS the user's written consent to the vendor applying for the refund. Furthermore, a registered ultimate vendor will generally have up to three years to file the refund claim.

This guidance should relieve some concerns about this tax collection scheme for farmers, state and local governments, and the vendors that have been selling undyed diesel fuel to the taxexempt users; the benefit of the tax exemption can eventually be obtained even if fuel is purchased from a vendor not currently registered. However, selling diesel fuel as an unregistered vendor has its drawbacks. The special refund procedure is available only if the claim is filed by the end of the quarter following the earliest quarter covered by the claim (i.e., if the claim covers any sales in the first quarter, the claim must be filed by the end of the second quarter). If the special procedure is not used, interest will be paid on the refund only if the claim becomes part of the vendor's income tax refund, and then only from the due date of that return (and only if the refund is not timely paid by the IRS). Consequently, a farmer or state or local government that cannot find a currently registered ultimate vendor that sells undyed fuel, an unregistered vendor willing to sell undyed fuel tax free, or any sorce of dyed fuel, may be forced, at least temporarily, to bear some of the tax burden.