As a fuel supplier or distributor, there are so many ways to inadvertently put your company at risk of a painful fuel excise tax audit.
You could collect the wrong amount. Or no amount at all. You might not realize that a fuel license has expired or that an exemption certificate is missing information. You could miss a jurisdiction’s rate change and charge the wrong taxes for six months straight.
The scariest part? You may not even realize it’s happening. With so many complex spreadsheets and overflowing customer files, it can be incredibly difficult to ensure you’re consistently collecting the right amounts (and documentation) from the right people at the right times.
If your company hasn’t faced any issues to date, you may think things are going just fine. As far as you know, everything’s been correctly calculated and thoroughly documented.
Unfortunately, an auditor won’t see it that way. Even if you’re right 95% of the time, the 5% that’s “off” can be hugely detrimental.
Consider what happened to Spirit Airlines in 2014. The air carrier diligently paid its fuel invoices on-time and in full. Those bills were a non-issue…until the airline’s supplier was audited and Spirit learned it had been undercharged for federal excise tax. For over five years.
Suddenly and without warning, the company was liable for $9.3 million in back taxes. As a result of the unexpected financial hit, shares dropped 5%. Needless to say, Spirit found another fuel supplier.
It’s an extreme, albeit real, example of how an unanticipated audit assessment can not only bring issues of noncompliance to the surface, but also impact profitability.
If you’re worried about your audit risk, don’t panic. There are several steps you can start taking today that will help prevent the most egregious fuel excise tax mistakes and reduce your risk of a costly assessment.
Here’s step number one:
Understand all taxes that need to be collected
In the wonderfully complicated world of excise tax, complexity is your biggest enemy. There are thousands of different taxing jurisdictions, and each one approaches motor fuels in its own way. You might have the state excise tax right. But are you correctly calculating environmental and underground storage tank fees for each state and locality? Are you making too many assumptions that could be setting up your company for a costly assessment?
At least one person on your tax team should be dedicated to answering these questions and others like them.
This job becomes even more critical if you’re relying solely on spreadsheets and home-grown solutions to calculate and file excise taxes in lieu of tax automation software. As your portfolio expands to incorporate additional jurisdictions or fuel types, make sure the system you use to calculate excise tax is able to adapt to handle new rules and rates, from federal and state excise tax down to underground storage tank fees. This is the first step to managing excise tax audit risk, but it’s far from the last.
For more tips to better manage your audit liability, please read my next entry which addresses changing rules and rates.