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Excise Tax Complexity in the Secondary Fuel Supply Chain

  • May 7, 2015 | Courtney Carstens

The fuel supply chain in the United States is complex and so is motor fuel taxation. As fuel flows down the supply chain from refiner to supply terminal to fuel retailer, its tax treatment changes. Tax regulations vary by product, state, and even municipality. Even more, each jurisdiction has its own set of tax laws, tax rates and reporting requirements. It’s this complexity that makes it difficult for companies to track, calculate, and file taxes accurately…..not to mention that it can make your head spin!

Let’s take a look at some examples of this complexity at each stop along the supply chain.

Supply Terminal Taxation

Fuel terminals are a gray area as some states consider the terminal and the fuel in the terminal as part of the primary distribution chain, while other states see them as part of the secondary distribution chain. Multiple license requirements and speciality reporting (EXSTARS and TOR reports) add to the complexity.

  • Iowa uses the a first sale rule to determine when the product passes from primary to secondary distribution.
  • New York and New Jersey are first import states and consider the terminal as part of the secondary distribution chain.
  • Tennesee taxes gasoline when first imported into the state but taxes diesel fuel when it leaves the terminal or upon import from a facility below the terminal system.

Terminal Truck Racks

All states consider the products that are transferred from a terminal to a truck via the rack as part of the secondary distribution chain and under the states’ jurisdiction for excise taxes. However, there are complications depending on the state model for taxation (generally characterized as either: destination rack, rack, or title pass) and the license held by the selling and purchasing parties. If the destination is in a different state than the terminal rack, the taxation becomes more complex and more dependent on the license of the parties involved in both states, namely the supplier, distributor, exporter, importer, or blender.

  • Indiana and Utah tax gasoline at the retail level but tax diesel at the terminal rack.
  • In Arkansas, there are 21 possible schedules on which a transaction can be required to be reported depending on the partners involed in the transaction and first/ second sell.

Truck Transportation

Some states require licensed carriers to report their movements of fuel. In most states, the supplier is responsible for collecting the tax and submitting it to the state and local governments. However, this is not the case in title pass states. In these states, the distributor – not the supplier - is responsible for collecting the tax and submitting it to the state and local governments.

  • In most states, the entity who sells to a non-licensed distributor needs to pay the tax.
  • In Georgia, when a supplier sells to a distributor at the rack, the distributor pays the supplier the federal taxes and is responsible for paying the state, county and city taxes to each respective entity. The supplier is not liable for the taxes other than the federal taxes.

Retail / Commercial Operations

There are only a few states that require the retail reporting of fuel receipts and disbursements.

  • When fuel distributors have consignment inventories in the ground at stations and they need to record individual sales for each days usage. This adds considerably to their accounting overhead and risk of filing errors.
  • Only four states, Kansas, New Mexico, North Carolina, and Iowa, require the retail reporting of fuel receipts and disbursements.

Whew! Does your brain hurt yet? If so, just think that these are just a few examples of the many rules that make up the monster that is motor fuel tax complexity. (There’s more?! Someone, please, pass the Advil!) But, there is some good news: staying up to date with all these rules doesn’t have to depend on you and you alone. Automating this process with software purpose-built for calculating, reporting and filing motor fuels excise taxes not only removes the complexity but also reduces filing costs while improving return accuracy and minimizing business and compliance risks.

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Avalara Author
Courtney Carstens
Avalara Author Courtney Carstens
Courtney Carstens is a 13-year marketing veteran with seven years specializing in excise motor fuel taxation. She’s currently responsible for managing demand generation and PR initiatives for Avalara’s Excise solutions. She’s a proud Texan, an Army brat, a lover of college football, and an avid history buff. She loves to cook and sing.