Local option fuel taxes create complexity for companies complying with excise tax

In the world of excise taxes, local tax can drive you plumb loco.

At a macro level, excise tax on fuel isn’t complex. Federal excise taxes are the same rate nationwide. State tax rates, of course, vary from state to state, but it’s not too difficult to track 50 state excise tax rates.

Many states also charge sales tax on fuel purchases, which complicates things a little. Indiana charges two gasoline taxes, a use tax equal to 7% of the previous month’s statewide average price for gasoline, and a separate 34-cent-per-gallon gasoline tax earmarked for funding infrastructure projects.

Still, all that isn’t too hard to keep track of.

Things get difficult when local jurisdictions — counties, cities, and special taxing jurisdictions — add their own gas tax to the mix. Unlike excise taxes, which are paid to governments by the merchants who sell the fuel, drivers are charged local taxes directly at the pump. And while many local option taxes are calculated in cents per gallon, some are percentages of the purchase price. Chances are, on a road trip through the United States, drivers pay many different excise tax rates. And as a business owner, it’s your job to stay on top of all the taxes that apply.

Many states allow for local option fuel taxes

Florida, for example, has three local option fuel taxes:

A “ninth-cent” tax of up to 1 cent per gallon on gas or diesel fuel
A 1% fuel surtax to benefit local transit systems
An additional tax of at least 6 cents per gallon, depending on the county

The ninth-cent tax (the name comes from the days when Florida levied an 8-cent state gasoline tax and the local tax was the “ninth cent”) can be collected by any county to fund local transportation projects; 60 out of 67 counties do so.

As of January 1, 2024, the Florida Department of Revenue requires terminal suppliers to collect and remit a minimum of 21 cents per gallon on each gallon of motor fuel sold to licensed wholesalers, to cover the minimum local option taxes. (That’s along with other state taxes and fees they’re also collecting and remitting). Terminal suppliers/wholesalers are responsible for collecting and remitting any additional local option tax above the minimum.

Hawaii

Florida isn’t the only state with local option gas taxes; Hawaii has a 16-cent-per-gallon state tax on gasoline and diesel fuel; but then each county adds between 16.5 cents and 24 cents per gallon. (Of note: Maui County has separate tax rates for biodiesel blends; it’s the only Hawaii county that does that.)

Nevada

Nevada counties have a required 2-cent-per-gallon tax (with gas tax revenue going only to repair existing roads, bridges, and highways) and an optional county tax to fund highway construction or purchase related equipment.

Illinois

Leave it to Illinois to complicate taxes: Chicago and Cook County have home-rule status, both the city and county levy their own motor fuel taxes. (Currently, 8 cents per gallon to the city and 3 cents per gallon to the county.) Certain counties have also imposed a municipal motor fuel tax of 3 cents per gallon.

New York

New York state has two different kinds of fuel taxes. One is a cents-per-gallon tax levied by the state, 24 of the 62 counties, nine cities, and the Metropolitan Commuter Transportation District (MCTD), which covers 12 counties in and around New York City. The other is a sales tax that counties and cities can extend to fuel sales.

Fuel tax rules and rates are subject to change

While the existence of taxes might be guaranteed, their rates are not fixed. New York, as well as the MCTD, temporarily suspended its fuel tax back in 2022.

Tax rules can be fickle as well, like when Florida changed who was responsible for collecting and remitting which part of the local option fuel taxes. And in Montana, the state’s legislature in 2021 repealed a law giving counties the option of levying a 2-cent-per-gallon local gas tax, just one year after voters in Missoula County made it the only county in the state to adopt it.

Special purpose districts create fuel tax complexity

Special purpose districts — independent government units created for a specific purpose (think New York’s MCTD) — can add to compliance complexity when it comes to motor fuel tax.

California, for example, lets local transit districts levy a 0.5% sales tax on motor vehicle fuel to get revenue for capital projects.

Likewise, three counties along the Mississippi Gulf Coast levy a 3-cent-per-gallon sea wall tax to fund the protection of highways along the shoreline. And Virginia lets a transportation district in the north part of the state levy an 8.7-cent-per-gallon tax on gasoline to fund rail transit projects.

Larger companies have bigger fuel tax compliance challenges

If you’re a local jobber or convenience store owner with only a handful of locations in one county, then these unique local taxes are just part of your everyday business. You know the tax laws and comply with them.

But if you have a growing business that spreads out over a larger geographic area, the chances of you encountering more of these local option exceptions to the excise tax rules become greater — and that makes meeting your tax obligations and staying compliant much more complex.

So how do you stay on top of all these local tax rate changes? It isn’t easy.

Some local governments, frankly, have more and better communication resources than others. Sometimes, the first notice you may get about a change is when a local official contacts you to let you know you’re out of compliance.

One solution is to build a strong in-house team of tax experts to monitor changes in rates and rules across all the cities, counties, and states where you do business. Another is to find a third-party vendor with the resources and expertise to do that kind of work for you, and to help you automate many of your basic compliance functions. Avalara tax compliance software is designed for oil, gas, and chemical companies, distributors, and energy traders of all sizes. Our automated tax software takes the guesswork out of knowing excise and local option fuel tax rates by automatically applying the appropriate taxes in your jurisdictions.

Read our report on Fuel tax compliance best practices to learn more.

This post has been updated. It was originally published in August 2022.

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.