The Taxation of Emerging Fuels

Like other emerging products, emerging fuels face complex and shifting tax rules. Watch this video to learn more.


Hi. Welcome to Will's White Board. I'm Will. The emerging fuel tax market has been growing in the US in the recent years. Things like ethanol, natural gas and bio-diesel are on the rise. I'll give you an example. By 2003 and 2013, bio-diesel production has gone up 8900%. There are a lot of companies who want to take advantage of this emerging market. However, many companies don't understand the tax complexity both on a sales tax and excise tax level that goes into staying compliant when it comes to emerging fuel tax. That's what we're going to talk about today.

All right. There are three factors that can influence tax complexity for emerging products. Let's look at each of them. First of all is complexity. By that I mean what is the complexity of the existing tax codes that would govern a product like this. In the case of fuel, it turns out that these are some of the most complex tax codes in the U.S. For instance, if you want to stay compliant with fuel taxes, you have to keep up with over a dozen fluctuating variables including location, licenses, and product type. And this is at the Federal, State and Local levels, all up and down the supply chain. It's very complex. This means that emerging fuel tax also has a great deal of complexity.

The second variable here is tax fit, and by that I simply mean how well do emerging fuels fit into the existing tax code. Is it a shoe-in, or are there modifications that have to be made? In this case, the answer is that it depends. For example, with natural gas. Some states have simply added a line item to fuel tax returns for natural gas while other states have opted to create completely separate forms for natural gas returns. This variability also adds to the complexity when it comes to emerging fuel tax.

Okay. Final point. This is about politics. Does the emerging product have a political component? Let's take natural gas again. Some people argue that natural gas should be taxed at a lower rate than other types of fuel. They're looking at state budgets going, "Man, fuel tax revenue is down. If we can incentivize production and consumption of natural gas, we can get more revenue from the tax." Other people are arguing, "Wait, that's not fair at all. Natural gas should be taxed the same as other fuel types." As you might guess, these politics can create a greater degree of complexity for the tax code because, depending on who wins the debate, the laws might change. So, you as a business are having to track this closely to see where the tax code actually lands.

So, these three things together mean that business who want to take advantage of the emerging fuel market are in for a really complex tax situation. They have to hit a really small target when it comes to compliance, especially if they're doing it manually. That's why a lot of businesses are opting to use services like Avalara's AvaTax Excise. Avalara's AvaTax Excise will automatically keep up with these rules and rates for you, up and down the supply chain. That means that you don't have to spend as much time trying to keep up, and you can devote more resources towards taking advantage of these emerging markets. I hope this helps to explain emerging fuel tax. I'll talk to you next time.