Avalara Tax Changes 2023

Energy and fuel tax changes

Avalara Tax Changes 2023

Energy and fuel tax changes

Energy and fuel

New taxes on chemicals, crude oil, and petroleum products are just some of what the energy sector has to deal with in 2023. Meanwhile, the governments that collect these taxes are trying to figure out how to replenish diminishing fuel tax revenue as electric vehicles become more prevalent.

SOURCES: Accounting Today and EPA


Funding the Superfund

You’ve probably seen a Superfund site because there’s one in every state. In fact, most states have far more than one. You’ll find them in the darndest places, like next to beachfront parks.

A Superfund site is an area where hazardous or toxic waste was dumped, left out in the open, or handled improperly in some other way. Sometimes the identity of the party responsible for creating the mess is clear, and in that case, they can be held accountable. More frequently, hazardous sites involve numerous entities and a lot of finger-pointing. When there’s no viable responsible party, cleanup falls to the Environmental Protection Agency (EPA).

If there’s money for the EPA to work with, it’s because of the Superfund — more formally known as the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). Established in 1980 but allowed to lapse in 1995, the Superfund was resurrected with a tax on chemicals in 2021. It will receive additional funding from the Inflation Reduction Act of 2022, which reinstates a tax on crude oil and petroleum products.

Not everyone is happy the Superfund is back.

OK, no one would say they want toxic sites to flourish, or that putting $21 billion toward cleanup is bad. It’s just that $21 billion can’t be pulled out of the air. To replenish the Superfund:

  • New excise taxes on chemicals went into effect on July 1, 2022

  • New excise taxes on crude oil and petroleum products took effect January 1, 2023

Taxing 42 chemicals, 100+ substances

As of July 1, 2022, federal excise tax applies to the sale or use of 42 different chemicals and more than 100 different substances — products containing at least 20% or more (by weight or value) of one of the 42 taxable chemicals. The delta between the highest and lowest product tax rates is considerable, from $1.49 per ton (ammonium nitrate) to $23.65 per ton (methyl isobutyl ketone). The IRS offers more details.


These are commonly used chemicals and substances. “You probably have a half dozen items on your desk with benzene or propylene in them,” says Avalara General Manager of Excise John Beaty. “The fruit you eat was probably ripened using ethylene.” 

Because the chemicals and substances are taxed at different rates, businesses must identify how much of each chemical and substance a product or product material contains. Tax is assessed on each chemical’s weight, value, or volume, so a product containing five different chemicals or substances could be taxed at five different rates. As a result, the taxes can be a nightmare for businesses to manage. You can learn more in this on-demand webinar.


Taxing crude oil, petroleum products

The Hazardous Substance Superfund tax on domestic crude oil and imported petroleum products went back into effect January 1, 2023, after lying dormant since 1995. Currently set to expire at the end of 2032, it’s expected to raise about $11.7 billion during its 10-year life span.

The rate will be adjusted annually for inflation but will start at 16.4 cents per barrel; when last in effect in 1995, it was 9.7 cents per barrel. The tax is typically paid by refineries that receive crude oil or the entity using or importing a petroleum product. This is just another item on a growing list of tax obligations that businesses in the energy sector need to track and manage.

And how will that affect consumer prices? Well, due to refining margins, 16.4 cents per barrel is equal to 39 cents per gallon, which translates to an increase of roughly 2 cents per gallon in retail gas prices because crude oil is only about half the cost of retail gasoline. The Tax Foundation believes the revised tax on crude oil will have “small economic costs” and raise only “a small amount of revenue.”

According to John Beaty, however, the revived tax on crude oil could have a significant impact on the cost of fuel.


The once and future electric car

It’s time to beef up the electricity grid.

Electric vehicles (EVs) accounted for about one-third of all vehicles on the road in the early 1900s. Yet the size of the country, limited range of EVs, and the lack of electricity outside of cities became serious impediments to sales as the United States grew. Due to those factors and the discovery of low-cost crude oil in Texas, electric cars took a back seat to their gas-guzzling counterparts by 1935.

Renewed interest in electric vehicles emerged during the fuel crisis of the 1970s and has been slowly growing ever since. Now, EVs could be on the cusp of a new heyday: EV registrations in the U.S. increased by 60%, to about 4.6% of the overall auto market, during the first three months of 2022. More than half of the vehicles on American roads could be electric by 2050.

This works out well in more ways than one because in little more than a decade, residents of some states may not be able to purchase a new nonelectric vehicle.

SOURCE: Car and Driver

More electric vehicles are coming, whether we’re ready or not

President Biden wants half of the vehicles sold in the country to be electric by 2030. By 2035, new gas-powered vehicles will no longer be sold in California. The state must meet ambitious goals between now and then:

  • 35% zero-emission vehicle (ZEV) sales by 2026

  • 68% ZEV sales by 2030

  • 100% ZEV sales by 2035

Where California goes, other states often follow. New York will also require all new passenger vehicles sold in the state to be zero emissions by 2035. And in the upper left corner of the country, King County, Washington, (home to Seattle) is working toward creating a 100% zero-emissions public transit fleet by the same year. 

However, switching to a country that primarily uses electric cars won’t be as easy as flicking a switch. 

The energy elephant in the room

The United States has yet to eliminate one of the main obstacles to widespread EV adoption: a nationwide charging system that will enable EV drivers to get from point A to point B no matter how far that distance is. 

Even if EV charging stations were neatly spaced throughout the country, and they’re not, some states would have a hard time reliably powering them. 

California has had trouble meeting current electrical demand. The state “teetered on the edge of rolling blackouts” in September 2022, and state officials predict drought, extreme heat, and wildfires will “threaten the reliability of California’s electrical grid” for the next five summers. And in February 2021, roughly 4 million Texans lost power when a winter storm “broke the grid.”

Producing enough electricity may not be problematic, but with just three electricity grids in this country, storage and distribution could be. Unlike fossil fuels, electricity can’t be stored in a barrel and shipped to where it’s needed: Electricity has to be generated on the grid where it’s used. 

So in the coming years, there will likely need to be more local production. Think solar panels on residences.

A perfect storm of energy tax revenue

With automakers already producing more fuel-efficient automobiles, and California and New York working to ban sales of nonelectric vehicles, gas tax revenue is expected to decline. In fact, it’s already down in some states. 

That’s a big deal. According to The Pew Charitable Trusts, fuel taxes account for nearly 40% of state transportation funds, and “much of that could vanish in the coming decades.” The Congressional Budget Office predicts the federal Highway Trust Fund will be about $140 billion short by 2031.

Taxing miles traveled

Recognizing this, some states are already on the hunt for other possible sources of revenue. Iowa will tax electricity at public EV charging stations starting in 2023, and several states are exploring a fee or tax on miles driven (also called vehicle miles traveled, or VMT). In fact, participants in California’s road mileage tax pilot program are now paying a VMT, based on odometer readings or GPS tracking. 

Many economists are in favor of a VMT tax, but as the Tax Foundation notes, “developing an equitable and effective VMT tax will be no small feat.” It will take time for a VMT tax to get off the ground. Political and public buy-in will be essential, notes Transportation Program Director Douglas Shinkle of the National Conference of State Legislatures.


Taxing deliveries by motor vehicle

Going another direction, Colorado now has a 27-cent retail delivery fee on deliveries of taxable goods made via motor vehicle in the state. The retail delivery fee is expected to generate $16.8 million during its first fiscal year alone. Colorado will also boost revenue for transportation maintenance and projects through new fees on passenger rides by transportation network companies and new fees on EV registrations.

So states aren’t without options. But as John Beaty explains, it will take time for the country to transition from its reliance on motor fuel taxes to alternative sources of revenue. In the meantime, we could face a perfect storm with taxes on electricity increasing but fuel taxes not decreasing. Indeed, in addition to its gas taxes, Illinois already has an electricity excise tax, an energy assistance charge, a renewable energy charge, and an energy transition assistance charge.

Mounting energy needs mixed with calls for clean energy could lead to the end of coal production and a rise in fuel cell, hydrogen, nuclear, solar, or wind power. Where there’s industry growth, taxes are sure to follow.


Other issues likely to affect the energy industry in 2023

The global energy crisis and all it unleashes

There will continue to be fallout from Russia’s invasion of Ukraine, which triggered a global energy crisis and, according to the International Energy Agency (IEA), is prompting a “wholesale reorientation of global energy trade.” The IEA says the crisis is “causing profound and long-lasting changes that have the potential to hasten the transition to a more sustainable and secure energy system.” 

As the IEA notes, the energy crisis delivered a “shock of unprecedented breadth and complexity” to the global energy sector. In the near-term, however, many governments are focusing on protecting consumers from the worst impacts of the crisis. They’re also starting to consider more long-term solutions, such as diversifying oil and gas supplies. Exactly how this will all play out remains to be seen.  


Stay tuned. We’ll share more insights in our upcoming comprehensive energy industry report coming your way in 2023.

Avalara Tax Changes 2023

A tax compliance guide for businesses

Download report

Avalara Tax Changes 2023 book cover