California Proposal To Amend Regulation Relating to Tax Paid Twice on Diesel Fuel

Oct 04, 2019

The California Department of Tax and Fee Administration (CDTFA) recently published a proposal to revise Regulation 1435, “Tax Paid Twice on Diesel Fuel,” so as to clarify when a diesel fuel supplier may claim a credit or refund of the tax paid on diesel placed into an IRS registered terminal for subsequent removal at the terminal rack. Among the proposed changes (the full text of which is in the attached Issue Paper) are the following:

  1. A proposal to amend Regulation 1435(a) to clarify that the supplier who removes diesel from a terminal rack on which a prior tax was paid may claim a credit or refund up to the same amount of tax-paid gallons of diesel fuel previously placed into the terminal for which no such credit or refund has yet been taken. The revision states that the total credit or refund may not exceed the amount of tax paid with respect to diesel placed into the terminal from which it is being removed;
  2. A new subsection (b) stating that refund or credit of tax with respect to dyed blended biodiesel may only be claimed with respect to any tax previously paid on the biodiesel portion and only to the extent that the supplier claiming the credit or refund can prove that he was the supplier who previously paid the tax;
  3. A new subsection (c) containing definitions of terms such as “terminal rack,” “first tax” and “blended biodiesel” among others;
  4. Subsection (b) is proposed to be renumbered as subsection (d) and will be revised to say that a credit of tax paid will only be allowed if all of the following conditions are met: (1) the first taxpayer purchased, imported or produced the diesel on which the first tax was paid below the rack; (2) the second taxpayer did not sell it above the terminal rack; (3) the first tax was not refunded to the first taxpayer; (4) the second taxpayer removes the diesel from an approved terminal and reports the removal as a taxable disbursement; (5) the second taxpayer takes a credit within 3 months; (6) the first taxpayer has met all reporting requirements; (7) the second taxpayer retains evidence of the fuel tax paid on the diesel the second taxpayer placed into storage; (8) a copy of the first taxpayer’s report and other evidence relating to the credit are retained; and (9) the second taxpayer maintains a reconciliation (details are specified in the proposal) by terminal of the number of tax-paid gallons subsequently removed at the terminal rack. Note that for purposes of the Regulation the first and second taxpayer may be the same person; where they are, no First Taxpayer Report is required.

In addition to the proposed revisions to the language of the Regulation, there is a proposal to add a new subsection (g) containing examples of tax paid twice so as to assist taxpayers in determining when their activities fall within the Regulation and when a credit or refund would or would not be permitted. There are six examples, three where the first and second taxpayer are different people and three where they are the same person. Those examples can be found on pages 17 and 18 of the attachment.

The CDTFA sought input from interested parties prior to publishing the proposed revisions. The formal rulemaking process is initiated by publishing the proposed action in the California Regulatory Notice Register; to date the proposed revisions have not been published in the Register. Once that has taken place there is a minimum 45 day period where the public can comment and the CDTFA can hold a hearing. The formal process must be concluded within one year.