News Alerts

Update on the Mixture Credit Exclusion from Income

Supreme Court Denies Sunoco’s Petition of Certiorari

On October 7, 2019,  the Supreme Court declined to hear Sunoco, Inc.’s (Sunoco) petition (or writ) of certiorari appealing the decision of the United States Court of Appeals for the Federal Circuit in Sunoco, Inc. v. The United States (2017-1402). While other cases are still pending in the lower courts for other taxpayers, this brings to an end Sunoco’s efforts to exclude the alcohol mixture tax credit from gross income. This means that while other blenders who claimed the mixture credit as a payment pursuant to 26 USC 6427(e) are able to exclude that payment from gross income, Sunoco – simply because it had excise tax liability and therefore took an offsetting credit in 26 USAC 6426 – is not. The lower courts determined that the manner in which Sunoco claimed the credit was simply a reduction in excise tax liability and not a payment of the credit like those taxpayers with no excise tax liability.

When the Supreme Court denies to hear a case, it does not have to issue a decision as to why. All a denial really means is that four of the nine justices did not agree to hear the case; it does not mean that the Court necessarily agrees with the lower court decision. The denial of a petition of certiorari does not affect any other cases that may be pending on the same issue; taxpayers with cases pending in a circuit other than the federal circuit may get a different result.

City of Rialto Tax on Fuels Storage Deemed Unconstitutional

California’s Fourth Appellate District has struck down a City of Rialto business license tax on wholesale liquid fuel storage facilities of up to $1 per cubic foot of storage capacity. The tax was imposed on “any person engaged in the business of owning, operating, leasing, supplying or providing a wholesale liquid fuel storage facility in Rialto.”  The tax, passed as Measure U in the 2014 elections, was touted by the City as a gas tax. However, several companies on whom the tax was imposed sued, arguing that the tax was not a business license or gas tax, but rather a tax on real property. After losing in the lower courts, the appeals court agreed with the plaintiffs. In its decision, the Court said that the tax was imposed, not on the proportion of business activity, but rather on the capacity of a facility’s storage tanks irrespective of whether they are used in business or whether there was fuel inside. The tax was triggered merely by owning a wholesale fuel liquid storage facility. The Court therefore concluded that the tax was actually a tax on real property and violated the California Constitution. In determining the tax was not an excise tax (or a business tax), the Court said the following:

“The Measure U tax is not an excise tax because it is not a tax on the privilege of using the facilities, storing fuel in the storage tanks, any other use of the facilities or the tanks, or any other incident of owning the facility or the tanks. Rather, Measure U taxes the owners of the facilities based solely on the storage capacity of the tanks in the facilities, regardless of whether the owners lease the facilities or the tanks, whether the facilities or the tanks are used in any way, or whether any fuel is stored in the tanks.”

Please contact Leanne Sobel at 713.893.1241 or lsobel@olgarza.com with any questions about this post.

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

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.

State Tax Changes – October 2019

ARKANSAS

Effective October 1, 2019 Arkansas will impose a wholesale sales tax on fuel. The tax is imposed on dealers of motor fuel and special fuels and is collected by distributors. The rate of tax will be $0.03 per gallon for gasoline and $0.06 per gallon for diesel

(https://www.dfa.arkansas.gov/images/uploads/exciseTaxOffice/2019MotorFuelsTaxRateAnnouncement.pdf)

The rate is determined by multiplying the 12-month wholesale sales price of motor fuel for the  period from January 1, 2018 through December 31, 2018, by 1.6%. This rate will then converted to a cent-per-gallon amount, and be effective for the period from October 1, 2019 through September 30, 2020. Beginning July 1, 2020, and each July 1 thereafter, the Director will calculate a new rate of tax using the 12-month average wholesale selling price of motor fuel for the period from January 1 through December 31 of the immediately preceding year multiplied by 1.6% and converted to a cent per gallon amount, and that rate will be effective for the 12-month period beginning on October 1 of the year in which the calculation is made, and ending on September 30 of the following year.

INDIANA

Indiana has set the gasoline use tax rate for the period October 1 – October 31, 2019 at $0.134 per gallon.  The rate is adjusted monthly.

MASSACHUSETTS

Massachusetts has announced tax rates for 4Q 2019.  There are changes to the rates for Liquefied Petroleum Gases, Aviation Gasoline and Jet Fuel

MICHIGAN

Effective October 1, 2019 Michigan’s prepaid sales tax on gasoline will be $0.138 per gallon and the prepaid sales tax on diesel will be $0.152 per gallon.  These rates are adjusted monthly and typically announced at the beginning of the prior month.

NEW JERSEY

New Jersey’s petroleum products gross receipts tax rates for the period October 1, 2019 – December 31, 2019 have been set at $0.309 per gallon for gasoline and LPG, $0.35 per gallon for diesel, $0.124 per gallon for fuel oil and $0.04 per gallon for aviation fuel.  Full details can be found at: http://www.state.nj.us/treasury/taxation/pdf/other_forms/petroleum/Petroleumgrosstax.pdf

OHIO

The Ohio Department of Taxation has issued the average wholesale price of fuel to be used when determining the gross receipts of a supplier subject to the petroleum activity tax (“PAT”) for the period October 1, 2019 – December 31, 2019.  The average wholesale prices are $1.916 per gallon for gasoline, $1.961 per gallon for diesel and $0.583 per gallon for propane.  With the PAT rate set at $0.0065, this makes the PAT for the fourth quarter of 2019 $0.012454 per gallon for gasoline, $0.0127465 per gallon for diesel and $0.0037895 per gallon for propane.

VERMONT

Vermont’s fuel tax rates for the period October 1 – December 31 2019 are $0.0444 per gallon for the MFTIA and $0.134 per gallon for the MFTA.

IRS Form 720 September Special Rule for Additional Deposit of Taxes

Please be advised that the IRS publications related to the September Special rule for an additional deposit of taxes for the period September 16 – September 26 are not in alignment. The instructions to Form 720 state that the due date for the payment is September 27. However, Publication 509 states that the due date is September 30; this date is based on the regulations at 26 CFR 40.6302(c)-2(a)(3) which state as follows:

(i) The deposit required for the period beginning September 16th must be made by September 29th unless–

(A) September 29th is a Saturday, in which case the deposit must be made by September 28th; or

(B) September 29th is a Sunday, in which case the deposit must be made by September 30th.

Given the discrepancy, in order to mitigate any risk of a late filing penalty we recommend that payments be made by September 27 so far as possible.

*This alert is provided free of charge by Oscar L. Garza & Associates, P.C.  Questions that arise from this alert may necessitate a formal attorney-client relationship if one does not already exist and fees may apply.  Please e-mail lsobel@olgarza.com with any questions about this alert.

Butane Alternative Fuel Mixture Credit Cases; Latest Updates on the Court Proceedings

Recent filings show the IRS taking a similar approach of confusing the court as it did in Sunoco, Inc. v. The United States, the case arguing that the alcohol mixture excise tax credit should be excluded from income, in cases arguing that blends of butane and gasoline should be eligible for the alternative fuel mixture excise tax credit under 26 U.S.C. § 6426(e). At the end of June, the plaintiff in Vitol Inc. v. United States of America, (No. 4:18-cv-2275) filed a Motion for Partial Summary Judgment asking that the court find that butane is a liquefied petroleum gas. In July, the defendant United States filed a response requesting that either the Court delay consideration of the motion until the close of the discovery period or grant the United States an extension of time to respond. In its motion, the United States argues that the opinion sought was with respect to butane generally rather than the specific butane subject to the claims. How the properties of butane could be so different that different volumes may or may not be deemed to be a liquefied petroleum gas is not explained; the United States seems satisfied to simply proffer that the properties might be sufficiently different that even if butane generally is within the definition of liquefied petroleum gas, the butane subject to the case at hand may not be. In a related case filed in April, Valero Marketing & Supply Co. v. United States of America, (No. 5:19-cv-328), plaintiff Valero filed a claim for a refund of excise tax paid on alternative fuel mixtures containing butane and gasoline under the theory that such mixtures should have been eligible for the alternative fuel mixture credit. In July, the defendant United States filed a Motion to Dismiss asserting sovereign immunity, the doctrine of variance and lack of subject matter jurisdiction.

Both cases are pending at a time when Congress is considering the future of the alternative fuel mixture credit. Perhaps as a way to stall any rulings on the merits while legislation is pending, the government is arguing everything but the merits of the motions.

*This alert is provided free of charge by Oscar L. Garza & Associates, P.C.  Questions that arise from this alert may necessitate a formal attorney-client relationship if one does not already exist and fees may apply.

Senate Finance Committee Issues Energy Task Force Report on Tax Extenders

The Senate Finance Committee’s Energy Task Force has issued its report on whether several expired and expiring energy tax policies – including the tax incentives for biodiesel and alternative fuels – are still necessary. A copy of the summary report can be found at: https://www.finance.senate.gov/imo/media/doc/Energy9.pdf

The report does not actually make any recommendations with regards to the tax extenders. Rather, it summarizes the proposals raised by stakeholders during meetings and includes copies of all written submissions. In March, the Senate Finance Committee proposed the “Tax Extender and Disaster Relief Act of 2019.” There has been no action on that legislation since introduction other than the forming of various task forces to review tax provisions. Included in the proposed legislation are the following provisions:

• a retroactive extension of the biodiesel and renewable diesel credits through December 31, 2019;

• a retroactive extension and clarification of the alternative fuel and alternative fuel mixture credits through December 31, 2019. The clarification is language that states that an alternative fuel mixture credit is not available to mixtures of that contain liquefied petroleum gas, compressed or liquefied natural gas and compressed or liquefied gas derived from biomass. The clarifying language applies on a forward basis and will not affect credits being claimed for the retroactive period;

• extension of the oil spill tax through 2019. The tax would be reinstated on the 1st day of the calendar month following enactment of the legislation.

This legislation is similar to the “Taxpayer Certainty and Disaster Tax Relief Act of 2019” passed out of the House Ways and Means Committee (though that legislation extends the provisions through 2020). The full House has not taken up the legislation to date.

Alabama – Gasoline and Undyed Diesel Fuel Excise Tax Law Changes

State of Alabama Department of Revenue issued a July 24, 2019 notice regarding the following excise tax changes that take effect September 1, 2019.

Tax Increase
Effective September 1, 2019, the gasoline and undyed diesel excise taxes will increase by $.06 per gallon to $.24 per gallon for gasoline and to $.25 per gallon for undyed diesel.

Tax Return Due Date
The due date of the return and payment for all motor fuel taxes, other than the 3-day voucher and payment as required in Section 40-17-340(d), Code of Alabama, has been changed from the 22nd to the 20th day of the month following the month in which the tax accrues. This change applies to the Blender, Exporter, Importer, and Supplier returns and payments (Alabama Terminal Excise Tax Act 2011-565 and amendments). The due date for the September 2019 period returns and payments is October 21, 2019 (Oct. 20th is on a Sunday).

Floor-Stocks Tax
Any wholesale distributor holding motor fuel in inventory outside of the bulk transfer/terminal system on the effective date of each tax increase levied by this Act shall be liable for the additional excise tax. This does not include product located at a retail service station. A floor-stocks tax return shall be filed and the tax paid on or before the last day of the third month following the tax increase. Beginning October 1, 2019, the floor-stocks return can be found by accessing our webpage at https://revenue.alabama.gov/forms/ and typing in “floor-stocks” in the search box. This form must be filed manually with the department. The floor-stocks tax return and payment for the tax increase effective September 1, 2019 shall be due on or before December 31, 2019.

Questions
If you have any questions pertaining to this notice, please contact this office at the address or telephone number shown below or via email at mft@revenue.alabama.gov.

BUSINESS & LICENSE TAX DIVISION
MOTOR FUELS SECTION
P. O. BOX 327540
MONTGOMERY, ALABAMA 36132-7540
(334) 242-9608
(334) 242-1199 (Fax)