Law and Border: The U.S. Fuel Tax Refund – There’s No Such Thing

by Daniel Joyce

All of us are guided by common sense, as well as some general principles, including the old adage that “If it seems too good to be true, than it probably is false.”

That certainly is the case for the rumour going around that Canadian carriers can receive a windfall refund of the U.S. tax paid on diesel fuel.

There is no such refund.

It is true that there is a provision in the U.S. tax code allowing certain businesses to receive a credit for the tax paid on diesel fuel.

However, it is not true that the credit pertains to Canadian trucking companies with respect to diesel fuel used for normal highway use.

It would be nice if the rumour were true, because the tax on diesel fuel is currently about US$0.25 per gallon.

For trucking companies using hundreds of thousands of gallons of fuel a year, the size of the refund would be significant. In fact it would be so significant that one would think it is too good to be true, and one would be correct.

It appears that the rumour started because of someone’s mistaken belief there was a loophole in the fuel tax credit provision, allowing a credit for diesel fuel used in connection with “foreign commerce.”

However, a review of the applicable law reveals that the credit is not available for diesel fuel used by trucking companies for highway use.

The United States imposes federal excise taxes on certain fuels, including gasoline, gasohol, aviation gasoline, undyed diesel fuel and undyed kerosene.

If the fuel is used for a “non-taxable use,” the purchaser can apply for a credit or refund.

The federal tax regulations identify 11 different types of non-taxable uses for the various types of fuels, including farming purposes and other off-highway business use, or use in a school bus or other local use buses.

These clearly don’t pertain to normal trucking operations. But one of the 11 non-taxable uses is “foreign trade.”

This is enticing, and this is apparently the basis on which some have improperly concluded that the refund is available to Canadian trucking companies.

However, a closer look at the matter reveals that this is not the case.

The 11 different non-taxable uses do not pertain to every type of fuel. Certain nontaxable uses pertain only to certain types of fuel.

Motor carriers use undyed diesel fuel. The non-taxable uses of undyed diesel fuel which are allowable for the credit are:

Off-highway business use;

Export (fuel purchased in the U.S. and shipped to a foreign country);

In a school bus, intercity bus or local bus;

In a train;

Used other than as a fuel.

“Foreign trade” is not an allowable nontaxable use for undyed diesel fuel.

The “foreign trade” nontaxable use pertains only to aviation fuel.

Unless the taxpayer is making a refund claim in relation to aviation fuel used in civil aircraft engaged in foreign trade, the foreign trade basis does not exist.

The “foreign trade” category applies only to aircraft, not trucks. Unfortunately, there are people out there who are advising carriers that the “foreign trade” category applies to Canadian transportation companies.

That simply is not true, and carriers can create quite a problem for themselves if they make a claim for a refund to which they are not entitled.

This does not mean that a refund is totally unavailable to Canadian carriers.

It is unlikely, but still possible, that diesel fuel purchased in the United States may have been used for “off-highway business use,” or for use “other than as a fuel.”

But the typical tractor-trailer combination will never qualify for off-highway use.

In order to qualify, the equipment cannot have been designed to perform a highway transportation function.

Examples of equipment used in off-highway use include forklift trucks, bulldozers, earthmovers and equipment used in construction, manufacturing, mining, timbering, farming or similar operations.

Off-highway use also includes use of fuel in a separate motor to operate special equipment, such as a refrigeration unit, pump, generator or mixing unit.

For example, in the case of a refrigerated truck, the same tank may supply fuel to the truck engine and to the motor for the refrigeration unit.

The carrier is allowed to determine the percentage of fuel that was used to propel the truck, and claim a refund for tax paid on the fuel used to run the refrigeration unit.

Don’t be misled.

If something seems too good to be true, it probably is.

– Daniel Joyce can be reached at Hirsch and Joyce, Attorneys at Law, at 716-564-2727.

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  • THX…had heard the rumour …knew …via common sense that it was ‘just too good to be true’…afterall, we do live in a rake-it-in world when it comes to TAX. And it is TAX PAIN TIME as well!