The Lord giveth and the Lord taketh away. Taxpayers often find the same to be true of the government. In a number of instances, the tax law grants an exemption from substantive tax liability only to make it procedurally difficult or even procedurally impossible to claim the exemption. Such can be the case with US federal fuel excise taxes, one of which is the topic of this alert. Tax policy is generally understood to provide exported taxable fuels with a US excise tax exemption. But taxpayers may wish to revisit the procedural requirements for this exemption to avoid potentially significant pitfalls that could make it difficult to avoid tax liability. With proper planning, a taxpayer may be able to mitigate or avoid such problems.
The Section 4081 excise tax and the export exemption
Under Section 4081 of the Internal Revenue Code of 1986, as amended (the Code), an excise tax is generally imposed on (1) the removal of a taxable fuel from any refinery or terminal, (2) the entry of a taxable fuel into the United States for consumption, use, or warehousing, and (3) the sale of a taxable fuel to an unregistered person, unless there was a prior taxable removal or entry into the United States. The rate of excise tax differs depending on the type of taxable fuel at issue. For diesel fuel or kerosene, the rate of tax is 24.3 cents per gallon, plus a 0.1 cent per gallon Leaking Under Ground Storage Tank (LUST) trust fund tax, for a total excise tax of 24.4 cents per gallon.
Under a special statutory exemption, the Section 4081 excise tax does not apply to diesel fuel or kerosene destined for a nontaxable use. For this purpose, the term “nontaxable use” is defined to include any use which is exempt from the tax imposed by Section 4041(a)(1) other than by reason of a prior imposition of tax.
Section 4041(a)(1) generally imposes a tax on any liquid other than gasoline sold by any person to an owner, lessee, or other operator of a diesel-powered highway vehicle or train, or used by any person as a fuel in such vehicles. Section 4041(g)(3), though, exempts from the Section 4041(a)(1) excise tax “the sale of any liquid for export, or for shipment to a possession of the United States” if the liquid is “in due course so exported or shipped.” Thus, because diesel fuel or kerosene that is sold for export and in due course is so exported is exempt from the Section 4041(a)(1) excise tax, it should also be exempt from the Section 4081 excise tax.
Section 4082(f)(1) provides that exemptions from the Section 4081 excise tax generally do not apply to the LUST tax. But there is an exception to this provision for fuel destined for export.
Accordingly, exported diesel fuel or kerosene is entirely exempt from the Section 4081 excise tax.
Since exported diesel fuel or kerosene is exempt from the Section 4081 excise tax, a taxpayer should never need to pay the tax, right? If only the tax law were so simple! The main obstacle that a person seeking to claim the export exemption will have to overcome is Section 6427(l)(1), which generally provides that if diesel fuel or kerosene on which the Section 4081 excise tax has been imposed is used by any person in a nontaxable use, the IRS shall pay a refund of the tax to the “ultimate purchaser.”
Neither the Code nor the Treasury Regulations define the term “ultimate purchaser” for purposes of Section 6427(l). In Valley Ice & Fuel Co. v. United States, 30 F.3d 635 (5th Cir. 1994), the Court of Appeals for the Fifth Circuit interpreted “ultimate purchaser” for purposes of Section 6427(l) as referring to “the purchaser in the stream of commerce who is intended to use the product himself — as opposed to a middleman who intended to resell the product.” If this definition were to be adopted with respect to the export exemption, no person liable for the Section 4081 excise tax would ever be able to claim the export exemption to reduce its excise tax liability. The only way for that person to recoup the tax would be to pass the cost on downstream, which may not always be economically feasible. The non-US ultimate purchaser might then be able to apply for a refund of the excise tax, if it is aware of the export exemption and can overcome various other hurdles.
The court in Valley Ice considered, but, on the facts of the case, declined to decide whether an exporter of fuel could be the ultimate purchaser for purposes of Section 6427(l) because the taxpayer there was a retailer rather than an exporter. Guidance, however, suggests that the Internal Revenue Service (IRS) believes exporters are ultimate purchasers for purposes of Section 6427(l). IRS Form 8849, Claim for Refund of Excise Taxes, is used to claim a refund of excise tax, including Section 4081 excise tax, paid to the IRS but for which an exemption is available. Schedule 1 to IRS Form 8849 is used to report claims based on nontaxable use of fuels, including undyed diesel fuel and undyed kerosene. The Internal Revenue Manual, which is a comprehensive guide for IRS employees to the procedures and policies governing all aspects of the IRS, notes that “Schedule 1 claims may be made only by the ultimate purchaser of the fuel” but adds that “[i]n the case of export, the exporter is the ultimate purchaser” (emphasis added).
Who is an exporter? Neither the Code nor the Treasury Regulations explicitly address this issue for purposes of Section 6427(l). Treas. Reg. § 48.0-2(a), however, contains definitions generally applicable to manufacturers and retailers excise taxes. And Treas. Reg. § 48.0-2(a)(9) defines the term “exporter” to mean “the person named as shipper or consignor in the export bill of lading.” Given the absence of a contrary definition in the Treasury Regulations, it appears that a person should be regarded as the exporter and hence ultimate purchaser for purposes of Section 6427(l) if it is named as the shipper or consignor in the export bill of lading.
Other requirements for claiming the export exemption
In addition to being the ultimate purchaser, a claimant must satisfy certain other requirements in order to be eligible to claim the export exemption. Chief among these is that the claimant produced or bought the diesel fuel or kerosene and did not sell it in the United States. Thus, a claimant of the export exemption will want to make sure that title to the exported diesel fuel or kerosene passes to foreign purchasers only outside the United States.
The claimant must also keep proof of exportation in its records. Such proof can be any of the following:
- A copy of the export bill of lading issued by the delivering carrier
- A certificate by the agent or representative of the export carrier showing actual exportation of the article
- A certificate of landing signed by a customs officer of the foreign country to which the article is exported
- Where the foreign country has no customs administration, a statement of the foreign consignee showing receipt of the article or
- Where a department or agency of the United States Government is unable to furnish any one of the foregoing four types of proof of exportation, a statement or certification on the department or agency stationery, executed by an authorized officer, that the listed or identified articles have, in fact, been exported.
An exporter will invariably want to claim the export exemption on Schedule C, Claims, to IRS Form 720, Quarterly Federal Excise Tax Return, as an offset to its current Section 4081 excise tax liability. If the exemption is not so claimed, the exporter may be able to obtain a cash refund of the Section 4081 excise tax liability by filing IRS Form 8849, Claim for Refund of Excise Taxes. Otherwise, the claimant may recover the Section 4081 excise tax liability, if at all, only in the form of an income tax credit by filing an IRS Form 4136, Credit for Federal Tax Paid on Fuels.
Exported diesel fuel or kerosene is exempt from the 24.4 cents per gallon excise tax imposed under Section 4081 (inclusive of the 0.1 cent per gallon LUST tax). The person liable for the tax, however, may be unable to claim the export exemption if it is not deemed to be the “ultimate purchaser” or does not satisfy other requirements imposed under the Treasury Regulations. Tax advisors should be consulted to help preserve such a claim, particularly if it is not economically feasible to pass on the cost of the excise tax to the non-US purchasers.
To learn more, please contact the author or these members of our Commodities group:
Robert J. Gruendel
Deanna R. Reitman
Glenn A. Reitman