Issue link: http://read.dmtmag.com/i/496801
18 Oil Prophets Mark S. Morgan PMAA Regulatory Counsel Washington D.C. - Ever since Congress passed the Jobs Creation Act of 2004 (H.R. 4520) a cloud of uncertainty has hung over the tax consequences of selling dyed fuel (diesel fuel or kerosene) to private school bus operators under contract with state and local governments. The Jobs Act prohibited the use of dyed fuel in intercity buses. An intercity bus is defined as being available to the general public and either runs scheduled or non-scheduled routes in buses that seat more than 20 passengers. This change creates a problem for petroleum marketers who sell dyed fuel for use in a privately owned school bus under contract with a state or local government that also qualifies as an intercity bus when used for private, for-hire charter service. Many believed that petroleum marketers could no longer sell dyed fuel to school bus operators who also engage in for-hire charter services. However, this is not the case. Petroleum marketers may sell dyed diesel fuel or kerosene to private school bus operators who also engage in private, for-hire charter services. However, the operator should have a supply of clear, tax included diesel fuel or kerosene on hand as well for use of a school bus in private, for-hire charter service. Typically such uses are associated with gambling trips to casinos or other private leisure activities. A reduced federal tax rate of 17 cpg on clear diesel fuel or clear kerosene applies for such use if the bus has more than 20 seats and is available for hire to the general public (Note: the 1/10th of a cent Leaking Underground Storage Tank (LUST) tax is not refundable.) A claim for 17- cents per gallon refund may be made by the registered ultimate vendor or the ultimate purchaser on IRS Form 8849 if clear fuel is used for a private, for-hire charter use. While IRS regulations holds all parties along the distribution chain liable for using dyed fuel for a taxable use, petroleum marketers are not expected to actively police customer activity looking for evidence of misuse. Instead, it is what you know that could get you in trouble. Under Section 6715 of the IRS Code, liability attaches to any party in the distribution chain who knows or should have reason to know that the dyed fuel in question was used for a taxable use. It does not matter who owns the fuel at the time of the violation or which party bears the risk of loss if price of the fuel increases. Liability attaches to all parties in the distribution chain, unless a valid defense can be raised. The penalty for violation under Section 6715 is $10 per gallon plus the 24.4 cpg federal excise tax. To avoid liability, petroleum marketers must have a defense against the "knows or has reason to know" standard. The best way to establish a defense is to obtain an affidavit from the school bus operator stating clearly that the dyed fuel purchased will not be used when school buses are engaged in private for-hire charter service. The affidavit should also include a statement that the operator maintains a separate supply of clear fuel available for use when operating as a private engaging in private, for- hire charter services. The affidavit should be renewed annually. As both a courtesy and insurance against possible misuse, marketers should explain to operators that switching back and forth between clear and dyed fuel in the tank of a school bus could lead to a violation if any visible evidence of dye remains when being used for private, for hire charter service. IRS agents are well known to test fuel in tanks of school busses parked at casinos and other gambling venues looking for visible evidence of dye. In addition, a statement on the product transfer document, REGULATORY CORNER Avoiding IRS Liability for Sale of Dyed Fuel