Excise Taxes – What Are You Missing?

Periodically, I refer to certain taxes as poor orphan step children. By that, I mean they are the taxes that aren’t talked about, researched, measured, or evaluated. Our clients ask us to help them reduce their income tax, property tax, and sales tax burden, but few ask us whether there are means to ensure they pay the appropriate amounts of excise tax, no more or no less than what is required.

Anyone who deals with excise taxes knows that they are every bit as complex as their income, sales, and property tax counterparts. They come with differing rates, bases, exemptions, reporting requirements, and administrative procedures. Some industries have them imposed, while others do not. Some purchases may be subject to excise tax, while a great many others may not. These taxes may be imposed at the federal or state level or both. 

Because of their complexity, taxpayers often have a less than perfect understanding of their responsibilities and their opportunities. In this article, we look at the excise tax on fuels and provide some background on the issues your company may wish to consider.

Do you need to register and report?

Seems like an easy question, doesn’t it? For most of us, it makes sense that the owner of a gas station might have to register, but would we think to check our registration requirements if we were a manufacturer of fuel? What about the manufacture of alcohol fuel, biodiesel fuel, or fuels derived from vegetable oils or animal fats? If the sale or manufacture of fuel products is part of your business, be sure to review your reporting requirements. This should occur when alternative fuels are involved as well.

Does the type of fuel matter?

At times, the type of fuel impacts the rate of tax imposed. For example, Minnesota taxes gasoline at $.285 per gallon and E85 at $.2025 per gallon. Illinois taxes gasoline at $.19 per gallon and diesel at $.215 per gallon. Certainly there are similarities within states, but differences abound.

What purchases are exempt?

Businesses may be aware of federal exemptions from fuel tax including fuel used “off highway” and for farming purposes, but these same businesses may not be aware of similar exemptions available at the state level. For example, Wisconsin grants exemption from motor vehicle excise tax for fuel used off road. Typical off-road uses include farming, construction, and logging. Minnesota provides exemptions to ambulance services and providers of transportation services to certain adult, Medicaid, and other community-based day care programs. Numerous other examples exist. Businesses should investigate the jurisdictions in which they operate to see whether exemptions apply to their business.

They should also not assume that “similar” federal exemptions equate to “same” exemptions for state excise tax purposes. Carefully research the details of various exemptions to ensure that you apply them correctly for both federal and state purposes. As with sales tax exemptions, excise tax exemptions will be strictly construed, and “common sense” may not govern all aspects of the exemption.

What can be done if excise tax has been paid in error?

Refund procedures may well be available to recover excise tax paid in error, but they should be reviewed and followed carefully to ensure that the claim is not denied on a procedural matter. Do not assume that the normal statute of limitations which governs income and sales tax will apply in the case of excise tax refunds. The time period for claiming refunds may vary depending on the type of refund sought or the situation in which the refund is sought. Many states’ refund claim periods are considerably shorter than their statute of limitations for income or sales tax purposes. For example, Minnesota refund claims for fuel used in power takeoff units and fuel used off highway must be filed within one year and two months (425 days) of the purchase. In addition, each Minnesota claim may cover only one month. Failure to follow procedure may result in the rejection of the refund claim or in refund delays.

What other considerations might apply when a refund claim is filed?

Businesses seeking refunds of excise tax should also weigh the impact of other taxes on the refund claim. In Wisconsin, fuel on which motor fuel excise tax has been paid is exempt from sales tax. When either the fuel is purchased exempt from excise tax or a refund is sought, the fuel becomes subject to Wisconsin sales and use tax unless some other exemption applies. Typical exemptions that may apply include waste treatment, manufacturing, and agriculture. Wisconsin carefully monitors excise tax refund claims to ensure that proper sales tax is paid and will often contact taxpayers to ensure compliance.

If motor vehicle or other alternative fuels are a significant portion of your business, they can be a source of opportunity or risk. Wipfli can help you identify both the compliance risks and the opportunities available to you.