Fuel Taxes

Excise taxes are imposed on all the following fuels.

• Gasoline.
• Gasohol.
• Diesel fuel.
• Kerosene.
• Aviation fuel.
• Special motor fuels (including LPG).
• Compressed natural gas.
• Fuels used in commercial transportation on inland waterways.

Measurement of taxable fuel. Volumes of taxable fuel (gasoline, diesel fuel, and kerosene) can be measured on the basis of actual volumetric gallons or gallons adjusted to 60 degrees Fahrenheit.

Information Returns

Form 720-TO, Terminal Operator Report, and Form 720-CS, Carrier Summary Report, are new information returns used by terminal operators and carriers to report their monthly receipts and disbursements of liquid products. The returns are due the last day of the month following the month in which the transaction occurs.

These returns can be filed on paper forms or electronically. For information on filing electronically, see Publication 3536, Motor Fuel Excise Tax EDI Guide.

Form 720-TO. This information return is used by terminal operators to report receipts and disbursements of all liquid products to and from all approved terminals. Each terminal operator must file a separate form for each approved terminal.

Form 720-CS. This information return must be filed by bulk transport carriers (barges, vessels, and pipelines) who receive liquid product from an approved terminal or deliver liquid product to an approved terminal.

Liquid product. A liquid product is any liquid transported into storage at a terminal or delivered out of a terminal. For a list of products, see the product code table in the Instructions for Forms 720-TO and 720-CS.

Registration Requirements

The following discussion applies to excise tax registration requirements for activities relating to gasoline, diesel fuel, and kerosene. The terms used in this discussion are explained later. See Registration for Certain Activities, earlier, for more information about registration.

Persons that must register. You must be registered if you are any of the following persons.

• A blender.
• An enterer.
• A pipeline operator.
• A position holder.
• A refiner.
• A terminal operator.
• A vessel operator.

In addition, bus and train operators must be registered if they use dyed diesel fuel in their buses or trains and they incur liability for tax at the bus or train rate.

Persons that may register. You may, but are not required to, register if you are any of the following persons.

• A feedstock user.
• A gasohol blender.
• An industrial user.
• A throughputter that is not a position holder.
• An ultimate vendor.
• An ultimate vendor (blocked pump).

Ultimate vendors do not need to be registered to buy or sell diesel fuel or kerosene. However, they must be registered for filing certain claims for the excise tax on these fuels.

Taxable fuel registrant. This is an enterer, an industrial user, a refiner, a terminal operator, or a throughputter who received a Letter of Registration under the excise tax registration provision and whose registration has not been revoked or suspended. The term taxable fuel means gasoline, diesel fuel, and kerosene. The term registrant as used in the discussions of these fuels means a taxable fuel registrant.

Additional information. See the Form 637 instructions for the information you must submit when you apply for registration.

Refunds of Second Tax

If the tax is paid on more than one taxable event for a taxable fuel (gasoline, diesel fuel, and kerosene), the person paying the "second tax" may claim a refund (without interest) of that tax if certain conditions and reporting requirements are met. No credit against any tax is allowed for this tax. For information about taxable events, see the discussions under Gasoline and Diesel Fuel and Kerosene, later.

Conditions to allowance of refund. A claim for refund of the tax is allowed only if all the following conditions are met.

1. A tax on the fuel was paid to the government and not credited or refunded (the "first tax").
2. After the first tax was imposed, another tax was imposed on the same fuel and was paid to the government (the "second tax").
3. The person that paid the second tax filed a timely claim for refund containing the information required (see Refund claim, later).
4. The person that paid the first tax has met the reporting requirements, discussed next.

Reporting requirements. Generally, the person that paid the first tax must file a "First Taxpayer's Report" with its Form 720 for the quarter for which the report relates. A model first taxpayer's report is shown in Appendix C as Model Certificate A. Your report must contain all information needed to complete the model.

By the due date for filing the Form 720, you must send a separate copy of the report to the following address.
Internal Revenue Service
Cincinnati, OH 45999-0555

Write "EXCISE - FIRST TAXPAYER'S REPORT" across the top of that copy.

Optional reporting. A first taxpayer's report is not required for the tax imposed on any of the following taxable events.

• Removal at a terminal rack.
• Nonbulk entries into the United States.
• Removals or sales by blenders.

However, if the person liable for the tax expects that another tax will be imposed on that fuel, that person should (but is not required to) file a first taxpayer's report.

Providing information. The first taxpayer must give a copy of the report to the buyer of the fuel within the bulk transfer/terminal system or to the owner of the fuel immediately before the first tax was imposed, if the first taxpayer is not the owner at that time. If an optional report is filed, a copy should (but is not required to) be given to the buyer or owner.

A person that receives a copy of the first taxpayer's report and later sells the fuel within the bulk transfer/terminal system must give the copy and a "Statement of Subsequent Seller" to the buyer. If the later sale is outside the bulk transfer/terminal system and that person expects that another tax will be imposed, that person should (but is not required to) give the copy and the statement to the buyer. A model statement of subsequent seller is shown in Appendix C as Model Certificate B. The statement must contain all information necessary to complete the model.

If the first taxpayer's report relates to fuel sold to more than one buyer, copies of that report must be made when the fuel is divided. Each buyer must be given a copy of the report.

Refund claim. You must make your claim for refund on Form 8849. Complete Schedule 5 (Form 8849) and attach it to your Form 8849. You must have filed Form 720 and paid the second tax before you file for a refund of that tax. Do not include this claim with a claim under another tax provision. You must not have included the second tax in the price of the fuel and must not have collected it from the purchaser. You must submit the following information with your claim.

• A copy of the first taxpayer's report (discussed earlier).
• A copy of the statement of subsequent seller if the fuel was bought from someone other than the first taxpayer.

Gasoline

The following discussion provides definitions and an explanation of events relating to the excise tax on gasoline.

Definitions

The following terms are used throughout the discussion of gasoline. Some of these terms are also used in the discussions of diesel fuel and kerosene. Other terms are defined in the discussion to which they pertain.

Gasoline. This means finished gasoline and gasoline blendstocks. Finished gasoline means all products (including gasohol) that are commonly or commercially known or sold as gasoline and are suitable for use as a motor fuel. The product must have an octane rating of 75 or more. Gasoline blendstocks are discussed later.

Approved terminal or refinery. This is a terminal operated by a registrant that is a terminal operator or a refinery operated by a registrant that is a refiner.

Aviation gasoline. This means all special grades of gasoline suitable for use in aviation reciprocating engines and covered by ASTM specification D 910 or military specification MIL-G-5572.

Blended taxable fuel. This means any taxable fuel produced outside the bulk transfer/terminal system by mixing taxable fuel on which excise tax has been imposed and any other liquid on which excise tax has not been imposed. This does not include a mixture removed or sold during the calendar quarter if all such mixtures removed or sold by the blender contain less than 400 gallons of a liquid on which the tax has not been imposed. Blended taxable fuel does not include gasohol that receives an excise tax benefit.

Blender. This is the person that produces blended taxable fuel.

Bulk transfer. This is the transfer of fuel by pipeline or vessel.

Bulk transfer/terminal system. This is the fuel distribution system consisting of refineries, pipelines, vessels, and terminals. Fuel in the supply tank of any engine, or in any tank car, railcar, trailer, truck, or other equipment suitable for ground transportation is not in the bulk transfer/terminal system.

Enterer. This is the importer of record for the fuel. However, if the importer of record is acting as an agent, the person for whom the agent is acting is the enterer. If there is no importer of record, the owner at the time of entry into the United States is the enterer.

Entry. Fuel is entered into the United States when it is brought into the United States and applicable customs law requires that it be entered for consumption, use, or warehousing. This does not apply to fuel brought into Puerto Rico (which is part of the U.S. customs territory), but does apply to fuel brought into the United States from Puerto Rico.

Pipeline operator. This is the person that operates a pipeline within the bulk transfer/terminal system.

Position holder. This is the person that holds the inventory position in the fuel in the terminal, as reflected on the records of the terminal operator. You hold the inventory position when you have a contractual agreement with the terminal operator for the use of the storage facilities and terminaling services for the fuel. A terminal operator that owns the fuel in its terminal is a position holder.

Rack. This is a mechanism capable of delivering fuel into a means of transport other than a pipeline or vessel.

Refiner. This is any person that owns, operates, or otherwise controls a refinery.

Refinery. This is a facility used to produce fuel from crude oil, unfinished oils, natural gas liquids, or other hydrocarbons and from which fuel may be removed by pipeline or vessel or at a rack. However, this term does not include a facility where only blended fuel or gasohol, and no other type of fuel, is produced. For this purpose, blended fuel is any mixture that would be blended taxable fuel if produced outside the bulk transfer/terminal system.

Registrant. This is a taxable fuel registrant (see Registration Requirements, earlier).

Removal. This is any physical transfer of fuel. It also means any use of fuel other than as a material in the production of taxable or special fuels. However, fuel is not removed when it evaporates or is otherwise lost or destroyed.

Sale. For fuel not in a terminal, this is the transfer of title to, or substantial incidents of ownership in, fuel to the buyer for money, services, or other property. For fuel in a terminal, this is the transfer of the inventory position if the transferee becomes the position holder for that fuel.

State. This includes any state, any of its political subdivisions, the District of Columbia, and the American Red Cross. Treat an Indian tribal government as a state only if transactions involve the exercise of an essential tribal government function.

Terminal. This is a storage and distribution facility supplied by pipeline or vessel, and from which fuel may be removed at a rack. It does not include a facility at which gasoline blendstocks are used in the manufacture of products other than finished gasoline if no gasoline is removed from the facility. A terminal does not include any facility where finished gasoline, undyed diesel fuel, or undyed kerosene is stored if the facility is operated by a registrant and all such fuel stored at the facility has been previously taxed upon removal from a refinery or terminal.

Terminal operator. This is any person that owns, operates, or otherwise controls a terminal.

Throughputter. This is any person that is a position holder or that owns fuel within the bulk transfer/terminal system (other than in a terminal).

Vessel operator. This is the person that operates a vessel within the bulk transfer/terminal system. However, vessel does not include a deep draft ocean-going vessel.

Taxable Events

The tax on gasoline is 18.4 cents a gallon. The tax on aviation gasoline is 19.4 cents per gallon. Tax is imposed on the removal, entry, or sale of gasoline. Each of these events is discussed later. However, see the special rules that apply to gasoline blendstocks, later. Also, see the discussion under Gasohol, if applicable.

If the tax is paid on the gasoline in more than one event, a refund may be allowed for the "second" tax paid. See Refunds of Second Tax, earlier.

Removal from terminal. All removals of gasoline at a terminal rack are taxable. The position holder for that gasoline is liable for the tax.

Terminal operator's liability. The terminal operator is jointly and severally liable for the tax if the position holder is a person other than the terminal operator and is not a registrant.

However, a terminal operator meeting all the following conditions at the time of the removal will not be liable for the tax.

• The terminal operator is a registrant.
• The terminal operator has an unexpired notification certificate (discussed later) from the position holder.
• The terminal operator has no reason to believe any information on the certificate is false.

Removal from refinery. The removal of gasoline from a refinery is taxable if the removal meets either of the following conditions.

• It is made by bulk transfer and the refiner or the owner of the gasoline immediately before the removal is not a registrant.
• It is made at the refinery rack.

The refiner is liable for the tax.

Exception. The tax does not apply to a removal of gasoline at the refinery rack if all the following requirements are met.

• The gasoline is removed from an approved refinery not served by pipeline (other than for receiving crude oil) or vessel.
• The gasoline is received at a facility operated by a registrant and located within the bulk transfer/terminal system.
• The removal from the refinery is by railcar.
• The same person operates the refinery and the facility at which the gasoline is received.

Entry into the United States. The entry of gasoline into the United States is taxable if the entry meets either of the following conditions.

• It is made by bulk transfer and the enterer is not a registrant.
• It is not made by bulk transfer.

The enterer is liable for the tax.

Removal from a terminal by unregistered position holder. The removal by bulk transfer of gasoline from a terminal is taxable if the position holder for the gasoline is not a registrant. The position holder is liable for the tax. The terminal operator is jointly and severally liable for the tax if the position holder is a person other than the terminal operator. However, see Terminal operator's liability under Removal from terminal, earlier, for an exception.

Bulk transfers not received at approved terminal or refinery. The removal by bulk transfer of gasoline from a terminal or refinery, or the entry of gasoline by bulk transfer into the United States, is taxable if the following conditions apply.

1. No tax was previously imposed (as discussed earlier) on any of the following events.
1. The removal from the refinery.
2. The entry into the United States.
3. The removal from a terminal by an unregistered position holder.
2. Upon removal from the pipeline or vessel, the gasoline is not received at an approved terminal or refinery (or at another pipeline or vessel).

The owner of the gasoline when it is removed from the pipeline or vessel is liable for the tax. However, an owner meeting all the following conditions at the time of the removal will not be liable for the tax.

• The owner is a registrant.
• The owner has an unexpired notification certificate (discussed later) from the operator of the terminal or refinery where the gasoline is received.
• The owner has no reason to believe any information on the certificate is false.

The operator of the facility where the gasoline is received is liable for the tax if the owner meets these conditions. The operator is jointly and severally liable if the owner does not meet these conditions.

Sales to unregistered person. The sale of gasoline located within the bulk transfer/terminal system to a person that is not a registrant is taxable if tax was not previously imposed under any of the events discussed earlier.

The seller is liable for the tax. However, a seller meeting all the following conditions at the time of the sale will not be liable for the tax.

• The seller is a registrant.
• The seller has an unexpired notification certificate (discussed later) from the buyer.
• The seller has no reason to believe any information on the certificate is false.

The buyer of the gasoline is liable for the tax if the seller meets these conditions. The buyer is jointly and severally liable if the seller does not meet these conditions.

Exception. The tax does not apply to a sale if all of the following apply.

• The buyer's principal place of business is not in the United States.
• The sale occurs as the fuel is delivered into a transport vessel with a capacity of at least 20,000 barrels of fuel.
• The seller is a registrant and the exporter of record.
• The fuel was exported.

Removal or sale of blended gasoline. The removal or sale of blended gasoline by the blender is taxable. See Blended taxable fuel under Definitions, earlier.

The blender is liable for the tax. The tax is figured on the number of gallons not previously subject to the tax on gasoline.

Notification certificate. The notification certificate is used to notify a person of the registration status of the registrant. A copy of the registrant's letter of registration cannot be used as a notification certificate. A model notification certificate is shown in Appendix C as Model Certificate C. Your notification certificate must contain all information necessary to complete the model.

The certificate may be included as part of any business records normally used for a sale. A certificate expires on the earlier of the date the registrant provides a new certificate, or the date the recipient of the certificate is notified that the registrant's registration has been revoked or suspended. The registrant must provide a new certificate if any information on a certificate has changed.

Additional persons liable. When the person liable for the tax willfully fails to pay the tax, joint and several liability for the tax is imposed on:

• Any officer, employee, or agent of the person who is under a duty to ensure the payment of the tax and who willfully fails to perform that duty, or
• Anyone who willfully causes the person to fail to pay the tax.

Gasoline Blendstocks

Gasoline includes gasoline blendstocks. The previous discussions apply to these blendstocks. However, if certain conditions are met, the removal, entry, or sale of gasoline blendstocks is not taxable. Generally, this applies if the gasoline blendstock is not used to produce finished gasoline or is received at an approved terminal or refinery.

Blendstocks. The following are gasoline blendstocks.

• Alkylate.
• Butane.
• Butene.
• Catalytically cracked gasoline.
• Coker gasoline.
• Ethyl tertiary butyl ether (ETBE).
• Hexane.
• Hydrocrackate.
• Isomerate.
• Methyl tertiary butyl ether (MTBE).
• Mixed xylene (not including any separated isomer of xylene).
• Natural gasoline.
• Pentane.
• Pentane mixture.
• Polymer gasoline.
• Raffinate.
• Reformate.
• Straight-run gasoline.
• Straight-run naphtha.
• Tertiary amyl methyl ether (TAME).
• Tertiary butyl alcohol (gasoline grade) (TBA).
• Thermally cracked gasoline.
• Toluene.
• Transmix containing gasoline.

However, gasoline blendstocks do not include any product that cannot be used without further processing in the production of finished gasoline.

Not used to produce finished gasoline. Gasoline blendstocks not used to produce finished gasoline are not taxable if the following conditions are met.

Removals and entries not connected to sale. Nonbulk removals and entries are not taxable if the person otherwise liable for the tax (position holder, refiner, or enterer) is a registrant.

Removals and entries connected to sale. Nonbulk removals and entries are not taxable if the person otherwise liable for the tax (position holder, refiner, or enterer) is a registrant, and at the time of the sale, meets the following requirements.

• The person has an unexpired certificate (discussed later) from the buyer.
• The person has no reason to believe any information in the certificate is false.

Sales after removal or entry. The sale of a gasoline blendstock that was not subject to tax on its nonbulk removal or entry, as discussed earlier, is taxable. The seller is liable for the tax. However, the sale is not taxable if, at the time of the sale, the seller meets the following requirements.

• The seller has an unexpired certificate (discussed next) from the buyer.
• The seller has no reason to believe any information in the certificate is false.

Certificate of buyer. The certificate from the buyer certifies the gasoline blendstocks will not be used to produce finished gasoline. The certificate may be included as part of any business records normally used for a sale. A model certificate is shown in Appendix C as Model Certificate D. Your certificate must contain all information necessary to complete the model.

A certificate expires on the earliest of the following dates.

• The date 1 year after the effective date (not earlier than the date signed) of the certificate.
• The date a new certificate is provided to the seller.
• The date the seller is notified the buyer's right to provide a certificate has been withdrawn.

The buyer must provide a new certificate if any information on a certificate has changed.

The IRS may withdraw the buyer's right to provide a certificate if that buyer uses the gasoline blendstocks in the production of finished gasoline or resells the blendstocks without getting a certificate from its buyer.

Received at approved terminal or refinery. The nonbulk removal or entry of gasoline blendstocks received at an approved terminal or refinery is not taxable if the person otherwise liable for the tax (position holder, refiner, or enterer) meets all the following requirements.

• The person is a registrant.
• The person has an unexpired notification certificate (discussed earlier) from the operator of the terminal or refinery where the gasoline blendstocks are received.
• The person has no reason to believe any information on the certificate is false.

Bulk transfers to registered industrial user. The removal of gasoline blendstocks from a pipeline or vessel is not taxable if the blendstocks are received by a registrant that is an industrial user. An industrial user is any person that receives gasoline blendstocks by bulk transfer for its own use in the manufacture of any product other than finished gasoline.

Credits or Refunds

A credit or refund of the gasoline tax (without interest) may be allowable if gasoline is, by any person:

• Exported,
• Used in a boat engaged in commercial fishing,
• Used in military aircraft,
• Used in foreign trade,
• Sold to a state for its exclusive use,
• Sold to a nonprofit educational organization for its exclusive use,
• Sold to the United Nations for its exclusive use, or
• Used or sold in the production of special motor fuels (defined later).

Claims by wholesale distributors. A credit or refund is allowable to a gasoline wholesale distributor who buys gasoline at a price that includes the excise tax and then sells it to the ultimate purchaser (including an exporter) for a purpose listed in the previous list. A wholesale distributor is any person who makes retail sales of gasoline at 10 or more retail motor fuel outlets or sells gasoline to producers, retailers, or users who purchase in bulk quantities and accept delivery into bulk storage tanks. A wholesale distributor is not a producer or importer.

The wholesale distributor must have sold the gasoline at a tax-excluded price and obtained a certificate of ultimate purchaser or proof of exportation.

The wholesale distributor must complete Schedule 4 (Form 8849) and attach it to Form 8849 to make a claim for refund for gasoline sold to an ultimate purchaser for a purpose listed earlier.

By signing the Form 8849, the gasoline wholesale distributor certifies that it:

• Bought the gasoline at a price that included the excise tax,
• Qualifies as a wholesale distributor,
• Sold the fuel at a tax-excluded price, and
• Has obtained the certificate of the ultimate purchaser or proof of export from its buyer.

Claims by persons who paid the tax to the government. A credit or refund is allowable to the person that paid the tax to the government if the gasoline was sold to the user (including an exporter) by either that person or by a retailer for a purpose listed earlier. A credit or refund also is allowable to that person if the gasoline was sold to the user by a wholesale distributor and either of the following is true.

• The distributor bought the gasoline at a price that did not include the tax.
• The sale to the user was charged on an oil company credit card.

By signing the claim, the person that paid the tax certifies that it:

1. Has obtained one of the three items below.
1. Proof of exportation.
2. A certificate of ultimate purchaser.
3. A certificate of ultimate vendor.
2. Has met any of the following conditions.
1. Has neither included the tax in the price of the gasoline nor collected the tax from the buyer.
2. Has repaid, or agreed to repay, the tax to the ultimate vendor of the gasoline.
3. Has gotten the written consent of the ultimate vendor to the allowance of the credit or refund.

Claims by the ultimate purchaser. A credit or refund is allowable to the ultimate purchaser of taxed gasoline used for a nontaxable use. See Publication 378 for more information about these claims.

Gasohol

Generally, the same rules that apply to the imposition of tax on the removal and entry of gasoline (discussed earlier) apply to gasohol.

However, the removal of gasohol from a refinery is taxable if the removal is from an approved refinery by bulk transfer and the registered refiner treats itself as not registered. This is in addition to the taxable events discussed earlier under Removal from
refinery.

Gasohol. Gasohol is a mixture of gasoline and alcohol that satisfies the alcohol-content requirements immediately after the mixture is produced. Alcohol includes ethanol and methanol. Generally, this includes ethanol used to produce ethyl tertiary butyl ether (ETBE) and methanol produced from methane gas formed in waste disposal sites. However, alcohol produced from petroleum, natural gas, coal (including peat), or any derivative or product of these items, and alcohol less than 190 proof do not qualify as alcohol for these rules.

Alcohol-content requirements. To qualify as gasohol, a mixture must contain a specific amount of alcohol by volume, without rounding. Figure the alcohol content on a batch-by-batch basis. There are three types of gasohol.

• 10% gasohol. This is a mixture that contains at least 9.8% alcohol.
• 7.7% gasohol. This is a mixture that contains at least 7.55%, but less than 9.8%, alcohol.
• 5.7% gasohol. This is a mixture that contains at least 5.59%, but less than 7.55%, alcohol.

Any mixture that contains less than 5.59% alcohol is not gasohol.

If the mixture is produced within the bulk transfer/terminal system, such as at a refinery, determine whether the mixture is gasohol when the taxable removal or entry of the mixture occurs.

If the mixture is produced outside the bulk transfer/terminal system, determine whether the mixture is gasohol immediately after the mixture is produced. If you splash blend a batch in an empty tank, figure the volume of alcohol (without adjustment for temperature) by dividing the metered gallons of alcohol by the total metered gallons of alcohol and gasoline as shown on each delivery ticket. However, if you add metered gallons of gasoline and alcohol to a tank already containing more than 0.5% of its capacity in a liquid, include the alcohol and non-alcohol fuel contained in that liquid in figuring the volume of alcohol in that batch.

Example 1. John uses an empty 8,000 gallon tank to blend alcohol and gasoline. His delivery tickets show that he blended Batch 1 using 7,200 metered gallons of gasoline and 800 metered gallons of alcohol. John divides the gallons of alcohol (800) by the total gallons of alcohol and gasoline delivered (8,000). Batch 1 qualifies as 10% gasohol.

Example 2. John blends Batch 2 in an empty tank. According to his delivery tickets, he blended 7,220 gallons of gasoline and 780 gallons of alcohol. Batch 2 contains 9.75% alcohol (780 × 8,000); it qualifies as 7.7% gasohol.

Batches containing at least 9.8% alcohol. If a mixture contains at least 9.8% but less than 10% alcohol, part of the mixture is considered to be 10% gasohol. To figure that part, multiply the number of gallons of alcohol in the mixture by 10. The other part of the mixture is excess liquid that is subject to the rules on failure to blend, discussed later.

Batches containing at least 7.55% alcohol. If a mixture contains at least 7.55% but less than 7.7% alcohol, part of the mixture is considered to be 7.7% gasohol. To figure that part, multiply the number of gallons of alcohol in the mixture by 12.987. The other part of the mixture is excess liquid subject to the rules on failure to blend, discussed later.

Batches containing at least 5.59% alcohol. If a mixture contains at least 5.59% but less than 5.7% alcohol, part of the mixture is considered to be 5.7% gasohol. To figure that part, multiply the number of gallons of alcohol in the mixture by 17.544. The other part of the mixture is excess liquid that is subject to the rules on failure to blend, discussed later.

Gasohol blender. A gasohol blender is any person that regularly produces gasohol outside of the bulk transfer/terminal system for sale or use in its trade or business. A "registered gasohol blender" is a person that has been registered by the IRS as a gasohol blender. See Registration Requirements, earlier.

Tax Rates

The tax rate depends on the type of gasohol. These rates are less than the regular tax rate for gasoline. The reduced rate also depends on whether you are liable for the tax on the removal or entry of gasoline used to make gasohol, or on the removal or entry of gasohol. You may be liable for additional tax if you later separate the gasoline from the gasohol or fail to blend gasoline into gasohol.

Tax on gasoline. The tax on gasoline removed or entered for the production of gasohol depends on the type of gasohol that is to be produced. The rates apply to the tax imposed on the removal at the terminal rack or from the refinery, or on the nonbulk entry into the United States (as discussed under Gasoline, earlier). The rates for gasoline used to produce gasohol containing ethanol are shown on Form 720. The rates for gasoline used to produce gasohol containing methanol are shown in the instructions for Form 720.

Requirements. The reduced rates apply if the person liable for the tax (position holder, refiner, or enterer) is a registrant and:

1. A registered gasohol blender that produces gasohol with the gasoline within 24 hours after removing or entering the gasoline, or
2. That person, at the time that the gasoline is sold in connection with the removal or entry:
1. Has an unexpired certificate from the buyer, and
2. Has no reason to believe any information in the certificate is false.

Certificate. The certificate from the buyer certifies that the gasoline will be used to produce gasohol within 24 hours after purchase. The certificate may be included as part of any business records normally used for a sale. A copy of the registrant's letter of registration cannot be used as a gasohol blender's certificate. A model certificate is shown in Appendix C as Model Certificate E. Your certificate must contain all information necessary to complete the model.

A certificate expires on the earliest of the following dates.

• The date 1 year after the effective date (which may be no earlier than the date signed) of the certificate.
• The date a new certificate is provided to the seller.
• The date the seller is notified the gasohol blender's registration has been revoked or suspended.

The buyer must provide a new certificate if any information on a certificate has changed.

Tax on gasohol. The tax on the removal or entry of gasohol depends on the type of gasohol. The rates for gasohol containing ethanol are shown on Form 720. The rates for gasohol containing methanol are shown in the instructions for Form 720.

Later separation. If a person separates gasoline from gasohol on which a reduced tax rate was imposed, that person is treated as the refiner of the gasoline. Tax is imposed on the removal or sale of the gasoline. This tax rate is the difference between the regular tax rate for gasoline and the tax rate imposed on the prior removal or entry of the gasohol. The person that owns the gasohol when the gasoline is separated is liable for the tax.

Failure to blend. Tax is imposed on the removal, entry, or sale of gasoline on which a reduced rate of tax was imposed if the gasoline was not blended into gasohol, or was blended into gasohol taxable at a higher rate. This tax is the difference between the tax that should have applied and the tax actually imposed. If the gasoline was not sold, the person liable for this tax is the person that was liable for the tax on the entry or removal. If the gasoline was sold, the person that bought the gasoline in connection with the taxable removal or entry is liable for this tax.

Example. John uses an empty 8,000 gallon tank to blend gasoline and alcohol. The delivery tickets show he blended 7,205 metered gallons of gasoline and 795 metered gallons of alcohol. He bought the gasoline at a reduced tax rate of 14.555 cents per gallon. The batch contains 9.9375% alcohol (795 × 8,000). John determines that 7,950 gallons (10 × 795) of the mixture qualifies as 10% gasohol. See Batches containing at least 9.8% alcohol, earlier. The other 50 gallons is excess liquid that he failed to blend into gasohol. He is liable for a tax of 3.845 cents per gallon (18.40 (full rate) - 14.555 (reduced rate)) on this excess liquid.

Credits or Refunds

A credit or refund for part of the gasoline tax may be allowed if gasoline taxed at the full rate is used to produce gasohol for sale or use in a person's trade or business. By signing the claim, the person certifies that it has, for each batch of gasohol, the required information related to the purchase of the gasoline.

Diesel Fuel and Kerosene

Generally, diesel fuel and kerosene are taxed in the same manner as gasoline (discussed earlier). The following discussion provides information about the excise tax on diesel fuel and kerosene.

Definitions

The following terms are used in this discussion of the tax on diesel fuel and kerosene. Other terms used in this discussion are defined under Gasoline.

Diesel fuel. The term diesel fuel means any liquid that, without further processing or blending, is suitable for use as a fuel in a diesel-powered highway vehicle or train. Diesel fuel does not include gasoline, kerosene, excluded liquid, No. 5 and No. 6 fuel oils covered by ASTM specification D 396, or F-76 (Fuel Naval Distillate) covered by military specification MIL-F-16884.

An excluded liquid is either of the following.

1. A liquid that contains less than 4% normal paraffins.
2. A liquid with all the following properties.
1. Distillation range of 125 degrees Fahrenheit or less.
2. Sulfur content of 10 ppm or less.
3. Minimum color of +27 Saybolt.

Kerosene. This means any of the following liquids.

• One of the two grades of kerosene (No. 1-K and No. 2-K) covered by ASTM specification D 3699.
• Aviation-grade kerosene.

However, kerosene does not include excluded liquid, discussed earlier.

Kerosene also includes any liquid that would be described above but for the presence of a dye of the type used to dye kerosene for a nontaxable use.

Aviation-grade kerosene. This is kerosene-type jet fuel covered by ASTM specification D 1655 or military specification MIL-DTL-5624T (Grade JP-5) or MIL-DTL- 83133E (Grade JP-8).

Approved terminal. This is generally a facility approved for registration purposes for the storage of non-tax-paid diesel fuel or kerosene.

Diesel-powered highway vehicle. This is any self-propelled vehicle designed to carry a load over public highways (whether or not also designed to perform other functions) and propelled by a diesel-powered engine. Generally, do not consider as diesel-powered highway vehicles specially designed mobile machinery for nontransportation functions and vehicles specially designed for off-highway transportation. For more information about these vehicles and for information about vehicles not considered highway vehicles, see Publication 378.

Diesel-powered train. This is any diesel-powered equipment or machinery that rides on rails. The term includes a locomotive, work train, switching engine, and track maintenance machine.

Taxable Events

The tax on diesel fuel and kerosene is 24.4 cents a gallon. It is imposed on the removal, entry, or sale of diesel fuel and kerosene. Each of these events is discussed later. The tax does not apply to dyed diesel fuel or dyed kerosene, discussed later.

If the tax is paid on the diesel fuel or kerosene in more than one event, a refund may be allowed for the "second" tax paid. See Refunds of Second Tax, earlier.

Removal from terminal. All removals of undyed diesel fuel or undyed kerosene at a terminal rack are taxable. The position holder for that fuel is liable for the tax.

Terminal operator's liability. The terminal operator is jointly and severally liable for the tax if the terminal operator provides any person with any bill of lading, shipping paper, or similar document indicating that undyed diesel fuel or undyed kerosene is dyed (discussed later).

The terminal operator is jointly and severally liable for the tax if the position holder is a person other than the terminal operator and is not a registrant. However, a terminal operator will not be liable for the tax in this situation if, at the time of the removal, the following conditions are met.

• The terminal operator is a registrant.
• The terminal operator has an unexpired notification certificate (discussed under Gasoline) from the position holder.
• The terminal operator has no reason to believe any information on the certificate is false.

Removal from refinery. The removal of undyed diesel fuel or undyed kerosene from a refinery is taxable if the removal meets either of the following conditions.

• It is made by bulk transfer and the refiner or owner of the fuel immediately before the removal is not a registrant.
• It is made at the refinery rack.

The refiner is liable for the tax.

Exception. The tax does not apply to a removal of undyed diesel fuel or undyed kerosene at the refinery rack if all the following conditions are met.

1. The undyed diesel fuel or undyed kerosene is removed from an approved refinery not served by pipeline (other than for receiving crude oil) or vessel.
2. The undyed diesel fuel or undyed kerosene is received at a facility operated by a registrant and located within the bulk transfer/terminal system.
3. The removal from the refinery is by:
1. Railcar and the same person operates the refinery and the facility at which the undyed diesel fuel or undyed kerosene is received, or
2. For undyed diesel fuel only, a trailer or semi-trailer used exclusively to transport the diesel fuel from a refinery (described in (1)) to a facility (described in (2)) less than 20 miles from the refinery.

Entry into the United States. The entry of undyed diesel fuel or undyed kerosene into the United States is taxable if the entry meets either of the following conditions.

• It is made by bulk transfer and the enterer is not a registrant.
• It is not made by bulk transfer.

The enterer is liable for the tax.

Removal from a terminal by unregistered position holder. The removal by bulk transfer of undyed diesel fuel or undyed kerosene from a terminal is taxable if the position holder for that fuel is not a registrant. The position holder is liable for the tax. The terminal operator is jointly and severally liable for the tax if the position holder is a person other than the terminal operator. However, see Terminal operator's liability under Removal from terminal, earlier, for an exception.

Bulk transfers not received at approved terminal or refinery. The removal by bulk transfer of undyed diesel fuel or undyed kerosene from a terminal or refinery or the entry of undyed diesel fuel or undyed kerosene by bulk transfer into the United States is taxable if the following conditions apply.

1. No tax was previously imposed (as discussed earlier) on any of the following events.
1. The removal from the refinery.
2. The entry into the United States.
3. The removal from a terminal by an unregistered position holder.
2. Upon removal from the pipeline or vessel, the undyed diesel fuel or undyed kerosene is not received at an approved terminal or refinery (or at another pipeline or vessel).

The owner of the undyed diesel fuel or undyed kerosene when it is removed from the pipeline or vessel is liable for the tax. However, an owner meeting all the following conditions at the time of the removal will not be liable for the tax.

• The owner is a registrant.
• The owner has an unexpired notification certificate (discussed under Gasoline) from the operator of the terminal or refinery where the undyed diesel fuel or undyed kerosene is received.
• The owner has no reason to believe any information on the certificate is false.

The operator of the facility where the undyed diesel fuel or undyed kerosene is received is liable for the tax if the owner meets these conditions. The operator is jointly and severally liable if the owner does not meet these conditions.

Sales to unregistered person. The sale of undyed diesel fuel or undyed kerosene located within the bulk transfer/terminal system to a person that is not a registrant is taxable if tax was not previously imposed under any of the events discussed earlier.

The seller is liable for the tax. However, a seller meeting all the following conditions at the time of the sale will not be liable for the tax.

• The seller is a registrant.
• The seller has an unexpired notification certificate (discussed under Gasoline) from the buyer.
• The seller has no reason to believe any information on the certificate is false.

The buyer of the undyed diesel fuel or undyed kerosene is liable for the tax if the seller meets these conditions. The buyer is jointly and severally liable if the seller does not meet these conditions.

Exception. The tax does not apply to a sale if all of the following apply.

• The buyer's principal place of business is not in the United States.
• The sale occurs as the fuel is delivered into a transport vessel with a capacity of at least 20,000 barrels of fuel.
• The seller is a registrant and the exporter of record.
• The fuel was exported.

Removal or sale of blended diesel fuel or kerosene. The removal or sale of blended diesel fuel or blended kerosene by the blender is taxable. See Blended taxable fuel in Definitions under Gasoline, earlier.

The blender is liable for the tax. The tax is figured on the number of gallons not previously subject to the tax.

Additional persons liable. When the person liable for the tax willfully fails to pay the tax, joint and several liability for the tax is imposed on:

• Any officer, employee, or agent of the person who is under a duty to ensure the payment of the tax and who willfully fails to perform that duty, or
• Anyone who willfully causes the person to fail to pay the tax.

Exemptions

The excise tax on diesel fuel or kerosene is not imposed if the requirements related to the following exemptions are met.

• Sale or use in Alaska.
• Aviation-grade kerosene used in an aircraft.
• Kerosene used for feedstock purposes.

See Dyed Diesel Fuel and Dyed Kerosene, discussed later, for information on the exemption for that fuel.

Sale or use in Alaska. The excise tax is not imposed on the removal, entry, or sale of diesel fuel or kerosene in Alaska for ultimate sale or use in an exempt area of Alaska. The removal or entry of any diesel fuel or kerosene is not taxable if all the following requirements are satisfied.

1. The person otherwise liable for the tax (position holder, refiner, or enterer):
1. Is a registrant,
2. Can show satisfactory evidence of the nontaxable nature of the transaction, and
3. Has no reason to believe the evidence is false.
2. In the case of a removal from a terminal, the terminal is an approved terminal.
3. The owner of the fuel immediately after the removal or entry holds the fuel for its own use in a nontaxable use (discussed later) or is a qualified dealer.

A qualified dealer is any person that holds a qualified dealer license from the state of Alaska or has been registered by the IRS as a qualified retailer. Satisfactory evidence may include copies of qualified dealer licenses or exemption certificates obtained for state tax purposes.

Later sales. The excise tax applies to diesel fuel or kerosene sold by a qualified dealer after the removal or entry. The tax is imposed at the time of the sale and the qualified dealer is liable for the tax. However, the sale is not taxable if all the following requirements are met.

• The fuel is sold in an exempt area of Alaska.
• The buyer buys the fuel for its own use in a nontaxable use or is a qualified dealer.
• The seller can show satisfactory evidence of the nontaxable nature of the transaction and has no reason to believe the evidence is false.

Aviation-grade kerosene. The excise tax on kerosene is not imposed on the removal from the terminal or refinery rack or non-bulk entry of aviation-grade kerosene if all the following conditions are met.

1. The person otherwise liable for tax (position holder, refiner, or enterer) is a registrant.
2. In the case of a removal from a terminal, the terminal is an approved terminal.
3. Either:
1. The person otherwise liable for tax delivers the kerosene into the fuel supply tank of an aircraft and this delivery is not in connection with a sale, or
2. The kerosene is sold for use as a fuel in an aircraft, and, at the time of the sale, the person otherwise liable for tax has an unexpired certificate (described later) from the buyer and has no reason to believe any information on the certificate is false.

Certain later sales. The excise tax applies to kerosene sold for use as a fuel in an aircraft (item (3)(b)) if there is a later disqualifying sale. The tax is imposed at the time of the first later disqualifying sale. The seller in that sale is liable for the tax. However, a later sale is not a disqualifying sale if either of the following apply to that sale.

• The seller has, at the time of the later sale, an unexpired certificate from the buyer and has no reason to believe any information on the certificate is false.
• The seller delivers the kerosene into the fuel supply tank of an aircraft.

Certificate. The certificate from the buyer certifies the kerosene will be used by the buyer as a fuel in an aircraft or resold for that use. The certificate may be included as part of any business records normally used for a sale. A model certificate is shown in Appendix C as Model Certificate F. Your certificate must contain all information necessary to complete the model.

A certificate expires on the earliest of the following dates.

• The date 1 year after the effective date (not earlier than the date signed) of the certificate.
• The date the seller is provided a new certificate or notice that the current certificate is invalid.
• The date the seller is notified the buyer's right to provide a certificate has been withdrawn.

The buyer must provide a new certificate if any information on a certificate has changed.

The IRS may withdraw the buyer's right to provide a certificate if the buyer uses the aviation-grade kerosene other than as a fuel in an aircraft or sells the kerosene without first obtaining a certificate from its buyer.

Kerosene used for feedstock purposes. The excise tax on kerosene is not imposed on the removal or entry of kerosene if all the following conditions are met.

1. The person otherwise liable for tax (position holder, refiner, or enterer) is a registrant.
2. In the case of a removal from a terminal, the terminal is an approved terminal.
3. Either:
1. The person otherwise liable for tax uses the kerosene for a feedstock purpose, or
2. The kerosene is sold for use by the buyer for a feedstock purpose and, at the time of the sale, the person otherwise liable for tax has an unexpired certificate (described later) from the buyer and has no reason to believe any information on the certificate is false.

Kerosene is used for a feedstock purpose when it is used for nonfuel purposes in the manufacture or production of any substance other than gasoline, diesel fuel, or special fuels. For example, kerosene is used for a feedstock purpose when it is used as an ingredient in the production of paint, but is not used for a feedstock purpose when it is used to power machinery at a factory where paint is produced. A feedstock user is a person that uses kerosene for a feedstock purpose. A registered feedstock user is a person that has been registered by the IRS as a feedstock user. See Registration Requirements, earlier.

Later sales. The excise tax applies to kerosene sold for use by the buyer for a feedstock purpose (item (3)(b)) if the buyer in that sale later sells the kerosene. The tax is imposed at the time of the later sale and that seller is liable for the tax.

Certificate. The certificate from the buyer certifies the buyer is a registered feedstock user and the kerosene will be used by the buyer for a feedstock purpose. The certificate may be included as part of any business records normally used for a sale. A model certificate is shown in Appendix C as Model Certificate G. Your certificate must contain all information necessary to complete the model.

A certificate expires on the earliest of the following dates.

• The date 1 year after the effective date (not earlier than the date signed) of the certificate.
• The date the seller is provided a new certificate or notice that the current certificate is invalid.
• The date the seller is notified the buyer's registration has been revoked or suspended.

The buyer must provide a new certificate if any information on a certificate has changed.

Credits or Refunds

A credit or refund is allowable to the ultimate purchaser or registered ultimate vendor for the tax on undyed diesel fuel or undyed kerosene used for a nontaxable use. See Publication 378.

Dyed Diesel Fuel and Dyed Kerosene

The excise tax is not imposed on the removal, entry, or sale of diesel fuel or kerosene if all the following tests are met.

• The person otherwise liable for tax (for example, the position holder) is a registrant.
• In the case of a removal from a terminal, the terminal is an approved terminal.
• The diesel fuel or kerosene satisfies the dyeing requirements (described next).

Dyeing requirements. Diesel fuel or kerosene satisfies the dyeing requirements only if it satisfies one of the following requirements.

• It contains the dye Solvent Red 164 (and no other dye) at a concentration spectrally equivalent to at least 3.9 pounds of the solid dye standard Solvent Red 26 per thousand barrels of fuel.
• It contains any dye of a type and in a concentration that has been approved by the Commissioner.

Notice required. A legible and conspicuous notice stating either: DYED DIESEL FUEL, NONTAXABLE USE ONLY, PENALTY FOR TAXABLE USE or DYED KEROSENE, NONTAXABLE USE ONLY, PENALTY FOR TAXABLE USE must be:

1. Provided by the terminal operator to any person that receives dyed diesel fuel or dyed kerosene at a terminal rack of that operator, and
2. Posted by a seller on any retail pump or other delivery facility where it sells dyed diesel fuel or dyed kerosene for use by its buyer.

The notice under item (1) must be provided by the time of the removal and must appear on all shipping papers, bills of lading, and similar documents accompanying the removal of the fuel.

Any seller that fails to post the required notice under item (2) is presumed to know that the fuel will be used for a taxable use (a use other than a nontaxable use listed later). That seller is subject to the penalty described next.

Penalty. A penalty is imposed on a person if any of the following situations apply.

1. Any dyed fuel is sold or held for sale by the person for a use the person knows or has reason to know is not a nontaxable use of the fuel.
2. Any dyed fuel is held for use or used by the person for a use other than a nontaxable use and the person knew, or had reason to know, that the fuel was dyed.
3. The person willfully alters, or attempts to alter, the strength or composition of any dye in dyed fuel.

The penalty is the greater of $1,000 or $10 per gallon of the dyed diesel fuel or dyed kerosene involved. After the first violation, the $1,000 portion of the penalty increases depending on the number of violations.

This penalty is in addition to any tax imposed on the fuel.

If the penalty is imposed, each officer, employee, or agent of a business entity who willfully participated in any act giving rise to the penalty is jointly and severally liable with that entity for the penalty.

If you are liable for the penalty, you may also be liable for the back-up tax, discussed later. However, the penalty applies only to dyed diesel fuel and dyed kerosene, while the back-up tax may apply to other fuels. The penalty may apply if the fuel is held for sale or use for a taxable use while the back-up tax does not apply unless the fuel is delivered into a fuel supply tank.

Exception to penalty. The penalty under item (3) will not apply in any of the following situations.

• Diesel fuel or kerosene meeting the dyeing requirements (described earlier) is blended with any undyed liquid and the resulting product meets the dyeing requirements.
• Diesel fuel or kerosene meeting the dyeing requirements (described earlier) is blended with any other liquid (other than diesel fuel or kerosene) that contains the type and amount of dye required to meet the dyeing requirements.
• The alteration or attempted alteration occurs in an exempt area of Alaska. See Sale or use in Alaska, earlier.
• Diesel fuel or kerosene meeting the dyeing requirements (described earlier) is blended with diesel fuel or kerosene not meeting the dyeing requirements and the blending occurs as part of a nontaxable use (other than export), discussed later.

Back-Up Tax

Tax is imposed on the delivery of any of the following into the fuel supply tank of a diesel-powered highway vehicle, train, or bus.

• Any dyed diesel fuel or dyed kerosene for other than a nontaxable use.
• Any diesel fuel or kerosene on which a credit or refund (for fuel used for a nontaxable purpose) has been allowed.
• Any liquid other than gasoline, diesel fuel, or kerosene.

Generally, this back-up tax is imposed at a rate of 24.4 cents a gallon. However, the rate for fuel for a diesel-powered train is 4.4 cents a gallon. The rate for delivery into the fuel supply tank of certain intercity or local buses is 7.4 cents a gallon.

Liability for tax. Generally, the operator of the vehicle, bus, or train into which the fuel is delivered is liable for the tax. In addition, the seller of the diesel fuel or kerosene is jointly and severally liable for the tax if the seller knows or has reason to know that the fuel will be used for other than a nontaxable use. Generally, a seller of diesel fuel or kerosene is not liable for tax on fuel delivered into the fuel supply tank of a bus or train. However, the person that delivers the fuel into the fuel supply tank of a train, rather than the train operator, is liable for the tax if, at the time of delivery, the deliverer and the train operator are both registered by the IRS as train operators and a written agreement between them requires the deliverer to pay the tax.

Exemptions from the back-up tax. The back-up tax does not apply to a delivery of diesel fuel or kerosene for uses (1) through (8) listed under Nontaxable Uses, next.

In addition, since the back-up tax is imposed only on the delivery into the fuel supply tank of a diesel-powered vehicle, bus, or train, the tax does not apply to diesel fuel or kerosene used as heating oil or in stationary engines.

Nontaxable Uses

The following are nontaxable uses of diesel fuel and kerosene.

1. Use on a farm for farming purposes (discussed later).
2. Exclusive use by a state (defined earlier under Gasoline).
3. Use in a vehicle owned by an aircraft museum (as discussed later under Aviation Fuel).
4. Use in a school bus (discussed later).
5. Use in a qualified local bus (discussed later).
6. Use in a highway vehicle that:
1. Is not registered (and is not required to be registered) for highway use under the laws of any state or foreign country, and
2. Is used in the operator's trade or business or for the production of income.
7. Exclusive use by a nonprofit educational organization.
8. Use in a highway vehicle owned by the United States that is not used on a highway.
9. Exported.
10. Use other than as a fuel in a propulsion engine of a diesel-powered highway vehicle (such as home heating oil).
11. Use as a fuel in a propulsion engine of a diesel-powered train (subject to back-up tax, discussed earlier).
12. Use in an intercity or local bus meeting certain qualifications, discussed later (subject to back-up tax, discussed earlier).

Used on a farm for farming purposes. Diesel fuel or kerosene is used on a farm for farming purposes only if used in carrying on a trade or business of farming, on a farm in the United States, and for farming purposes.

Farm. A farm includes livestock, dairy, fish, poultry, fruit, fur-bearing animals, and truck farms, orchards, plantations, ranches, nurseries, ranges, and feedyards for fattening cattle. It also includes structures such as greenhouses used primarily for raising agricultural or horticultural commodities. A fish farm is an area where fish are grown or raised--not merely caught or harvested.

Farming purposes. Diesel fuel or kerosene is used on a farm for farming purposes if it is bought by the owner, tenant, or operator of the farm and used for any of the following purposes.

1. To cultivate the soil, or to raise or harvest any agricultural or horticultural commodity.
2. To raise, shear, feed, care for, train or manage livestock, bees, poultry, fur-bearing animals, or wildlife.
3. To operate, manage, conserve, improve, or maintain your farm and its tools and equipment.
4. To handle, dry, pack, grade, or store any raw agricultural or horticultural commodity (as provided below).
5. To plant, cultivate, care for, or cut trees or to prepare (other than sawing logs into lumber, chipping, or other milling) trees for market, but only if the planting, etc., is incidental to your farming operations (as provided below).

Diesel fuel or kerosene is treated as used on a farm for farming purposes if it is bought by a person other than the owner, tenant, or operator of the farm and used on the farm for any of the purposes in item (1) or (2).

Item (4) applies only if more than one-half of the commodity so treated during the tax year was produced on the farm. Commodity refers to a single raw product. For example, apples would be one commodity and peaches another. The more-than-one-half test applies separately to each commodity.

Item (5) applies if the operations are minor in nature when compared to the total farming operations.

If undyed diesel fuel or undyed kerosene is used on a farm for farming purposes, the fuel is not considered used for any other nontaxable use.

Not used for farming purposes. Diesel fuel or kerosene is not used for farming purposes if it is used in any of the following ways.

• Off the farm, such as on the highway or in noncommercial aviation, even if the fuel is used in transporting livestock, feed, crops, or equipment.
• For personal use, such as mowing the lawn.
• In processing, packaging, freezing, or canning operations.
• In processing crude gum into gum spirits of turpentine or gum resin or in processing maple sap into maple syrup or maple sugar.

Buses. Diesel fuel or kerosene used in a school bus or in a qualified local bus is used for a nontaxable use and is not subject to excise tax. However, fuel used in an intercity or local bus is subject to a reduced rate of tax.

School bus. A school bus is a bus engaged in the transportation of students and employees of schools. A school is an educational organization with a regular faculty and curriculum and a regularly enrolled body of students who attend the place where the educational activities occur.

Qualified local bus. A qualified local bus is a bus meeting all the following tests.

• It is engaged in furnishing (for compensation) intracity passenger land transportation available to the general public.
• It operates along scheduled, regular routes.
• It has a seating capacity of at least 20 adults (excluding the driver).
• It is under contract with (or receiving more than a nominal subsidy from) any state or local government to furnish that transportation.

Intracity passenger land transportation means land transportation of passengers between points located within the same metropolitan area. It includes transportation along routes that cross state, city, or county boundaries if the routes remain within the metropolitan area.

A bus is under contract with a state or local government only if the contract imposes a bona fide obligation on the bus operator to furnish the transportation. A subsidy is more than nominal if it is reasonably expected to exceed an amount equal to 3 cents multiplied by the number of gallons of fuel used in buses on subsidized routes.

A company that operates its buses along subsidized and unsubsidized intracity routes may consider its buses qualified local buses only when the buses are used on the subsidized intracity routes.

Intercity or local bus. A reduced tax of 7.4 cents a gallon is imposed on dyed fuel delivered into the fuel supply tank of an intercity or local bus. (See Back-Up Tax, earlier.) This is a bus engaged in furnishing (for compensation) passenger land transportation available to the general public. The bus must be engaged in one of the following activities.

• Scheduled transportation along regular routes regardless of the size of the bus.
• Nonscheduled transportation if the seating capacity of the bus is at least 20 adults (not including the driver).

A bus is available to the general public if the bus is available for hire to more than a limited number of persons, groups, or organizations.

Aviation Fuel

Aviation fuel is any liquid (other than gasoline or diesel fuel) that is suitable for use as a fuel in an aircraft.

Taxable Event

Tax of 21.9 cents per gallon is imposed on the sale or use of aviation fuel by its producer or importer. The producer or importer is liable for the tax.

Additional persons liable. When the person liable for the tax willfully fails to pay the tax, joint and several liability for the tax is imposed on:

• Any officer, employee, or agent of the person who is under a duty to ensure the payment of the tax and who willfully fails to perform that duty, or
• Anyone who willfully causes the person to fail to pay the tax.

Producers. Producers include refiners, blenders, and wholesale distributors of aviation fuel and dealers selling aviation fuel exclusively to producers of aviation fuel if these persons have been registered by the IRS. The term also includes the actual producer of aviation fuel. See Registration for Certain Activities, earlier.

Any person buying aviation fuel at a reduced rate is the producer of that fuel.

Wholesale distributors. To qualify as a wholesale distributor, you must hold yourself out to the public as being engaged in the trade or business of either of the following.

1. Selling aviation fuel to producers or retailers or to users who purchase in bulk quantities (25 gallons or more) and accept delivery into bulk storage tanks and one of the following applies.
1. At least 30% of your sales of aviation fuel during the preceding 12-month period are to these buyers, or
2. At least 50% of the volume of aviation fuel is sold to these buyers and at least 500 of your sales during the preceding 12-month period are made to these buyers, or
2. Selling aviation fuel for nontaxable uses (such as use on a farm for farming purposes) and sell at least 70% of your volume of aviation fuel during the preceding 12-month period to these users.

Bulk storage tanks. A bulk storage tank is a container that holds at least 50 gallons and is not the fuel supply tank of any engine mounted on, or attached to, an aircraft.

Refunds of Prior Tax

A registered aviation fuel producer holding aviation fuel on which a prior tax was paid (and not credited or refunded), can get a refund (without interest) of the tax. Generally, this applies when a producer buys taxed fuel from a retailer. No credit against any tax is allowed.

Conditions to allowance of refund. A claim for refund of the tax is allowed only if all the following conditions are met.

1. A tax on the aviation fuel was paid to the government by an importer or producer (the first producer) and the tax has not been credited or refunded.
2. After the tax was imposed, the fuel was acquired by a registered aviation fuel producer (the second producer).
3. The second producer has filed a timely claim for refund that contains the information required (see Refund claim, later).
4. The first producer and any person that owns the fuel after its sale by the first producer and before its purchase by the second producer (a subsequent seller) have met the reporting requirements, discussed next.

Reporting requirements. Generally, the first producer must file a report (the first producer's report). A model first producer's report is shown in Appendix C as Model Certificate H. The report must contain all information needed to complete the model.

Providing information. The first producer must give a copy of the report to the person to whom the first producer sells the aviation fuel.

Each subsequent seller must give to its buyer a statement that provides all the information necessary to complete the "Statement of Subsequent Seller (Aviation Fuel)" shown in Appendix C as Model Certificate I. The statement can be at the bottom or on the back of the copy of the first producer's report (or in an attached document).

If the first producer's report relates to aviation fuel divided among more than one buyer, copies of that report should be made when the fuel is divided and a copy given to each buyer.

Refund claim. You must make your claim for refund on Form 8849. Complete Schedule 6 (Form 8849) and attach it to Form 8849. Do not include this claim with a claim under another tax provision. See the form instructions for how and where to file the claim. You must attach all the following information to Schedule 6.

• Volume and type of aviation fuel.
• Date on which you acquired the aviation fuel included in the claim.
• Amount of tax on the fuel the first producer paid to the government and a statement that you have not included this tax in the sales price of the fuel and have not collected it from any buyer.
• A copy of the first producer's report that relates to the aviation fuel covered by the claim (discussed earlier).
• A copy of any statement of subsequent seller that you received with respect to the aviation fuel.

Aviation Fuel Exemptions

Registered producers may sell aviation fuel tax free or at a tax-reduced rate for sales to the persons or for the nontaxable uses described below, but only if certain prescribed conditions are met. No seller of aviation fuel is eligible to claim a credit or refund for aviation fuel used by the buyer for a nontaxable use.

Sales to other producers. Registered producers may sell aviation fuel tax free to other registered producers of aviation fuel. The buyer must give the seller a written statement containing the buyer's registration number.

Sales for nontaxable uses. A registered producer may sell aviation fuel tax free for any of the following uses.

• Use other than as a fuel in the propulsion engine of an aircraft (such as use as heating oil).
• Use in military aircraft owned by the United States or a foreign country.
• Use in a domestic air carrier engaged in foreign trade or trade between the United States and any of its possessions.
• Use in a foreign air carrier engaged in foreign trade or trade between the United States and any of its possessions, but only if the country in which the foreign carrier is registered allows U.S. carriers reciprocal privileges. For a list of these countries, see Revenue Ruling 74-346 in Cumulative Bulletin 1974-2, Revenue Ruling 75-109 in Cumulative Bulletin 1975-1, and Revenue Rulings 75-398 and 75-526 in Cumulative Bulletin 1975-2.
• Use on a farm for farming purposes, as discussed earlier under Diesel Fuel and Kerosene.
• Use in an aircraft or vehicle owned by an aircraft museum, discussed next.
• Certain helicopter and fixed-wing air ambulance uses, discussed later.
• Exclusive use by a state, as discussed earlier under Gasoline.
• Exclusive use by the United Nations.
• Exclusive use by a nonprofit educational organization.
• Export.

A buyer for these uses gives its supplier a signed exemption certificate stating the buyer's name, address, employer identification number, registration number (if applicable), and intended use. A buyer may give a separate exemption certificate for each purchase or may give one certificate to cover all purchases from a particular seller for up to 1 year.

Aircraft museums. Aviation fuel may be sold tax free for use in an aircraft or vehicle (such as a ground servicing vehicle for aircraft) owned by an aircraft museum and used exclusively for purposes described in item (3) of the following definition.

An aircraft museum is an organization with all the following characteristics.

1. It is exempt from income tax as an organization described in section 501(c)(3) of the Internal Revenue Code.
2. It is operated as a museum under a state (or District of Columbia) charter.
3. It is operated exclusively for acquiring, exhibiting, and caring for aircraft of the type used for combat or transport in World War II.

Certain helicopter uses. Aviation fuel may be sold tax free for use in a helicopter used for one of the following purposes.

1. Transporting individuals, equipment, or supplies in the exploration for, or the development or removal of, hard minerals, oil, or gas.
2. Planting, cultivating, cutting, transporting, or caring for trees (including logging operations).
3. Providing emergency medical transportation.

For items (1) and (2), this applies if the helicopter does not take off from, or land at, a facility eligible for assistance under the Airport and Airway Development Act of 1970, or otherwise use services provided pursuant to section 44509 or 44913(b) or subchapter I of chapter 471 of title 49, United States Code, during such use. For item (1), each flight segment is treated as a separate flight.

Fixed-wing air ambulance uses. Aviation fuel may be sold tax free for use in a fixed-wing aircraft providing emergency medical transportation. The exemption applies if the aircraft is equipped for, and exclusively dedicated on that flight to, acute care emergency medical services.

Sales to commercial airlines. Registered producers may sell aviation fuel at the tax-reduced rate of 4.4 cents a gallon to a registered commercial aircraft operator for use as a fuel in commercial aviation (other than foreign trade). See Registration for Certain Activities, earlier.

Commercial aviation is any use of an aircraft in the business of transporting persons or property by air for pay. However, commercial aviation does not include any of the following uses.

• Any use of an aircraft that has a maximum certificated takeoff weight of 6,000 pounds or less, unless the aircraft is operated on an established line. For more information, see Small aircraft under Special rules on Transportation Taxes, earlier.
• Any use exclusively for the purpose of skydiving.
• Any use of an aircraft owned or leased by a member of an affiliated group and unavailable for hire by nonmembers. For more information, see Aircraft used by affiliated corporations under Special Rules on Transportation Taxes, earlier.

To buy at a tax-reduced rate, the airline gives the seller a signed exemption certificate stating the buyer's name, address, employer identification number, registration number, and intended use of the fuel. An airline may give a separate exemption certificate for each purchase or may give one certificate to cover all purchases from a particular seller for up to 1 year.

Credits or Refunds

A credit or refund is allowable to the ultimate purchaser for taxed aviation fuel used for a nontaxable use. See Publication 378.

Special Motor Fuels

Special motor fuel means any liquid fuel including liquefied petroleum gas, liquefied natural gas, benzol, benzene, and naptha. However, gasoline, diesel fuel, kerosene, gas oil, and fuel oil do not qualify as special motor fuel.

Special motor fuels/alcohol mixture. This is a blend of alcohol with special motor fuels. The blend must be at least 10% alcohol that is 190 proof or more. Figure the proof of any alcohol without regard to any added denaturants.

The alcohol includes methanol or ethanol. This includes methanol produced from methane gas formed in waste disposal sites. But it does not include alcohol produced from petroleum, natural gas, coal (including peat), or any derivative or product of these items.

Treat the separation of special motor fuel from an alcohol mixture on which tax has been imposed at a rate for special motor fuels/alcohol mixture as a sale of special motor fuel. The tax on the sale is imposed on the person who makes the separation. Reduce the tax on special motor fuel by the tax already paid on the alcohol mixture.

Qualified methanol and ethanol fuels. A special rate applies to these fuels. These fuels consist of at least 85% methanol, ethanol, or other alcohol produced from a substance other than petroleum or natural gas.

Partially exempt methanol and ethanol fuels. A special rate applies to these fuels. These fuels consist of at least 85% methanol, ethanol, or other alcohol produced from natural gas.

Motor vehicle. For the purpose of applying the tax on the delivery of special motor fuels, motor vehicles include all types of vehicles, whether or not registered (or required to be registered) for highway use, that have both the following characteristics.

• They are propelled by a motor.
• They are designed for carrying or towing loads from one place to another, regardless of the type of material or load carried or towed.

Motor vehicles do not include any vehicle that moves exclusively on rails, or any of the following items.

Taxable Event

Tax is imposed on the delivery of special motor fuels into the fuel supply tank of the propulsion engine of a motor vehicle or motorboat. However, there is no tax on the delivery if tax was imposed under the bulk sales rule, discussed later, or the delivery is for a nontaxable use, listed later. If the delivery is in connection with a sale, the seller is liable for the tax. If it is not in connection with a sale, the operator of the vehicle or boat is liable for the tax.

Liquefied petroleum gas (LPG). Tax is imposed on the delivery of LPG into the fuel supply tank of certain intercity and local buses and qualified local and school buses and must be reported on Form 720 even though a credit or refund may be allowable for LPG used in those buses.

Bulk sales. Tax is imposed on the sale of special motor fuels that is not in connection with delivery into the fuel supply tank of the propulsion engine of a motor vehicle or motorboat if the buyer furnishes a written statement to the seller stating the entire quantity of the fuel covered by the sale is for other than a nontaxable use, listed later. The seller is liable for this tax.

Tax rate. The special motor fuels tax rate depends on the type of fuel involved. The tax rate for LPG is shown on Form 720 (IRS No. 61). The tax rates for all other special motor fuels are shown in the Form 720 instructions for other fuels (IRS No. 79).

Nontaxable Uses

The following are nontaxable uses of special motor fuels.

• In an off-highway business use (discussed later).
• Use in a boat engaged in commercial fishing.
• Use on a farm for farming purposes, as discussed earlier under Diesel Fuel and Kerosene.
• By a state for its exclusive use, as discussed earlier under Gasoline.
• By nonprofit educational organizations for their exclusive use, as discussed earlier under Communications Tax.
• By the United Nations for its official use.
• Use in a vehicle owned by an aircraft museum as discussed earlier under Aviation Fuel.
• Use in any boat operated by the United States for its exclusive use or any vessel of war of any foreign nation.

Off-highway business use. This is use in a highway vehicle that is not registered (or required to be registered) for highway use under the laws of any state or foreign country and is used in the operator's trade or business or for the production of income. It also includes use in a vehicle owned by the United States that is not used on a highway.

Compressed Natural Gas

Tax applies to compressed natural gas (CNG) under the circumstances described next.

Taxable Event

Tax is imposed on the delivery of CNG into the fuel supply tank of the propulsion engine of a motor vehicle or motorboat. However, there is no tax on the delivery if tax was imposed under the bulk sales rule discussed next, or the delivery is for a nontaxable use, listed later. If the delivery is in connection with a sale, the seller is liable for the tax. If it is not in connection with a sale, the operator of the boat or vehicle is liable for the tax.

Bulk sales. Tax is imposed on the sale of CNG that is not in connection with delivery into the fuel supply tank of the propulsion engine of a motor vehicle or motorboat if the buyer furnishes a written statement to the seller that the entire quantity of the CNG covered by the sale is for use as a fuel in a motor vehicle or motorboat and the seller has given the buyer a written acknowledgement of receipt of the statement. The seller of the CNG is liable for the tax.

Tax rate. The rate is 48.54 cents per thousand cubic feet (determined at standard temperature and pressure).

Motor vehicle. For this purpose, motor vehicle has the same meaning as given under Special Motor Fuels, earlier.

Nontaxable Uses

The following are nontaxable uses of CNG.

• In an off-highway business use, as discussed earlier under Special Motor Fuels.
• Use in a boat engaged in commercial fishing.
• Use in a school bus or qualified local bus, as discussed earlier under Diesel Fuel and Kerosene.
• Use on a farm for farming purposes, as discussed earlier under Diesel Fuel and Kerosene.
• By a state for its exclusive use, as discussed earlier under Gasoline.
• By nonprofit educational organizations for their exclusive use, as discussed earlier under Communications Tax.
• By the United Nations for its official use.
• Use in a vehicle owned by an aircraft museum, as discussed earlier under Aviation Fuel.
• Use in any boat operated by the United States for its exclusive use or any vessel of war of any foreign nation.

There is no tax on a delivery in connection with a sale of CNG only if, by the time of sale, the seller meets both the following conditions.

• Has an unexpired certificate from the buyer.
• Has no reason to believe any information in the certificate is false.

Certificate. The certificate from the buyer certifies the CNG will be used in a nontaxable use (listed earlier). The certificate may be included as part of any business records normally used for a sale. A model certificate is shown in Appendix C as Model Certificate J. Your certificate must contain all information necessary to complete the model.

A certificate expires on the earliest of the following dates.

• The date 1 year after the effective date (which may be no earlier than the date signed) of the certificate.
• The date a new certificate is provided to the seller.
• The date the seller is notified the buyer's right to provide a certificate has been withdrawn.

Fuels Used on Inland Waterways

Tax applies to liquid fuel used in the propulsion system of commercial transportation vessels while traveling on certain inland and intracoastal waterways. The tax generally applies to all types of vessels, including ships, barges, and tugboats.

Inland and intracoastal waterways. Inland and intracoastal waterways on which fuel consumption is subject to tax are specified in section 206 of the Inland Waterways Revenue Act of 1978, as amended. See section 48.4042-1(g) of the regulations for a list of these waterways.

Commercial waterway transportation. Commercial waterway transportation is the use of a vessel on inland or intracoastal waterways for either of the following purposes.

• The use is in the business of transporting property for compensation or hire.
• The use is in transporting property in the business of the owner, lessee, or operator of the vessel, whether or not a fee is charged.

The operation of all vessels meeting either of these requirements is commercial waterway transportation regardless of whether the vessel is actually transporting property on a particular voyage. (However, see Exemptions, later.) The tax is imposed on fuel consumed in vessels while engaged in any of the following activities.

• Moving without cargo.
• Awaiting passage through locks.
• Moving to or from a repair facility.
• Dislodging vessels grounded on a sand bar.
• Fleeting barges into a single tow.
• Maneuvering around loading and unloading docks.

Liquid fuel. Liquid fuel includes diesel fuel, Bunker C residual fuel oil, special motor fuel, and gasoline. The tax is imposed on liquid fuel actually consumed by a vessel's propulsion engine and not on the unconsumed fuel in a vessel's tank.

Dual use of liquid fuels. The tax applies to all taxable liquid used as a fuel in the propulsion of the vessel, regardless of whether the engine (or other propulsion system) is used for another purpose. The tax applies to all liquid fuel consumed by the propulsion engine even if it operates special equipment by means of a power take-off or power transfer. For example, the fuel used in the engine both to operate an alternator, generator, or pumps and to propel the vessel is taxable.

The tax does not apply to fuel consumed in engines not used to propel the vessel.

If you draw liquid fuel from the same tank to operate both a propulsion engine and a nonpropulsion engine, determine the fuel used in the nonpropulsion engine and exclude that fuel from the tax. IRS will accept a reasonable estimate of the fuel based on your operating experience, but you must keep records to support your allocation.

Voyages crossing boundaries of the specified waterways. The tax applies to fuel consumed by a vessel crossing the boundaries of the specified waterways only to the extent of fuel consumed for propulsion while on those waterways. Generally, the operator may figure the fuel so used during a particular voyage by multiplying total fuel consumed in the propulsion engine by a fraction. The numerator of the fraction is the time spent operating on the specified waterways and the denominator is the total time spent on the voyage. This calculation cannot be used where it is found to be unreasonable.

Taxable event. Tax of 24.4 cents a gallon is imposed on liquid fuel used in the propulsion system of a vessel.

The person who operates (or whose employees operate) the vessel in which the fuel is consumed is liable for the tax. The tax is paid with Form 720. No tax deposits are required.

Exemptions. Certain types of commercial waterway transportation are excluded from the tax.

Fishing vessels. Fuel is not taxable when used by a fishing vessel while traveling to a fishing site, while engaged in fishing, or while returning from the fishing site with its catch. A vessel is not transporting property in the business of the owner, lessee, or operator by merely transporting fish or other aquatic animal life caught on the voyage.

However, the tax does apply to fuel used by a commercial vessel along the specified waterways while traveling to pick up aquatic animal life caught by another vessel and while transporting the catch of that other vessel.

Deep-draft ocean-going vessels. Fuel is not taxable when used by a vessel designed primarily for use on the high seas if it has a draft of more than 12 feet on the voyage. For each voyage, figure the draft when the vessel has its greatest load of cargo and fuel. A voyage is a round trip. If a vessel has a draft of more than 12 feet on at least one way of the voyage, the vessel satisfies the 12-foot draft requirement for the entire voyage.

Passenger vessels. Fuel is not taxable when used by vessels primarily for the transportation of persons. The tax does not apply to fuel used in commercial passenger vessels while transporting property in addition to transporting passengers. Nor does it apply to ferryboats carrying passengers and their cars.

Ocean-going barges. Fuel is not taxable when used in tugs to move LASH and SEABEE ocean-going barges released by their ocean-going carriers solely to pick up or deliver international cargoes.

However, it is taxable when any of the following conditions apply.

• One or more of the barges in the tow is not a LASH barge, SEABEE barge, or other ocean-going barge carried aboard an ocean-going vessel.
• One or more of the barges is not on an international voyage.
• Part of the cargo carried is not being transported internationally.

State or local governments. No tax is imposed on the fuel used in a vessel operated by a state or local government in transporting property on official business. The ultimate use of the cargo must be for a function ordinarily carried out by governmental units. An Indian tribal government is treated as a state only if the fuel is used in the exercise of an essential tribal government function.

All operators of vessels used in commercial waterway transportation who acquire liquid fuel must keep adequate records of all fuel used for taxable purposes. Operators who are seeking an exclusion from the tax must keep records that will support any exclusion claimed.

Alcohol Sold as Fuel But Not Used as Fuel

If you sell or use alcohol (either mixed or straight) as a fuel, you may be eligible for an income tax credit. Use Form 6478, Credit for Alcohol Used as Fuel, to figure the credit. For more information about this credit, see Alcohol Fuel Credit in Publication 378.

If the credit was claimed, you are liable for an excise tax if you did any of the following.

• Used the mixture or straight alcohol other than as a fuel.
• Separated the alcohol from a mixture.
• Mixed the straight alcohol.

Report the tax on Form 720. The rate of tax depends on the applicable rate used to figure the credit. No tax deposits are required.

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