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.

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