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.

Your records should include all of the following information.

• The acquisition date and quantity of fuel delivered into storage tanks or the tanks on your vessel.
• The identification number or name of each vessel using the fuel.
• The departure time, departure point, route traveled, destination, and arrival time for each vessel.

If you claim an exemption from the tax, include in your records the following additional information as it pertains to you.

• The draft of the vessel on each voyage.
• The type of vessel in which you used the fuel.
• The ultimate use of the cargo (for vessels operated by state or local governments).

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.

Manufacturers Taxes

The following discussion of manufacturers taxes applies to the tax on the following items.

• Sport fishing equipment.
• Bows.
• Arrow components.
• Coal.
• Tires.
• Gas guzzler automobiles.
• Vaccines.

Manufacturer.   The term manufacturer includes a producer or importer. A manufacturer is any person who produces a taxable article from new or raw material, or from scrap, salvage, or junk material, by processing or changing the form of an article or by combining or assembling two or more articles. If you furnish the materials and keep title to those materials and to the finished article, you are considered the manufacturer even though another person actually manufactures the taxable article.

A manufacturer who sells a taxable article in knockdown condition is liable for the tax. The person who buys these component parts and assembles a taxable article may also be liable for tax as a further manufacturer depending on the labor, material, and overhead required to assemble the completed article if the article is assembled for business use.

Importer.   An importer is a person who brings a taxable article into the United States, or withdraws a taxable article from a customs bonded warehouse for sale or use in the United States.

Sale.   A sale is the transfer of the title to, or the substantial incidents of ownership in, an article to a buyer for consideration which may consist of money, services, or other things.

Use considered sale.   A manufacturer who uses a taxable article is liable for the tax in the same manner as if it were sold.

Lease considered sale.   The lease of an article (including any renewal or extension of the lease) by the manufacturer is generally considered a taxable sale. However, for the gas guzzler tax, only the first lease (excluding any renewal or extension) of the automobile by the manufacturer is considered a sale.

Manufacturers taxes based on sales price.   The manufacturers taxes imposed on the sale of sport fishing equipment, electric outboard motors, sonar devices, bows, and arrow components are based on the sale price of the article. The taxes imposed on coal are based either on the sale price or the weight.

The price for which an article is sold includes the total consideration paid for the article, whether that consideration is in the form of money, services, or other things. However, you include certain charges made when a taxable article is sold and you exclude others. To figure the price on which you base the tax, use the following rules.

1. Include both the following charges in the price.
   1. Any charge for coverings or containers (regardless of their nature).
   2. Any charge incident to placing the article in a condition packed ready for shipment.
2. Exclude all the following amounts from the price.
   1. The manufacturers excise tax, whether or not it is stated as a separate charge.
   2. The transportation costs pursuant to the sale. (The cost of transportation of goods to a warehouse before their bona fide sale is not excludable.)
   3. Delivery, insurance, installation, retail dealer preparation costs, and other charges you incur in placing the article in the hands of the purchaser under a bona fide sale.
   4. Discounts, rebates, and similar allowances actually granted to the purchaser.
   5. Local advertising charges. A charge made separately when the article is sold and that qualifies as a charge for local advertising may, within certain limits, be excluded from the sale price.
   6. Charges for warranty paid at the purchaser's option. However, a charge for a warranty of an article that the manufacturer requires the purchaser to pay to obtain the article is included in the sale price on which the tax is figured.

Bonus goods.   Allocate the sale price if you give free nontaxable goods with the purchase of taxable merchandise. Figure the tax only on the sale price attributable to the taxable articles.

Example.   A manufacturer sells a quantity of taxable articles and gives the purchaser certain nontaxable articles as a bonus. The sale price of the shipment is $1,500. The normal sale price is $2,000: $1,500 for the taxable articles and $500 for the nontaxable articles. Since the taxable items represent 75% of the normal sale price, the tax is based on 75% of the actual sale price, or $1,125 (75% of $1,500). The remaining $375 is allocated to the nontaxable articles.

Taxable Event

Tax attaches when the title to the article sold passes from the manufacturer to the buyer. When the title passes depends on the intention of the parties as gathered from the contract of sale. In the absence of expressed intention, the legal rules of presumption followed in the jurisdiction where the sale occurs determine when title passes.

If the taxable article is used by the manufacturer, the tax attaches at the time use begins.

The manufacturer is liable for the tax.

Partial payments.   The tax applies to each partial payment received when taxable articles are:

• Leased,
• Sold conditionally,
• Sold on installment with chattel mortgage, or
• Sold on installment with title to pass in the future.

To figure the tax, multiply the partial payment by the tax rate in effect at the time of the payment.

Exemptions

The following sales are exempt from the manufacturers tax.

• Sale of an article to a state or local government for the exclusive use of the state or local government. (This exemption does not apply to the taxes on coal, gas guzzlers, and vaccines.) State is defined under Gasoline.
• Sale of an article to a nonprofit educational organization for its exclusive use. (This exemption does not apply to the taxes on coal, gas guzzlers, and vaccines.) Nonprofit educational organization is defined under Communications Tax.
• Sale of an article for use by the purchaser as supplies for vessels. (This exemption does not apply to the taxes on coal and vaccines.) Supplies for vessels means ships' stores, sea stores, or legitimate equipment on vessels of war of the United States or any foreign nation, vessels employed in the fisheries or whaling business, or vessels actually engaged in foreign trade.
• Sale of an article for use by the purchaser for further manufacture, or for resale by the purchaser to a second purchaser for use by the second purchaser for further manufacture. (This exemption does not apply to the tax on coal.) Use for further manufacture means use in the manufacture or production of an article subject to the manufacturers excise taxes. If you buy articles tax free and resell or use them other than in the manufacture of another article, you are liable for the tax on their resale or use just as if you had manufactured and sold them.
• Sale of an article for export or for resale by the purchaser to a second purchaser for export. The article may be exported to a foreign country or to a possession of the United States. (A vaccine shipped to a possession of the United States is not considered to be exported.) If an article is sold tax free for export and the manufacturer does not receive proof of export, described later, the manufacturer is liable for the tax.
• Sales of articles of native Indian handicraft, such as bows and arrow components, manufactured by Indians on reservations, in Indian schools, or under U.S. jurisdiction in Alaska.

Requirements for Exempt Sales

The following requirements must be met for a sale to be exempt from the manufacturers tax.

Registration requirements.   The manufacturer, first purchaser, and second purchaser in the case of resales must be registered. See the Form 637 instructions for more information.

Exceptions to registration requirements.   Registration is not required for any of the following.

• State or local governments.
• Foreign purchasers of articles sold or resold for export.
• The United States.
• Parties to a sale of supplies for vessels.

Certification requirement.   If the purchaser is required to be registered, the purchaser must give the manufacturer its registration number and certify the exempt purpose for which the article will be used. The information must be in writing and may be noted on the purchase order or other document furnished by the purchaser to the seller in connection with the sale.

For a sale to a state or local government, an exemption certificate must be signed by an officer or employee authorized by the state or local government. See section 48.4221-5(c) of the regulations for the certificate requirements.

For sales for use as supplies for vessels, if the manufacturer and purchaser are not registered, the owner or agent of the vessel must provide an exemption certificate to the manufacturer before or at the time of sale. See section 48.4221-4(d) of the regulations for the certificate requirements.

Proof of export requirement.   Within 6 months of the date of sale or shipment by the manufacturer, whichever is earlier, the manufacturer must receive proof of exportation. See section 48.4221-3(d) of the regulations for evidence that qualifies as proof of exportation.

Proof of resale for further manufacture requirement.   Within 6 months of the date of sale or shipment by the manufacturer, whichever is earlier, the manufacturer must receive proof that the article has been resold for use in further manufacture. See section 48.4221-2(c) of the regulations for evidence that qualifies as proof of resale.

Information to be furnished to purchaser.   The manufacturer must indicate to the purchaser that the articles normally would be subject to tax and are being sold tax free for an exempt purpose because the purchaser has provided the required certificate.

Previous | First | Next

Publication Index | 2002 Tax Help Archives | Tax Help Archives | Home