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89 6.1 Introduction The vast majority of the financial support for our nationâs transportation system is provided by revenues from motor fuel and other highway use taxes. Ensuring all motor fuel and high- way use tax funds are collected, remitted, and credited to the Federal and State HTF is a priority; however, evasion of motor fuel excise taxes has made this priority difficult to achieve. This report was completed as part of an NCHRP project designed to develop and demonstrate a methodology for iden- tifying and quantifying state-level fuel tax evasion. This report provides background material related to state fuel tax policies and techniques used to evade these taxes in the past. The report analyzes methods used in the past to estimate fuel tax evasion and characterizes the data available for such research. The report focuses on developing reliable estimates for motor fuel tax evasion rates to enable states to identify and measure state fuel tax evasion. The methodologies presented allow individ- ual states to tailor approaches that suit the needs of their states and evaluate potential solutions and enforcement options. 6.2 Motor Fuel Tax Evasion at the Federal and State Level In 1993, the evasion rate for the federal gasoline tax was estimated to be between 3 and 7 percent and the diesel tax evasion rate was estimated at 15 to 25 percent (FHWA, 1992). At the time, this level of evasion translated to roughly $1 bil- lion in annual lost revenue. These estimates largely were based on Congressional subcommittee testimony of state and federal representatives, as well as the testimony of convicted tax evaders. At the state level, estimates of annual motor fuel excise tax evasion have varied significantly, from as low as $600 million to as high as $2 billion (Weimar et al., 2002). Since 1993, revenue for the HTF increased due to changes in legislation relating to enforcement and auditing, primarily directed toward diesel, kerosene and aviation fuels. Simple, unscientific estimates that compare the growth rates of rev- enue indicators (i.e., VMT) with the actual revenue growth suggest that these recent changes in motor tax policies have reduced evasion and enhanced collections (Baluch, 1996). However, the results of post-1993 joint audits performed under the FHWA Joint Federal/State Motor Fuel Tax Com- pliance Project (JFSMFTCP 1999) do not reflect broadâbased motor fuel tax compliance. Historically, reliable estimates for motor fuel tax evasion rates and other highway user taxes have not been achievable. The rise of elaborate schemes to evade motor fuel excise taxes was seeded by the unprecedented increases in state and federal fuel tax rates experienced during the 1980s and early 1990s. Between 1980 and 1994, federal and state fuel tax rates ascended steadily, from 4 and 9.8 cents per gallon to 18.4 and 20.8 cents per gallon, respectively. With these significant motor fuel tax rate increases, evasion of motor fuel taxes became a lucrative venture. In the mid 1980s, large volume schemes to evade fuel taxes, known as daisy chains, were uncovered by the IRS and state agencies. However, tax evasion schemes detected to date have not only included large conspiracies involving organized crime. Fraudulent practices were discovered at many levels and scales throughout the motor fuel supply chain. While large organized crime operations were involved in elab- orately concocted evasion schemes, small retailers and distrib- utors could simply not report all or some of their gallons sold. Even motor fuel consumers had profit opportunities through tax fraud. For example, consumers could easily purchase tax- exempt fuel and use it on-road. Federal and state agencies found themselves hard pressed to keep up with these multilevel and multifaceted enforcement problems. The analysis of state motor fuel tax administrative and enforcement issues conducted for this study identified nine key motor fuel tax evasion methods facing states: false refund or credit, evasion of untaxed dyed fuel, abuse of the IFTA return process, evasion associated with exporting/importing fuel across state lines, illegal importation across international C H A P T E R 6 Conclusions
90 borders, failure to remit, cocktailing and false labeling, abuses due to the presence of Native American reservations, and daisy chains. These evasion techniques are examined in detail in Chapters 2 and 5. 6.3 State Perspective on Motor Fuel Tax Evasion The project team conducted 35 interviews with state and tribal tax administrators, industry representatives, federal agents, the API, the ATA, the FTA, and the Petroleum Marketers Association. The tax administrators interviewed for this study represented 24 states and a diverse set of administrative and enforcement characteristics (e.g., high- and low-tax states, states with international borders, and states with significant or modest enforcement programs). General conclusions derived from these interviews included the following: ⢠A number of states have moved the point of taxation to the rack. Most report an increase in revenue associated with the move. ⢠A number of states reported that attempts to move the point of taxation to the rack have run into industry opposition. ⢠States differ substantially in the volume of refunds, the documentation required, and the amount of auditing performed. ⢠A lack of uniformity between state tax systems creates poten- tial for evasion. Tax rate differentials create the most signif- icant issue, enhancing the potential for import/export fraud. ⢠In general, interviewees indicated there is substantial room for improvement in both the sharing of information across jurisdictions and within states. ⢠Many state representatives interviewed for this study reported that evasion tied to Native American fuel sales was not viewed as a problem because agreements were in place to address the issue. Other states that to date have not reached agreements with Native American Tribes view sales on reservations as a substantial problem. ⢠Most states view IFTA as an effective system, although there are some suggestions for improvement, such as an electronic reporting mandate. ⢠Many states have developed electronic motor fuel tracking systems and most find them to be effective. ⢠Many states follow FTA uniformity guidelines closely while others have a variety of reporting guidelines. ⢠Licensing requirements vary significantly between juris- dictions. ⢠A number of states perform relatively few audits of motor fuel taxpayers. This typically occurs because audit staff are responsible for multiple tax systems and view motor fuels as less important. In contrast, some states report extensive auditing efforts with dedicated motor fuel tax staff. A strong auditing program is viewed as an essential deterrent to motor fuel tax evasion. ⢠Many states have limited experience with prosecution of motor fuel tax evasion cases. A number of states expressed concern over whether prosecutors were knowledgeable about motor fuel tax laws, either because they had no recent experience or because they were more interested in other types of cases. ⢠States typically report high levels of returns to their audit and enforcement activities, generally $10â$15 per dollar spent on enforcement. 6.4 Motor Fuel Tax EOE Estimation Methodology During the past 20 years, states and the federal government have devised a multitude of tools, strategies, and methods for estimating motor fuel tax evasion. Studies have employed a broad spectrum of approaches. Generally, these studies have used one or several of the following methods to estimate evasion: (a) literature review, (b) audit review, (c) analysis of border interdictions, (d) survey of tax administrators, (e) comparison of fuel supply with taxed gallons, and (f) econo- metric analysis. From a conceptual standpoint, the literature review carried out for this study sought to find consensus among evasion studies completed to date to determine the most promising model or accepted practice. No such consensus or preferred approach was found. Rather, methods used in previous studies varied widely from a simple review of previous literature to complex econometric models. In a small number of studies, more than one method was employed and findings were compared to construct ranges of evasion estimates. The most successful approaches were designed with flexi- bility in mind, capturing the unique characteristics of the state being examined (e.g., the variance in fuel tax rates in the state relative to its neighboring states, relative enforcement efforts). It is the uniqueness of these characteristics that poses challenges to the modeler, thus requiring a comprehensive approach that is mindful of the state-by-state variability in tax code, enforcement programs, and geographic location that largely determine levels of evasion. This report provides a methodology flexible enough to estimate the EOE level for each of the aforementioned nine types of evasion using unique state-level data. The methodol- ogy provides a strategy that allows the sum of the individual types of EOE to equal the amount of total EOE. The strategy implies that no one approach can be used to accurately esti- mate overall motor fuel tax EOE in a state. The level and qual- ity of compliance and enforcement differs by state and therefore, the approach to calculating EOE also must differ. The methodology is presented in Chapter 5.
91 6.5 Disseminating the Outcome of the Research Project We would propose a two-step process to disseminate the outcomes of this project. The first step would include devel- oping a website that included the report. The second step would include hosting sessions at the 2009 TRB Meeting and the 2008 FTA Motor Fuel Tax Section Annual Meeting. A website similar to the one prepared for the Highway Eco- nomic Requirements SystemâState Version (HERS-ST) (HERS-ST 2005) could be developed that includes the proj- ect report and decision framework developed in Chapter 5 outlining the steps needed to calculate evasion based on the type and quality of data available for each state. In the second step, sessions could be hosted at the 2009 TRB Meeting and the 2008 Motor Fuel Tax Section Annual Meeting. NCHRP staff or the Battelle team could host these sessions. It should be noted that none of these steps are a part of the NCHRP 19-06 scope; therefore, they are not funded.
