Identifying and Quantifying Rates of State Motor Fuel Tax Evasion (2008) / Chapter Skim
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Pages 14-50
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14 2.1 Introduction Over a 10-month period from October 2004 through August 2005, the project team conducted 35 interviews with state and tribal tax administrators, industry representatives, federal agents, the American Petroleum Institute (API) , the American Trucking Association (ATA)
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weighted based on taxed volumes. Diesel taxes have had equivalent rate increases.
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2.2.1 Use of Dyed Fuel On-Road 2.2.1.1 Description Business operations using off-road vehicles (e.g., farming, logging and construction) purchase tax-free dyed diesel.
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miles driven in the high-tax state. Thus, they avoid having to pay extra taxes to the high-tax state on the fuel they bought in the low-tax state.
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• Fuel used in marine vehicles, • Fuel used in home or business heating, • Fuel used in certain intercity buses, and • Fuel stolen, accidentally destroyed, or contaminated. A buyer or seller may falsely claim on their refund or credit application that fuel was sold or bought for one of the above purposes, thus evading the tax owed.
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perpetrators have dumped their fuel within a state and refilled the carrier tank with water so that a weigh station would assume that there is fuel inside the tank (Turner, 2004)
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2.2.6.4 Evasion Curtailing Methods A system of total fuel accountability can disable perpetrators from selling illegally imported fuel if distributors or retailers are required to report the source of those volumes. Information exchange among foreign jurisdictions that require detailed reporting from their refineries and terminals also may be helpful in identifying any leakages.
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would violate the sovereignty of these nations. In many states, Native American retail outlets may purchase tax-free fuel or obtain a refund for fuel distributed to reservation residents.
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reasonableness, on all fuel delivered from local refineries and terminals. Some states have instituted policies where refunds are capped based on the number of enrolled members of a tribe and an assumption regarding a reasonable average number of gallons consumed per person for the time period each refund claim covers.
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manned at certain times of the week. A perpetrator can pull up to the loading rack, order a load of dyed diesel, tamper with fuel dye injection equipment, and leave with undyed and untaxed fuel.
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caught, after being flagged for investigation when an inspector saw him purchasing tax-free fuel with cash, dumping a carton of green dye into the fuel tank on route between pick up and delivery. Ontario was able to test the fuel to ensure that it had originally been untaxed dyed diesel because of an invisible chemical marker that is injected into the fuel along with the dye.
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approximately $25,325. The California charges were from a daisy chain scheme that operated between 1992 and 1995.
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fuel. While some individuals may successfully evade the fuel tax, most fuel tax evasion occurs after the tax is collected from the citizen and before the tax is remitted to the state.
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must be a mechanism for the taxpayer to get a refund. In some cases, the government will allow the seller to claim that a sale was made to an exempt user or for an exempt use and file directly for the refund.
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It is apparent that not all distributor taxes are the same and that there is a mix of agents and taxpayers. While the distinction is not universal, an agent for the state does not bear ultimate liability for the tax and is often credited with a collection allowance or other compensation for serving as an agent.
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may be delayed for almost two months, allowing for interestfree use of the funds, known as the float. Distributors view loss of the float as a cost increase to them.
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and an explanation of the operation for which the fuel was used. There are a number of companies/individuals who can claim refunds.
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ally reported higher tax collections and other improvements in the administration of the fuel tax, many states have other points of collection. The federalism system in this country allows each state to develop their unique system for road fund revenue collection.
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Tax rate differentials make payment of the tax in a low-tax state and sale of the fuel in a high-tax state very attractive. While states can take actions to deter such activity, a large tax differential may make it very profitable.
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actions to support each other when it comes to tracking fuel, detecting and prosecuting tax evasion, or other actions. Similarly, coordination between states and the federal government has been raised as a potential issue in tracking fuel, detecting evasion, and collecting taxes.
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34 State Tribal Exemption from Fuel Tax Tribal Agreement with State for Fuel Taxation Mechanism in Place to Ensure Tribal Sales to Tribal Members Not Subject to Tax Alabam a No No Agreem ent No Alaska No Not Reported No Arizona Yes Agreem ent/Negotiation Yes Arkansas No No Agreem ent No California No No Agreem ent No Colorado Yes No Agreem ent No Connecticut No Negotiation No Delaware No No Agreem ent No Florida No No Agreem ent No Georgia No No No Hawaii Not Reported Not Reported Not Reported Idaho No Litigation No Illinois No No Agreem ent No Indiana No Tribal Lands No Tribal Lands No Iowa Yes No Agreem ent Yes Kansas No Litigation/No Agreem ent Not subject to taxation Kentucky No No Tribal Lands Not applicable Louisiana For one tribe Agreem ent No Maine No No Agreem ent No Maryland No No Agreem ent No for gasoline. Yes for diesel.
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or have agreements with the tribes in their jurisdictions. For estimating evasion, sales on Native American lands are relatively visible since it is more a question of jurisdiction than of purposeful evasion.
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A tracking system can allow a state to determine whether fuel movements are appropriately reported with taxes paid. However, a tracking system cannot cause payment to be made from an organization that has declared bankruptcy or is otherwise insolvent.
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of fuel tax evasion, but, as noted in the interviews, this may not be sufficient to track all potential evasion. In particular, fuel that originates outside the reporting system can evade taxes.
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based on the particular activity for a business. For example, Virginia has 17 licenses posted on its web site.
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viding some outreach seems to be the most common method. The expectation is that honest taxpayers themselves feel cheated by those avoiding taxes and value the opportunity to turn in cheats.
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sure that all fuel can be tracked and that appropriate taxes were paid. These types of audits are more focused on detection of daisy chains, inappropriate sales of tax-free fuel, or attempts to avoid taxes by claiming exports for fuel that does not leave the state or related schemes.
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41 State Tax Paid in First Instance By Tax Computed on Basis of Tax Collected and Administered by Alabam a Distributors, refiners, retail dealers, users Quantities sold Departm ent of Revenue Alaska Dealers and users Quantities sold, transferred or used Depart me nt of Revenue Arizona Distributors Quantities sold Depart me nt of Transportation, Motor Vehicle Division Arkansas Wholesale distributors (first receivers) Inshipm ents or receipts Depart me nt of Finance and Adm inistration, Motor Fuel Tax Section California Distributors, ma nufacturers, and importers Quantities distributed State Board of Equalization Assesses, and State Controller Collects Accounts Receivable Colorado Distributors and refiners Gross gallonage Depart me nt of Revenue, Motor Carrier Services Division Connecticut Licensed distributors Quantities sold and used Departm ent of Revenue Services Delaware Wholesale distributors Quantities sold and used Depart me nt of Transportation, Motor Fuel Tax Adm inistration Dist.
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penalty in this sense is a combination of the probability of being caught, the probability of being convicted if caught, and the magnitude of the punishment. Increases in either the probabilities of apprehension or conviction or increases in the magnitude of the punishment reduce the incentive to commit the crime.
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ishment. Some of the southern region's legislatures are looking carefully at motor fuels tax evasion and reinterpreting failure to pay as a felonious crime.
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44 State Civil Penalties Criminal Penalties Alaska 5% per month for late payment to a maximum of 25%. Negligence is 30%.
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state has never prosecuted a case. This seems to be due more to the difficulty of prosecution than to the absence of fraud.
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2.7.1 Motor Carrier Enforcement The enforcement of motor carrier regulations requires the cooperation of state DOTs, which build, operate, and construct the highway infrastructure, and the law enforcement agencies responsible for commercial vehicles within that state. Typically, these enforcement agencies are the State Police or equivalent.
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(Special Report 267, 2002)
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applicable, driver's record of duty status as required, hours of service, seat belt, vehicle inspection report, and HM requirements, as applicable. LEVEL IV: Special Inspections.
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dyed fuel inspections data in the United States. From these data, it appears the violation rates for dyed fuel inspections are similar to the overweight citations.
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Opportunity for other future enforcement techniques (i.e., cargo tracking of fuel to destination) is certainly a possibility.
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