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Motor Fuels Tax Legislative Update

August 2003

The Texas Legislature has recently passed new laws that affect motor fuel taxes.

House Bill 2425
Effective September 1, 2003
Motor vehicle air conditioning and heating will no longer be considered power take-off systems. Fuel used to operate motor vehicle air conditioning and heating will not be eligible for a refund.

Under the new law, refund claims for PTO use prior to September 1, 2003, must be postmarked within one year from the date of use. The Comptroller cannot approve tax refunds for claims postmarked more than one year after the date of use.

House Bill 2458
Effective January 1, 2004
The current motor fuel tax law Chapter 153 is replaced by new Chapter 162. Under the new law, state motor fuel taxes will be collected and remitted to the Comptroller based on the net gallons of gasoline and diesel removed from the terminal rack. Also, the person blending or importing motor fuel into the state outside the bulk terminal/transfer system will remit state motor fuel tax to the Comptroller. Only dyed diesel can be removed from a terminal or sold tax-free. This act will also change many of the current motor fuel tax permits, returns and refunds.

New Licenses
All current gasoline distributor, gasoline jobber, diesel fuel supplier and diesel fuel jobber permits will be cancelled effective December 31, 2003. In August, current permit holders will receive details on the new license requirements along with a questionnaire. Permit holders must return the questionnaire to the Comptroller no later than September to receive their new license before January 1, 2004. The following new licenses will replace the current distributor, supplier and jobber permits.

  • A supplier license is required for a taxpayer registered under Section 4101, Internal Revenue Code, who owns motor fuel inventory in a terminal or refinery.

  • A permissive supplier is available, but not required, for someone registered under Section 4101, Internal Revenue Code, who only owns motor fuel inventory in a terminal or refinery located in another state. A permissive supplier collects and remits tax to the Comptroller on motor fuel removed from an out of state terminal or refinery and intended for delivery to Texas.

  • A distributor license is required to purchase motor fuel from a licensed supplier, permissive supplier or another licensed distributor for resale at wholesale. A distributor may also make retail sales.

  • An importer license is required to import motor fuel into Texas outside the bulk terminal/transfer system.

  • An exporter license is required to export motor fuel from this state outside the bulk terminal/transfer system.

  • A blender license is required for anyone who mixes one or more petroleum products outside the bulk terminal/transfer system into a product capable of being used in a motor vehicle's engine.

No additional permit is required if a licensed supplier or permissive supplier also acts as a distributor, importer, exporter, blender or aviation fuel dealer. A distributor permit is also valid for acting as an importer, exporter or blender, while an importer permit also covers acting as an exporter or blender.

A supplier, permissive supplier, distributor, or importer who also operates as a motor fuel transporter must get a separate transporter license.

The new law requires a person who owns, operates or otherwise controls a terminal, and who has a Terminal Control Number issued by the IRS, to obtain a terminal operator license. A terminal receives motor fuel from a pipeline or ship and then transfers it outside the bulk transfer/terminal system by transport vehicle, railroad tank car or other means. The operator must report to the Comptroller the terminal's motor fuel inventory and all motor fuel received and removed. A licensed supplier who also owns or operates a terminal must have a separate terminal operator license.

Effective January 1, 2004, the agricultural bonded user permit will be replaced by a dyed diesel fuel bonded user license. Beginning January 1, agricultural users may only purchase dyed diesel tax-free. See the changes under Refunds and Inventory Tax.

All diesel tax prepaid user permits will be cancelled effective December 31. Permit holders will automatically receive a refund for the unused portion of the permit. Permit holders must apply for either a dyed diesel fuel bonded user license or register for an end user number to be used with a signed statement to buy tax-free dyed diesel. Permit holders will be notified in August of the changes and given the opportunity to obtain a license or registration number before January 1.

This act also requires railroads and marine vessels (including barges) that transport motor fuels outside the bulk terminal/transfer system to register as a motor fuel transporter. Transporters must file quarterly information returns with the Comptroller reporting the total motor fuel transported in Texas. Common and contract carriers who transport motor fuel who are currently registered with the Comptroller as well as newly registered motor fuel transporters will be mailed a motor fuel transporter license by January 1.

The new law made no changes to the aviation fuel dealer or the interstate trucker licenses.

Bonds or other securities filed with the Comptroller by current permit holders will be automatically transferred to the new license. Applicants for new permits must post bond or other securities to receive a license.

Signed Statements for Purchasing Diesel Fuel
Under the new law, agricultural exemption numbers can no longer be used to purchase undyed (clear) diesel tax-free. Beginning January 1, 2004, a signed statement can be used only to purchase dyed diesel.

End user signed statement numbers will continue to use the prefixes DD and AG. DD signed statements are limited to single deliveries of 7,400 gallons and no more than 10,000 gallons of dyed diesel in a calendar month. AG signed statements are limited to single deliveries of 7,400 gallons and no more than 25,000 gallons of dyed diesel in a calendar month. A person with a DD number and an exception letter from the Comptroller for oil and gas production is entitled to purchase single deliveries of 7,400 gallons and no more than 25,000 gallons of dyed diesel in a calendar month.

A taxable sale or removal of dyed diesel fuel cannot be made except when exceeding the above limitations. A purchaser who exceeds the above limitations must obtain a dyed diesel fuel bonded user license.

Only licensed suppliers and distributors can sell tax-free dyed diesel by accepting a signed statement and a DD or AG signed statement number.

It is a third-degree felony to use a signed statement to buy tax-free dyed diesel that is then used to propel a motor vehicle on the highway.


COLLECTION AND REMITTANCE OF TAX
Removal From the Bulk Terminal/Transfer System
Under the new law, the licensed supplier collects tax on all gasoline and undyed (clear) diesel removed from a Texas terminal. A licensed permissive supplier collects tax on gasoline and diesel removed from a terminal located in another state and destined for delivery in Texas. Only a licensed supplier, permissive supplier, distributor, dyed diesel fuel bonded user, aviation fuel dealer or person using a signed statement can remove dyed diesel from a terminal tax-free. Only a licensed supplier, permissive supplier or distributor can sell tax-free dyed diesel to a licensed dyed diesel fuel bonded user, a person using a signed statement, a licensed aviation fuel dealer or another licensed distributor.

There is no tax on gasoline and diesel purchases by the federal government, Texas public school districts, companies providing transportation services to a Texas public school district and non-profit electric and telephone cooperatives organized under the Texas Utilities Code. A licensed distributor who paid tax on gasoline or undyed (clear) diesel and subsequently resells it to one of these exempt entities without collecting the tax can take a credit on their monthly tax return. A licensed distributor does not need to file a separate claim for tax refund, but will receive a refund based on the credits reported on their monthly tax return.

State and Local Government
State and local government agencies can continue to use dyed diesel fuel bonded user licenses to buy tax-free dyed diesel. State and local government agencies that buy tax-free dyed diesel with a signed statement and end user number should only use the fuel in off-highway equipment, and must remit state tax on fuel used in motor vehicles. Taxable uses of dyed diesel are reported on the bonded user quarterly or annual tax return.

Kerosene for Heating, Cooking and Lighting
Under the new law, only dyed kerosene can be bought tax-free for heating, cooking, lighting and similar off-highway uses.

Refund claims for undyed (clear) kerosene used on or after January 1, 2004, must be postmarked by December 31, 2004. The Comptroller cannot approve refund claims postmarked after December 31, 2004. Beginning January 1, 2005, there will be no tax refunds on undyed (clear) kerosene used for off-highway purposes.

Imports
Licensed importers (including licensed suppliers, permissive suppliers and distributors) remit tax to the Comptroller on the net gallons of gasoline and diesel imported into this state outside the bulk terminal/transfer system. An importer who imports dyed diesel for their own use must also hold a bonded user license.

Blended Fuel
Licensed blenders (including licensed suppliers, permissive suppliers, distributors and importers) who blend gasoline or diesel outside the bulk terminal/transfer system remit tax to the Comptroller on the difference between the gallons of blended fuel and gallons of previously taxed gasoline or diesel. Water, ethanol and biodiesel blended with taxable diesel fuel continue to be tax exempt.

Exports
A licensed exporter (including licensed suppliers, permissive suppliers, distributors and importers) can remove gasoline and diesel from a terminal for export to another state only if they hold a valid license in the destination state for the purpose of paying the destination state's tax. Effective January 1, 2006, a licensed supplier must either collect the Texas tax or be licensed to collect the destination state's tax on all gasoline or diesel removed from a terminal for export.

A licensed exporter (including licensed suppliers, permissive suppliers, distributors and importers) can remove gasoline and diesel from a terminal tax-free for export to another country only when the bill of landing shows a foreign destination and the fuel is actually exported.

Back Up Tax
Under the new law, a person who has motor fuel on which the tax has not been paid and then uses or sells the fuel for a taxable purpose must collect the tax at the time of the use or sale. The tax must be remitted to the Comptroller no later than the 25th of the month following the month in which the motor fuel was used or sold.

A person who gets a tax refund on motor fuel but actually uses the fuel for a taxable purpose is also liable for the back up tax. The back up tax must be remitted to the Comptroller no later than the 25th of the month following the month in which the tax refund was issued.

Tax-Free Deliveries of Diesel into Off-Highway Equipment
Licensed suppliers and distributors can make deliveries of tax-free dyed diesel into the fuel supply tanks of railway engines, motorboats, refrigeration units or other stationary equipment. Tax must be collected on undyed (clear) diesel fuel delivered into off-highway equipment. See changes under Refunds.

Racing Gasoline
Under the new law, tax is not imposed on racing gasoline. Racing gasoline contains lead, has an octane rating of 110 or higher, does not have detergent additives and is not suitable for use in a motor vehicle used on the public highways.

Allowance for Administrative Expenses
A licensed distributor or importer can defer paying tax to a licensed or permissive supplier until two days before the supplier must remit the tax to the Comptroller. The deferred tax payment must be made by electronic funds transfer. Suppliers and permissive suppliers must provide at least two days notice to the distributor or importer of the amount of tax that will be drafted from their account.

Distributors and importers who pay tax to the supplier or permissive supplier on time keep 1.75 percent of the total taxes due to cover administrative expenses. A licensed supplier or permissive supplier retains 2 percent of the tax remitted on time to the Comptroller.

A distributor or importer who fails to pay tax to the supplier can have their right to defer tax payments suspended. The supplier must first notify the Comptroller of nonpayment. The right to defer tax payments can be reinstated if the Comptroller notifies the supplier that the distributor or importer is in good stating with the state.

Licensed importers also retain two percent of the tax remitted on time to the Comptroller on time.

Dyed diesel fuel bonded users, interstate truckers, and blender license holders filing tax returns after January 1, 2004, are no longer given an allowance on tax remittances.


REFUNDS
Diesel for PTO and Auxiliary Power Units
Effective January 1, 2004, there will be no tax refunds on diesel fuel for a PTO or auxiliary power unit supplied by the same fuel tank used to propel the vehicle. For such use prior to January 1, 2004, taxpayers still have one year from date of use to file a claim. The Comptroller cannot give tax refunds for claims postmarked more than one year after the date of use.

Under a new definition, a solid waste refuse vehicle means a motor vehicle equipped with a power take-off or auxiliary power unit that provides power to compact the refuse, open the back of the container and eject the compacted refuse. Roll-off trucks, dump trucks and other types of trucks that transport solid waste will no longer qualify as solid waste refuse vehicles for purposes of a motor fuel tax refund.

Refunds on gasoline used for a PTO or auxiliary power units are not affected, other than by the new definition of a solid waste refuse vehicle.

Diesel for Off-Highway Equipment, Stationary Engines and Other Non-Highway Uses
Effective January 1, 2004, there will be no-tax free purchases of undyed (clear) diesel. The only exceptions are purchases by the federal government, a Texas public school district, a company that provides transportation for a Texas public school district, and Texas non-profit electric and telephone cooperatives organized under the Texas Utilities Code.

For use prior to January 1, 2004, taxpayers still have one year from date of use to claim a tax refund on undyed (clear) diesel used in off-highway equipment, stationary engines and for other non-highway purposes. The Comptroller cannot approve tax refunds for claims postmarked more than one year after the date of use.

For such non-highway use from January 1, 2004 through December 31, 2004, refund claims must be postmarked by December 31, 2004. The Comptroller cannot approve tax refunds for claims postmarked after December 31, 2004.

Effective January 1, 2005, there will be no refund of taxes paid on undyed diesel used in off-highway equipment, stationary engines and for other non-highway purposes. The only exceptions are purchases by the federal government, a Texas public school district, a company that provides transportation for a Texas public school district, and Texas non-profit electric and telephone cooperatives organized under the Texas Utilities Code.

Tax refunds on gasoline used in off-highway equipment, stationary engines and other non-highway uses are not affected by the new changes in law.

Reduced Tax Rates for Transit Systems
Beginning January 1, 2004, a supplier or distributor cannot sell gasoline or diesel to a qualified transit company at a reduced tax rate. All qualifying transit companies must pay the full tax when buying gasoline or diesel.

Transit companies that pay the regular tax rate can request a refund for fuel used in qualified vehicles. The refund for gasoline is one cent per gallon and one-half cent per gallon for diesel. Transit companies will have one year from the date of use to file for a refund. To support claims for refunds, transit companies must keep a distribution log showing the gallons of gasoline or diesel removed from their bulk storage.

Tax Due on Inventories
Current distributor, supplier, and agricultural bonded user permit holders must pay tax on the gallons of tax-free gasoline and undyed (clear) diesel fuel they hold in their inventories outside the bulk terminal/transfer system as of the close of business on December  31, 2003. Diesel tax prepaid user permit holders must remit tax on tax-free undyed (clear) diesel in excess of 2,000 gallons in their inventory as of the close of business on December 31, 2003.

Permit holders will be mailed an inventory report in November. This inventory report, with tax payment, must be returned to the Comptroller no later than February 25, 2004. Normal penalties and interest apply to late payments.

Aviation fuel dealers are not required to pay tax on inventories.

Future Legislative Updates will include more information on the new motor fuel tax license, record keeping, tax returns and EDI filing requirements.


96-727
(08/2003)