Fuel Tax Primer
Learn About Fuel Excise Taxes
What are indirect motor fuel excise taxes?
These are taxes that a jurisdiction may require a bulk fuel supplier to collect from their customer when fuel is sold. These indirect taxes are then periodically aggregated by the supplier and remitted with a tax return.
A fuel excise tax is a volumetric tax, based on the volume purchased. For example, excise tax is calculated on cents per gallon, unlike a sales tax, which is a percentage of the price paid. Often, multiple fuel excise taxes are charged on each bulk fuel transaction, including federal, state, county, and municipal level excise taxes, in addition to various environmental and underground storage tank related excise taxes.
Who needs to collect and remit fuel taxes?
Each tax jurisdiction has regulations that specify which participants in the fuel supply chain are responsible for collecting and remitting fuel taxes. In general, the jurisdiction will charge taxes at a single point in the supply chain between the refiner and the ultimate fuel user. Those participants who are “downstream” of the point of taxation are purchasing “after tax” and will embed the taxes that have been paid in the price of the fuel for any subsequent buyers.
States will typically specify the point of taxation to be either:
- when the fuel is sold at a supply terminal (rack),
- when the fuel is first imported into the state, or
- when the final licensed distributor in the supply chain sells the fuel.
Note that fuel suppliers and distributors who operate in multiple states need to pay careful attention to state-specific rules for indirect tax collection, especially if they buy on one state and sell in another.
What jurisdictions require collection of fuel taxes?
The U.S. federal and all state governments impose fuel taxes on bulk fuel sales. In addition, fuel taxes may be charged at the county, municipal, and even “special jurisdiction” levels.
What determines the amount of fuel tax due?
In addition to the volume of fuel purchased and the excise tax rate for the specific type of fuel (gas, diesel, biofuel, natural gas, etc.), there are many additional determining factors. These other factors will depend on the specific tax jurisdiction, and may include: origin location, destination location, title transfer location relative to the terminal rack (above/at/below), seller licenses, buyer licenses, buyer exemptions, product blend percentage, and transportation mode, among others.
Fuel suppliers and distributors who are responsible for determining, calculating, and filing for indirect fuel taxes are constantly challenged to keep up with this complexity. Vigilance and understanding of specific jurisdiction tax rules is necessary to ensure full tax compliance.
Avalara AvaTax Excise understands this complexity and works with back-office systems to automatically determine and calculate indirect fuel taxes.