State and Federal Excise Tax Refunds on Clear Diesel Used in an Exempt Manner

When we go to fill up at the corner gas station nearby we’re all familiar with the choices of diesel and the various octane ratings of unleaded fuel.  What your corner gas station may not have is a pump for dyed diesel.  That isn’t really a problem for individual consumers, but it might be for business consumers who may qualify for excise tax refunds on clear diesel used in a qualifying manner.

Dyed diesel is called by a number of different names – off-road diesel, untaxed diesel, pink or red diesel – but the only real difference between it and the clear diesel is that dye has been added.  The dye is added to distinguish it from the clear diesel because dyed diesel is taxed at a lower rate by both the state and federal government.

Dyed diesel is illegal for use on roads and highways because it is taxed at a lower rate than clear diesel.  The taxes on clear diesel include both state and federal taxes for the maintenance of the roads and highways.  Because dyed diesel is intended to be used “off-road” the taxes to offset the costs of the wear and tear caused by vehicles operating on the roads and highways are not included in the taxes levied on dyed diesel.

Approved off-road uses include agricultural or farming use, operation of heavy equipment, construction machinery or generators, cooling of space in refrigerated trucks or trailers or operation of other auxiliary truck equipment, and residential heating.  It is important to stress that dyed diesel can only be used in a function whereby the power generated by the dyed diesel does not result in over-the-road transportation.  For example, a traditional dump truck that is plated to operate on roads and highways cannot use dyed diesel even though it could be considered construction equipment.  It would be acceptable to use dyed diesel in a front end loader or one of those giant ultra-class haul trucks used in mining that is not plated for on-road use.

Let’s look at an example of the difference in cost between using clear and dyed diesel in the four most populated U.S. states – California, Florida, New York and Texas:

Footnote: Pricing and tax data gathered from the U.S. Energy Information Administration and the Federation of Tax Administrators

Then it’s time to file for refunds both at the state and federal level!  The federal excise tax refunds are the easiest to pursue as the taxes are administered by the Internal Revenue Service.  To file excise tax refunds at the federal level a taxpayer must file a Form 720 – Schedule C , or a Form 8849 & Form 8849 Schedule 1.

Which form you file will depend on the nature of your business and whether you are reporting excise tax liabilities with offsetting credits (Form 720) or whether you are solely filing an excise tax refund claim (Form 8849).

To file for excise tax refunds as well as other tax refunds, including sales and use tax, at the state level you will have to file multiple refund requests because the taxes in the table above are aggregated and are actually comprised of multiple distinct taxes, some of which are collected and administered by different divisions of the state tax and revenue agencies.

For example, while the California Department of Tax and Fee Administration collects all these taxes, the sales and use tax division would be responsible for reviewing any refund claims related to the difference in sales tax rates between the clear and dyed diesel, and the diesel fuel tax division would be responsible for reviewing any refund claims related to state diesel fuel excise taxes.

Other states have similar arrangements to that of California therefore the refund procedures differ from state-to-state and even within each state from tax-to-tax.  Agile Consulting Group’s sales tax consultants can help navigate this confusion to ensure taxpayers maximize the refunds for which they are eligible.

As with all sales and use tax research, the specifics of each case need to be considered when determining taxability. Additional advice from Agile Consulting Group’s sales tax consultants can be found on our page summarizing the states sales and use tax exemptions.

If you have questions, comments or would like to discuss the specific circumstances you are encountering regarding this particular issue or any other sales and use tax issue, please contact one of Agile Consulting Group’s sales tax consultants at (888) 350-4TAX (4829) or via email at info@salesandusetax.com.

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