The US fuel excise tax on the sale of gasoline, diesel fuel, and other fuels is a means of federally funding transportation-related projects and programs, including the construction and maintenance of highways, bridges, and other infrastructure.
In addition to funding transportation-related projects and programs, the fuel excise tax encourages fuel conservation and the use of alternative fuels. Set at 18.4 cents per gallon for gasoline and 24.4 cents per gallon for diesel, the tax makes these fuels more expensive incentivizing consumers and businesses to opt for fuel-efficient vehicles and explore alternative fuel sources, such as electric or hybrid vehicles.
Understanding the exemptions and tax credits associated with the fuel excise tax can help uncover cost-saving opportunities and offset the tax’s expense.
Federal Fuel Excise Tax Exemptions
The fuel excise tax has exemptions that apply to specific industries and uses. The two most common are the agricultural and the off-road use exemptions.
The agricultural exemption allows farmers to purchase fuel without paying the fuel excise tax if the fuel is used exclusively for farming purposes. This includes fuel used to power tractors, combines, and other farm equipment. The agricultural exemption is an important benefit as it reduces farmers’ operating costs and keeps food prices affordable.
The off-road use exemption waives the fuel excise tax if the fuel is used exclusively for off-road purposes, like powering construction and landscaping equipment, generators, and other types of off-road machinery. This exemption helps businesses that rely on heavy equipment reduce operating costs and remain competitive in the marketplace.
It's important to note that these exemptions are subject to certain conditions and requirements. For example, to qualify for the agricultural exemption, the fuel must be used exclusively for farming purposes. Similarly, to qualify for the off-road use exemption, the fuel must be used exclusively for off-road purposes.
Federal Alternative Fuel Credits
In addition to the agricultural and off-road use exemptions, the alternative fuel credit supports taxpayers who use certain types of alternative fuels, such as electricity, natural gas, and propane. The credit is designed to encourage the use of alternative fuels, which can help reduce greenhouse gas emissions and improve air quality.
The amount of the alternative fuel credit varies depending on the type of fuel and the amount used. For example, the credit for electricity used in electric vehicles is currently set at $2,500 to $7,500, depending on the size of the vehicle's battery. The credit for natural gas used in a vehicle is currently set at $0.50 per gallon of gasoline equivalent, similarly the credit for propane used in a vehicle is currently set at $0.50 per gallon.
It's important to note that the alternative fuel credit is subject to certain conditions and requirements. As an example, to qualify, the alternative fuel must be used in a vehicle or equipment designed to operate on that fuel. Additionally, the credit is only available for a limited time, and the amount of the credit may be reduced or eliminated over time.
State Fuel Excise Taxes
In addition to the federal fuel excise tax, many states also impose fuel excise taxes. Like the federal tax, these taxes fund transportation-related projects and programs at the state level.
Like the federal fuel excise tax, state fuel excise taxes also have industry and use-specific exemptions. The statute of limitations, tax rates, and available exemptions vary by jurisdiction. Tax rates can vary from zero to as high as $0.51 per gallon and the statute of limitation can vary from six months to three years. The length of the statute of limitations is particularly important to note since it dictates the time period when a company may be subject to audit or may seek a refund of overpaid tax.
Again, the two most common state fuel excise tax exemptions are for agricultural and off-road use. State guidelines for these exemptions align with federal regulations in terms of use cases and taxpayer benefits.
Overall, federal and state fuel excise taxes are critical components to the US economy and infrastructure. While many taxpayers may rely on fuel vendors to appropriately charge tax on transactions, these vendors may not be aware of how the purchaser may ultimately use the fuel. As a result, a review of these taxes could reduce the overall tax burden for many taxpayers who use significant amounts of fuel. It's important to carefully review the requirements and conditions for exemptions and credits, and to consult with a tax professional if you have any questions or concerns.
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