Transportation Equity Act:
A Legacy for Users
SAFETEA-LU
Section 11144 - PTO Report
SB/SE Research – Philadelphia
Project ID – PHL0019
SB/SE Research Executive Summary ... i
Introduction ... 1
The Research Problem and Its Importance ... 1
Project Background and Objectives ... 3
Methodology ... 4
Research Approach ... 4
Limitations ... 5
Findings ... 5
SAFETEA-LU SECTION 11144 - (a) (1) (A) – PTO Fuel Usage ... 5
SAFETEA-LU SECTION 11144 - (a) (1) (B) – PTO Exemption ... 6
SAFETEA-LU SECTION 11144 - (a) (1) (B) (i) – Exemption for Mobile Machinery ... 7
SAFETEA-LU SECTION 11144 - (a) (1) (B) (ii) – Exemption for Single Motor Vehicles ... 8
SAFETEA-LU SECTION 11144 - (a) (2) (A) – Fuel Use for Dual Motor Vehicles ... 9
SAFETEA-LU SECTION 11144 - (a) (2) (B) – Tax Issues for Dual Motor Vehicles ... 9
Summary ... 10
Signature Page/Approvals ... 11
Appendix
Appendix A SAFETEA Public Law 109--59 ... 13Appendix B Research Report Definitions ... 15
Appendix C Federal Register Notice/Public Comments ... 16
Appendix D PTO Exemption Rate Methodology - Process Steps ... 26
Appendix E Single Unit vehicle PTO Fuel Use ... 28
Appendix F Tractor Trailer vehicle PTO Fuel Use ... 29
Appendix G PTO Implementation Options ... 30
Appendix H PTO Funding Options ... 35
Appendix I Information to be submitted by Ultimate Vendors ... 37
Tables
Table 1 PTO Fuel Consumption ... 6Table 2 Tax Paid on PTO Fuel ... 6
Table 3 Proposed Implementation Options for a PTO Excise Tax Credit ... 8
Table 4 Proposed Funding Options for a PTO Excise Tax Credit ... 9
SB/SE Research
Executive Summary
Power-Take-Off (PTO)
Exemption Options
May Tax IRS Compliance
Resources
Background
For a number of years, industries and their affiliate trade organizations have been advocating excise tax relief for registered highway vehicles that operate auxiliary equipment via “power-take-off" (PTO). Federal excise tax laws and regulations have prohibited taxpayers from taking a credit or claiming a refund for any fuel used in the propulsion motor of a registered highway vehicle even though that motor also operates special equipment by PTO1 or power transfer. Taxpayers have expressed concerns over this rule as well as the current definition of Mobile Machinery as defined in Internal Revenue Code Section (IRC) section 4053(8).
In 2005, Congress enacted the Safe, Accountable, Flexible, Efficient, Transportation Equity Act - A Legacy For Users (SAFETEA-LU). Section 11144 of the SAFETEA-LU Act requires the Secretary of the Treasury to conduct a study on the use by trucks of highway motor fuel that is not used for the purpose of propulsion of the vehicle. The Secretary tasked the Internal Revenue Service (IRS) with completing this study.2
The sections of the SAFETEA-LU Act, their Research Objectives and Findings appear in the table below. This is the third and final report required by the SAFETEA-LU Act. Section 11144(a)(3) of the Act is covered in a separate IRS Research Report.
The scope of this report addresses all PTO activity, which includes taxed fuel consumed for the use of loading and unloading equipment, towing winches, and certain other equipment. This includes vehicles using PTO for carrying equipment related to the transportation function of the vehicle.
Section 11144(a)(1)/(2)
Objectives
Findings
(a)(1)(A):
For vehicles carrying equipment that is unrelated to the
transportation function of the vehicle, by type of vehicle, what is the annual average amount of tax-paid fuel consumed per vehicle used by the propulsion engine to provide power to the equipment attached to the highway vehicle?
PTO Fuel Usage
- Estimate the amount of taxed fuel consumed due to PTO usage by vehicle type.
Our research indicates that there are approximately 2 million single unit and tractor trailer PTO vehicles. The 2 million PTO vehicles consume approximately 6 billion gallons of fuel per year. The portion of the fuel that is consumed by the propulsion engine to power PTO equipment is approximately 18.7% or 1.1 billion gallons. The tax paid on the 1.1 billion gallons is $274.9 million. This includes vehicles using PTO for carrying equipment related to the transportation function of the vehicle.
(a)(1)(B):
Is it technically and administratively feasible to exempt such non-propulsive use of highway fuels from the highway motor fuels
excise taxes?
Tax Issues for PTO Exemption - Determine if it is technically and administratively feasible to exempt PTO related fuel.
The law currently allows a credit or refund for the off-highway business use of taxed fuel in the following situations:
Fuel used in non-highway vehicles, including mobile machinery where the vehicle travels less than 7,500 miles per year on the highway.
Fuel used in a separate motor used to power special equipment that is on registered vehicles. An exemption for PTO use would reduce the amount of excise tax collected for the Highway Trust Fund. An exemption would also be administratively burdensome, placing at risk the current IRS system for maintaining, measuring, and ensuring Excise tax compliance.
Technical issues are covered in the next two sections:
1
A mechanical device used to transmit engine power to auxiliary equipment. Power take-offs can be mounted on either a main or auxiliary transmission. Front-mounted and flywheel-mounted power take-offs are also used in various applications. - National Truck Equipment Association - www.ntea.com/tr/glossary_detail.asp?term_id=199
Table Continued… (a)(1)(B)(i):
Assuming the answer to Subsection (a) (1) (B) is yes, what options can we propose for implementing the exemption for mobile machinery (as defined in IRC §4053(8)) whose non-propulsive fuel use exceeds 50%?
Exemption Options for Mobile Machinery (MM)
- Determine exemption options for mobile machinery as defined by IRC 4053(8) where PTO fuel usage exceeds 50%.
The following three tests must be met in order for the particular highway vehicle to qualify as MM:
a. The special equipment or machinery at issue must be permanently mounted on the chassis.
b. The vehicle’s chassis must be designed to serve only as a mobile carriage for the jobsite equipment. c. The chassis must not be capable of transporting
any load other than the jobsite equipment without substantial structural modification.
A credit or refund is allowed for fuel used in mobile machinery that traveled less than 7,500 miles on public highways during the owner's taxable year. See IRC §6421.3
Therefore, the only option for implementing the exemption for MM operators who currently do not meet the
requirements of IRC §6421 but whose non-propulsive fuel use exceeds 50% would be to change the use-based test of IRC §6421(e)(2)(C)(ii)(II).
(a)(1)(B)(ii):
Assuming the answer to Subsection (a) (1) (B) is yes, what options can we propose for implementing the exemption for any highway vehicle, which consumes fuel for both transportation and
non-transportation-related equipment, using a single motor?
Exemption Options for Single Motor Vehicle
- Determine options for exempting PTO fuel usage in single motor vehicles.
The research report presents five potential options for allowing an excise tax fuel credit for single motor vehicles with PTO fuel trade or business usage.
The options are:
1. Ultimate vendor claims
2. PTO operator claim for fixed (dollar) credit amount for PTO vehicles
3. PTO operator claim for percentage of gallons purchased 4. PTO operator claim for actual gallons used in PTO 5. PTO operator claim for gallons based on meter reading
(a)(2)(A):
Where a separate motor runs non-transportation equipment, what is the annual average amount of fuel exempted from tax in the use of such equipment?
Dual Motor Vehicle Fuel Usage - Estimate untaxed fuel consumed by PTO usage for dual motor vehicles.
It is estimated that the average amount of fuel exempted from excise tax due to the use of a separate motor to power auxiliary equipment is 571,216,618 gallons per year. The excise tax credits and/or refunds associated with this fuel are approximately $139 million.
(a)(2)(B):
Where a separate motor runs non-transportation equipment, what are the issues relating to administration and compliance of the present-law exemption provided for such fuel use?
Tax Issues for Dual Motor Vehicle
- Determine the issue(s) relating to administration and compliance of the present-law exemption provided for fuel used by a separate motor to operate a PTO.
A refund is allowed for any taxed fuel that is not used in the propulsion system of a diesel-powered highway vehicle.
In situations where a separate motor runs
non-transportation equipment, the issue is how to determine how much fuel the separate motor consumes when the fuel is drawn from the same tank that supplies the vehicle’s engine.
Summary/Conclusions
PTO activity consumes over 1.1 billion gallons of fuel each year. The excise tax associated with this fuel is approximately $275 million.
The options outlined in this report for the allowance of a credit for PTO fuel usage would present IRS with a number of challenges. Within each of the suggested options is the potential for excise and/or income tax abuse. As such, a primary concern for IRS is whether resources will be available to ensure and maintain compliance with any potential tax law change.
Introduction
The Research Problem and Its Importance
Current law and regulations prohibit taxpayers from taking a credit or claiming a refund for fuel used in the propulsion motor of a registered highway vehicle even though that motor also operates special equipment by “power-take-off” (PTO)1 or power transfer.2
For a number of years, various industries (e.g., concrete pumpers, concrete/ready-mix, tank truck and waste management) and their affiliated trade organizations have sought federal excise tax relief from what they perceive to be inequitable tax administration of the off-highway business use provisions, particularly as it relates to registered vehicles using fuel to operate special equipment by a PTO. Their general positions on the application of the excise tax law can be summarized by this public comment received from one company within the industry:
“[T]he current approach to fuel used for operation of the PTO is unfair and inconsistent with congressional intent and sound policy.
First, it is at odds with the congressional purpose of applying the fuel tax to operations of the vehicle that cause wear and tear on the highways. In furtherance of that purpose, Congress exempted off-road vehicles from tax. An exemption for fuel used for the PTO would similarly further that purpose, since the fuel is not used to propel the vehicle and cause wear on the roads.
Second, the approach rewards taxpayers for using two, separate motors on a vehicle, rather than a single motor to propel the vehicle and operate the PTO equipment. Fuel used in a second motor is exempt, and fuel used for the PTO should also be exempt. The PTO is more fuel efficient, and results in lower emissions of air pollutants than the separate motor.”3
Another issue for these groups is the current definition of “mobile machinery” as a non-highway vehicle. Before the JOBS Act, Treasury regulation section 48.4061(a)-1(d)(2)(ii) excluded “mobile machinery” from the sales tax on trucks and allowed a credit or refund for the fuel used in such vehicles. The JOBS Act codified the regulation in section 4053(8) of the Code. But for fuel tax purposes, the JOBS Act added an additional requirement: the vehicle had to be used less than 7,500 miles on the public highways during a year (section 6421(e)(2)(C)). The imposed travel restriction/limitation has caused some in the industries mentioned above and others to feel burdened by the Act. For example, the American Concrete Pumping Association (ACPA) states:
Generally, the JOBS bill provision was effective in its apparent objective of delineating those vehicles that use a significant portion of their fuel on the job site from those that use most of their fuel on the public highways. However, concrete pumps were the lone, notable exception. Most concrete pumps travel more than 7,500 per year, so the JOBS bill provision effectively ended their federal fuel tax exemption. However, concrete pumps consume more than half of
1
A mechanical device used to transmit engine power to auxiliary equipment. Power take-offs can be mounted on either a main or auxiliary transmission. Front-mounted and flywheel-mounted power take-offs are also used in various applications.- National Truck Equipment Association - www.ntea.com/tr/glossary_detail.asp?term_id=199,
2
Treasury Regulations, 26 CFR 48.4041-7 and 26 CFR 48.6427-1(d).
3
“Comments and recommendations on exemptions from tax for fuel used for non-transportation purposes,” Waste Management - Government Affairs- Robert Eisenbud, Vice President, Federal Public Affairs.
their fuel in off-highway job site operations. Thus, in a clear departure from the "user pays" concept of highway tax design, concrete pump owners must now pay taxes on 100 percent of their fuel consumption, even though less than half is consumed on the public highways.4
Treasury regulations define a highway vehicle as any self-propelled vehicle designed to carry a load over public highways, whether or not it is also designed to perform other functions. Generally, the following kinds of vehicles are not considered highway vehicles for purposes of the credit or refund of fuel taxes:
Specially designed mobile machinery for non-transportation functions. A self-propelled vehicle is
not a highway vehicle if all of the following apply:
• The chassis has permanently mounted to it machinery or equipment used to perform certain operations (construction, manufacturing, drilling, mining, timbering, processing, farming, or similar operations) if the operation of the machinery or equipment is unrelated to transportation on or off the public highways.
• The chassis has been specially designed to serve only as a mobile carriage and mount (and power source, if applicable) for the machinery or equipment, whether or not the machinery or equipment is in operation.
• The chassis could not, because of its special design and without substantial structural modification, be used as part of a vehicle designed to carry any other load.
For the fuel tax credit, the vehicle must meet the design-based test described above, and also have traveled less than 7,500 miles on public highways during the owner's taxable year.5
Vehicles specially designed for off-highway transportation. A self--propelled vehicle is not treated
as a highway vehicle if the vehicle is (i) specially designed for the primary function of transporting a particular type of load other than over the public highway, and (ii) because of this special design, the vehicle's capability to transport a load over a public highway is substantially limited or impaired. The key factors in this determination are one the vehicle's size, whether the vehicle is subject to licensing, safety, or other requirements, and whether the vehicle can transport a load at a sustained speed of at least 25 miles per hour. It does not matter that the vehicle can carry heavier loads off highway than it is allowed to carry over the highway.6
Non-transportation trailers and semi-trailers. A trailer or semi-trailer is not treated as a highway
vehicle if it is specially designed to function only as an enclosed stationary shelter for carrying on a non-transportation function at an off-highway site. For example, a trailer that is capable only of functioning as an office for an off-highway construction operation is not a highway vehicle.7
The terms, “Off-highway business use,” “Public highway,” and “Registered” are defined in Appendix B. See Appendix C for Federal Register Notice and additional public comments.
4
American Concrete Pumping Association (ACPA), “study of highway fuels used by trucks for non-transportation purposes” (Section 11144 of Public Law 108-59), Public comment document - Christi Collins Executive Director, American Concrete Pumping Association.
5
The 7,500 mile use-based test was enacted with the American Jobs Creation Act of 2004.
6
IRC §7701(a)(48)(A).
7
In seeking federal excise tax relief, the industry affiliates emphasize that at least 29 state taxing agencies have offered some form of fuel tax relief by allowing a credit and/or refund for tax paid on diesel fuel, which is used by equipment powered by the propulsion of engine of the vehicle. Advocates of excise tax relief for PTO fuel usage generally acknowledge that there may be a potential burden placed on the Highway Trust Fund (HTF) by reducing available revenue. For this reason, some industries are open to a General Business Tax Credit for PTO fuel usage.
Project Background and Objectives
Enacted on August 10, 2005, the Safe, Accountable, Flexible, Efficient Transportation Equity Act – A Legacy for Users (SAFETEA–LU) (Public Law 109—59)8 requires the Secretary of the Treasury to report to the Committees on Finance and Environment and Public Works of the Senate and the Committees on Ways and Means and Transportation and Infrastructure of the House of Representatives the results relating to the provisions of Section 11144 of the Act.
Section 11144 (a) of SAFETEA-LU requires the Secretary of the Treasury to conduct a study regarding the use by trucks of highway motor fuel that is not used for the propulsion of the vehicle. As part of such study, the Secretary of the Treasury shall determine:
Sec. 11144 (a) (1) (A): For vehicles carrying equipment that is unrelated to the transportation
function of the vehicle by type of vehicle, what is the annual average amount of tax-paid fuel consumed per vehicle used by the propulsion engine to provide power to the equipment attached to the highway vehicle?
Sec. 11144 (a) (1) (B): Is it technically and administratively feasible to exempt such
non-propulsive use of highway fuels from the highway motor fuels excise taxes?
Sec. 11144 (a) (1) (B) (i): Assuming the answer to Subsection (a) (1) (B) is yes, what options
can be proposed for implementing the exemption for mobile machinery (as defined in IRC § 4053) (8) whose non-propulsive fuel use exceeds 50%?
Sec. 11144 (a) (1) (B) (ii): Assuming the answer to Subsection (a) (1) (B) is yes, what options
can be proposed for implementing the exemption for any highway vehicle that consumes fuel for both transportation and non-transportation-related equipment using a single motor?
Sec. 11144 (a) (2) (A): Where a separate motor runs non-transportation equipment, what is the
annual average amount of fuel exempted from tax in the use of such equipment?
Sec. 11144 (a) (2) (B): Where a separate motor runs non-transportation equipment, what are
the issues relating to administration and compliance of the present-law exemption provided for such fuel use?
The Secretary tasked the IRS with responsibility for the study. The IRS’ Small Business/Self Employed (SB/SE) Research Office completed the study, whose objectives were to determine the six items listed above that are components of Section 11144. This report outlines the research methodology and reports on the specific requirements contained in the components of Section 11144.
The scope of this report addresses all PTO activity, which includes taxed fuel consumed for the use of loading and unloading equipment, towing winches, and certain other equipment. This includes vehicles using PTO for carrying equipment related to the transportation function of the vehicle.
8
Methodology
Research Approach
SB/SE Research used multiple approaches to obtain information for this report. SB/SE Research: • Conducted a literature search to identify related surveys, studies, and reports.
• In accordance with Title XI, Section 11144 of the Safe, Accountable, Flexible, Efficient Transportation Equity Act: a Legacy for Users (SAFETEA-LU), invited the general public and other federal and state agencies to comment on and have their comments considered in the studies mandated by this section.
• Held meetings and conversations with members of the Department of Transportation (USDOT), the Department of Energy (DOE), and the U.S. Environmental Protection Agency (EPA) to communicate specifics of the SAFETEA-LU and to obtain information for the report.
• Held meetings with IRS subject-matter experts on IRS excise tax issues and obtained concerns related to the options proposed to allow an exemption for PTO fuel use.
• Held meetings with The National Ready Mixed Concrete Association (NRMCA). • Observed PTO testing performed by NRMCA.
• Held meetings with The American Concrete Pumping Association (ACPA). • Reviewed PTO testing data provided ACPA.
• Held conversations with representatives from The National Tank Truck Carriers, Inc. (NTTC). • Reviewed PTO testing data provided by NTTC.
• Held meetings with members of Waste Management Inc. Federal Public Affairs Office. • Reviewed PTO study provided by Waste Management.
• Held meetings with the State of California resources Board–Enforcement Division.
• Generated data tables based on the U.S. Department of Commerce’s - 2002 Vehicle Inventory and Use Survey (VIUS) conducted by Bureau of the Census.
• Developed a range of cost estimates based on selected industry data. • Reviewed websites of the EPA, DOE, and USDOT.
• Used state websites were to determine applicable PTO allowances. • Held conversations with National Energy Control Services, Inc (NECS). • Held conversations with a representative from Wolf Tree Inc.
• Held conversations with representatives from the Association of Equipment Manufacturers (AEM).
In addition, to estimate the total PTO fuel usage on an annual basis, both State and Census data were used. The 2002 VIUS survey estimates mileage by PTO vehicle type, while the State information contains PTO allowances (flat percentage rates) by vehicle type. Since PTO allowances are not uniform at the State level, weighted averages were used to represent total PTO fuel usage by vehicle type. The calculation for the PTO usage by vehicle type is as follows: The total estimated fuel by
vehicle type (based on the 2002 VIUS survey) multiplied by the weighted PTO average by vehicle type (as determined by the State PTO allowances). The source for each of the State’s PTO allowance by vehicle type is each State’s website. See Appendix D for calculations of weighted average.
Limitations
There are four limitations associated with this research report:
1. The primary data source for estimates on PTO fuel usage by vehicle type is based on 2002 data. The 2002 VIUS Survey was the only government document found that provided a comprehensive listing of registered vehicles and their related PTO fuel usage. The 2002 VIUS survey is widely used as a reference in numerous government reports and studies. This report is published every five years. The next survey (if funded) would be available in 2008.
2. The types of vehicles listed in this report may not be all inclusive. Vehicles represented in this report are those primarily listed in the 2002 VIUS survey document. However, in order to be as comprehensive as possible, the report also includes identified PTO vehicles from those States that allow a PTO fuel credit.
3. There is an uncertainty as to the different types of vehicles and the correct number of vehicles that have dual motors, one of which is used for PTO off-highway activities. As such, data for fuel consumed by dual motor vehicles was limited to a single vehicle type.
4. The PTO fuel usage is only representative of those States that provide an allowance for PTO off-highway fuel usage.
Findings
SAFETEA-LU SECTION 11144 - (a) (1) (A) – PTO Fuel Usage
Q1: For vehicles carrying equipment that is unrelated to the transportation function of the vehicle, by type of vehicle, what is the annual average amount of tax-paid fuel consumed per vehicle used by the propulsion engine to provide power to the equipment attached to the highway vehicle?
The 2002 US Census VIUS survey and PTO State data were used to develop findings for this SAFETEA-LU question. Based on these two data sources, it is estimated that the total PTO vehicle population is approximately 2 million vehicles, with 75% classified as Single Unit Trucks and the other 25% classified as Tractor Trailers.
Combined, these vehicles will consume an estimated 6 billion gallons of taxed fuel per year. Approximately 19% or 1.1 billion gallons of this fuel is related to PTO off-highway business use. The estimated excise tax related to off-highway PTO fuel usage is $275 million. The scope of this report addresses all PTO activity, which includes taxed fuel consumed for the use of loading and unloading equipment, towing winches, and certain other equipment. This includes vehicles using PTO for carrying equipment related to the transportation function of the vehicle.
Table 1 below presents the findings for PTO fuel usage associated with the broad categories of Single Unit Trucks and Tractor Trailers. As shown below, Table 2 represents the estimated amount of excise tax collected on fuel used by PTOs for each of the above categories.
See Appendix E through F for a breakdown of the individual types of vehicles listed within each of the two broad categories, their related fuel usage, and the assigned weighted PTO allowance.
Table 1 PTO Fuel Consumption
PTO Vehicles
PTO VehiclesNon-Propulsion Exemption Rate (State Data Based)
Annual Fuel Consumed by PTO (Gallons) Trucks Gal/Year Single-Unit Trucks 1,673,695 3,297,961,062 20.3% 670,618,747 Tractor Trailers 336,114 2,740,425,060 16.6% 455,973,013 Total 2,009,809 6,038,386,122 18.7% 1,126,591,760
Data Source: 2002 U.S Census VIUS Report & State Taxing Authority PTO Data9
We estimate that there are approximately 2 million PTO vehicles. These vehicles consume 6 billion gallons of fuel of which 1.1 billion gallons of fuel is consumed by the PTO activity.
Table 2 Tax Paid on PTO Fuel
PTO Vehicles
PTO Vehicles Annual Fuel Consumed by PTO
Trucks Gal/Year Gallons Cost (@$0.244/Gal)
Single-Unit Trucks 1,673,695 3,297,961,062 670,618,747 $ 163,630,974
Tractor Trailers 336,114 2,740,425,060 455,973,013 $ 111,257,415
Total 2,009,809 6,038,386,122 1,126,591,760 $ 274,888,389
Data Source: 2002 U.S Census VIUS Report
SAFETEA-LU SECTION 11144 - (a) (1) (B) – PTO Exemption
Q2: Is it technically and administratively feasible to exempt such non-propulsive use of highway fuels from the highway motor fuels excise taxes?
The law currently allows a credit and/or refund for the off-highway business use of taxed fuel in the following situations:
• Fuel used in non-highway vehicles, including mobile machinery where the vehicle travels less than 7,500 miles per year on the highway.
• Fuel used in a separate motor to power special equipment that is on a registered highway vehicle.
To allow an exemption for other than these two situations, new or amended excise tax laws would be required along with public notification for tax law interpretation and filing procedures/requirements. A credit for fuel used in PTO would reduce the amount of excise tax collected for the HTF and place at risk the current IRS system for maintaining, measuring, and ensuring excise-tax compliance.
In addition, there would be administrative burdens on both the IRS and ultimate vendors involved with selling the fuel to PTO operators at a tax-excluded price if an ultimate-vendor rule were adopted. The primary burden would be the registration and record-keeping requirements associated with Form 637
9
(Application of Registration for Certain Excise Tax Activities). See Appendix I for ultimate vendor claim information. Given the level of retail fuel service stations, ten thousand or more Ultimate Vendors might need to be registered. If the Ultimate Purchasers (PTO Operators) Implementation Options were selected, the administrative burden on the IRS would be even greater. See Appendix G for the Implementation Options Matrix.
Existing IRS forms could be used to process claims related to several of the potential PTO exemption options presented in this report (see SAFETEA-LU Section 11144 - (a) (1) (B) (ii) below). What remains uncertain is the potential increase in the volume of annual claims due to any change in the tax law. The overall cost associated with processing excise tax claims would increase.
Another issue would be the funding burden placed on the HTF for any allowable PTO claim. As previously indicated, with an annual estimate of 1.1 billion gallons of fuel used by PTOs, the reduction of HTF revenue is likely to exceed $275 million each year.
See Appendix G and H for a complete listing of IRS concerns related to the technical and administrative issues of exempting non-propulsive (PTO) use of highway fuels from the highway motor fuel excise taxes.
SAFETEA-LU SECTION 11144 - (a) (1) (B) (i) – Exemption for Mobile Machinery
Q3: Assuming the answer to Subsection (a) (1) (B) is yes, what options can be proposed for implementing the exemption for mobile machinery (as defined in IRC §4053(8)) whose non-propulsive fuel use exceeds 50%?
For tax years beginning after October 22, 2004, mobile machinery operators may claim an excise-tax (fuel) credit for taxed undyed diesel fuel used in mobile machinery (MM) vehicle if the operators meet the design--based and use--based tests.
A taxpayer will satisfy the MM design-based test if:
• The chassis has permanently mounted to it machinery or equipment used to perform certain operations (construction, manufacturing, drilling, mining, timbering, processing, farming, or similar operations) if the operation of the machinery or equipment is unrelated to transportation on or off the public highways;
• The chassis has been specially designed to serve only as a mobile carriage and mount (and power source, if allocable) for the machinery or equipment, whether or not the machinery or equipment is in operation; and
• The chassis could not, because of its special design, and without substantial structural modification, be used as part of a vehicle designed to carry any other load.
A taxpayer meets the use-based test if the taxpayer uses the vehicle on public highways for less than 7,500 miles during the taxpayer’s taxable year.
A taxpayer may claim a credit for taxed diesel fuel only on its income tax return, using Form 4136, Credit for Federal Tax Paid on Fuels. For tax years beginning after October 22, 2004, mobile machinery operators cannot use dyed diesel fuel in their mobile machinery vehicles.10
10
Fuel used in mobile machinery that traveled less than 7,500 miles on public highways during the owner's taxable year is entitled to a credit for excise tax paid under IRC § 6421.
Therefore, the only option for implementing the exemption for MM operators who currently do not meet the requirements of IRC § 6421, but whose non-propulsive fuel use exceeds 50%, would be to change the use-based test of IRC § 6421(e)(2)(C)(ii)(II). IRS concerns related to allowing an exemption for MM are similar to those appearing in Appendix G – PTO Implementation Options (1a) and (1b).
SAFETEA-LU SECTION 11144 - (a) (1) (B) (ii) – Exemption for Single Motor Vehicles
Q4: Assuming the answer to Subsection (a) (1) (B) is yes, what options can be proposed for implementing the exemption for any highway vehicle that consumes fuel for both transportation and non-transportation-related equipment using a single motor?
The research report presents five potential options for allowing an excise tax fuel credit for single motor vehicles with PTO fuel usage. The options range from allowing PTO operators to purchase fuel at a tax-excluded price at the point of sale to allowing a fixed credit amount based on the type of vehicle. Tables 3 and 4 below outline the proposed options and the potential funding sources. See Appendix G and H for related IRS concerns.
Table 3
Proposed Implementation Options for a PTO Excise Tax Credit
Implementation Option
Process Description
1. Ultimate vendor claims
PTO operators purchase at a tax-excluded price based on either a fixed tax-free percentage or a percentage based on vehicle type. Example: Dump Truck purchases 15 gal. @ established PTO rate.
2. PTO operator claim for fixed (dollar) credit amount for PTO vehicles
Fixed credit amount for all PTO vehicles or fixed credit amount based on vehicle type. Example: $150 per PTO vehicle or $200 per Dump Truck, $250 per Cement Mixer, etc.
3. PTO operator claim for percentage of gallons purchased
Based on gallons purchased multiplied by a fixed tax-free percentage or a tax-free percentage based on vehicle type. Example: 100 gallons purchased at a fixed PTO rate of 15% would result in 15 gallons tax-free.
4. PTO operator claim for actual gallons used in PTO
Based on substantiated PTO gallons. Example: actual PTO gallons consumed @ $0.244.
5. PTO operator claim for gallons based on
meter reading Based on actual gallons per meter reading. Example: meter reading (gallons) @ $0.244.
Note: If Taxpayer files IRS Form 2290 (Heavy Highway Vehicle Use Tax Return), credit could be used to offset tax.
Table 4
Proposed Funding Options for a PTO Excise Tax Credit
Funding Option
Process Description
1. Income Tax Return General Business Tax (GBT) Credit
2. Excise Tax Return Highway Trust Fund (HTF) Refund
3. Taxpayer Option GBT Credit vs. HTF Refund
SAFETEA-LU SECTION 11144 - (a) (2) (A) – Fuel Use for Dual Motor Vehicles
Q5: Where a separate motor runs non-transportation equipment, what is the annual average amount of fuel exempted from tax in the use of such equipment?
Conversations with representatives from the Association of Equipment Manufacturers (AEM) and the IRS excise-tax program have indicated that vehicles with a separate motor and a single fuel tank are not as common as they once were. Concrete mixers, trash trucks and refrigeration vehicles used to be the primary users. However, due to advancements in single motor equipment and the need for less maintenance and less weight, dual motor vehicles are primarily limited to refrigeration type trucks. For these reasons, and because SB/SE Research found limited data sources with which to develop estimates of fuel usage for dual motor vehicles, findings for the above SAFETEA-LU question are limited to refrigeration type vehicles.
It is estimated that the average amount of fuel exempted from excise tax due to the use of a separate motor to power auxiliary equipment is 571 million gallons per year. The excise tax credit and/or refund associated with this fuel is approximately $139 million ($0.244 * 571,216,618). See Table 5 for more detailed fuel and cost information.
Table 5 Dual Motor Vehicle Fuel Consumption
Vehicles
PTO Vehicles Non-Propulsion
Exemption Rate State Data (Weighted Average) Non-Propulsive Fuel (Gallons/Year) Trucks Gal/Year Tractor Trailers 1,632,737 16,103,448,215 Van, Insulated Refrigerated 122,135 1,933,636,042 60.6% Dual Motor ~58,403 942,601,680 60.6% 571,216,618
Data Source: 2002 U.S Census VIUS Report
SAFETEA-LU SECTION 11144 - (a) (2) (B) – Tax Issues for Dual Motor Vehicles
Q6: Where a separate motor runs non-transportation equipment, what are the issues relating to administration and compliance of the present-law exemption provided for such fuel use?
IRS SB/SE Specialty Programs/Excise Tax operations responded to this question as follows: In situations where a separate motor runs non-transportation equipment, the issue is to
If that motor has a separate fuel supply tank, the determination is relatively straightforward: it is the fuel that this motor consumes out of that tank. However, since the tank is separate, dyed non-taxed fuel may have been used. Therefore, taxpayers must demonstrate that excise tax was actually imposed on the fuel in the separate supply tank.
If the motor draws fuel from the same supply tank, the issue is whether the taxpayer made a reasonable determination of the quantity of taxable liquid fuel used in the separate motor. One must establish the consumption rate of that equipment, which is usually on a per hour basis, and then determine the number of hours the equipment was operated. In the case of refrigeration, most units operate whenever the truck or trailer is in operation, as the cargo must be maintained within a constant temperature range. IRS must then determine whether the method the taxpayer used was reasonable.11
Many of the refrigeration units that do not have separate fuel supply tanks now have a gauge that will provide the number of gallons that the refrigeration units consumed. If there are no meters, then taxpayers may use specified hourly usage estimates provided by the manufacturer of the separate motors. Such usage is allowable under IRC section 6427(l) and Treasury Regulation section 48.6427-8. IRS has not seen any large significant tax issues in the calculations.
Summary
Under current law, all fuel that is used in the propulsion engine of a registered highway vehicle is subject to tax, and a credit or refund is not allowed, even if that engine also provides power for a PTO. By contrast, a credit or refund is allowed for fuel used in a separate motor on the vehicle, even if that motor draws fuel from the same tank that supplies the propulsion engine of the vehicle. An estimated 1.1 billion gallons of taxed diesel fuel per year is used for PTO use. Exempting this fuel from taxation at a minimum would have the potential to decrease the Highway Trust Fund or the general Treasury by $275 million per year.
While there are several options to exempt PTO fuel usage, each presents IRS with a unique set of challenges. Some primary concerns are:
The additional IRS resources needed to ensure compliance.
The potential need for IRS SB/SE to register over 10,000 ultimate vendors.
The validation and determination of equitable PTO allowance rates by type of PTO vehicles.
11
Signature Page/Approvals
_______________________
________________
Chief,
SB/SE
Research
Date
Philadelphia
_______________________ ________________
Keith V. Taylor
Date
Appendix A SAFETEA Public Law 109--59 Public Law 109-59 109th Congress An Act
To authorize funds for Federal-aid highways, highway safety programs, and transit programs, and for other purposes. <<NOTE: Aug. 10, 2005 - [H.R. 3]>>
Be it enacted by the Senate and House of Representatives of the United States of America in Congress <<NOTE: Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for
Users. Inter- governmental relations. 23 USC 101 note.>> assembled,
SEC. 11144. TREASURY STUDY OF HIGHWAY FUELS USED BY TRUCKS FOR NON- TRANSPORTATION PURPOSES.
(a) Study.--The Secretary of the Treasury shall conduct a study regarding the use of highway motor fuel by trucks that is not used for the propulsion of the vehicle. As part of such study--
(1) in the case of vehicles carrying equipment that is unrelated to the transportation function of the vehicle--
(A) the Secretary of the Treasury, in consultation with the Secretary of Transportation, and with public notice and comment, shall determine the average annual amount of tax-paid fuel consumed per vehicle, by type of vehicle, used by the propulsion engine to provide the power to operate the equipment attached to the highway vehicle, and
(B) the Secretary of the Treasury shall review the technical and administrative feasibility of exempting such nonpropulsive use of highway fuels from the highway motor fuels excise taxes, and, if such exemptions are technically and administratively feasible, shall propose options for implementing such exemptions for--
(i) mobile machinery (as defined in section 4053(8) of the Internal Revenue Code of 1986) whose nonpropulsive fuel use exceeds 50 percent, and
(ii) any highway vehicle which consumes fuel for both transportation and non-transportation- related equipment, using a single motor,
(2) in the case where non-transportation equipment is run by a separate motor--
(A) the Secretary of the Treasury shall determine the annual average amount of fuel exempted from tax in the use of such equipment by equipment type, and
(B) the Secretary of the Treasury shall review issues of administration and compliance related to the present-law exemption provided for such fuel use, and
(3) the Secretary of the Treasury shall--
(A) estimate the amount of taxable fuel consumed by trucks and the emissions of various pollutants due to the long-term idling of diesel engines, and
(B) determine the cost of reducing such long-term idling through the use of plug-ins at truck stops, auxiliary power units, or other technologies.
Appendix B Research Report Definitions
Data Source-IRS
Off-highway business use – Any use of fuel in a trade or business or in an income-producing activity. No use of a boat is consider as an off-highway business use.
Highway Vehicle – A highway vehicle is any self-propelled vehicle designed to carry a load over public highways, whether or not also designed to perform other functions. Examples of vehicles designed to carry a load over public highways are passenger automobiles, motorcycles, buses, and highway-type trucks and truck tractors. A vehicle is a highway vehicle, even though the vehicle's design allows it to perform a highway transportation function for only one of the following:
o A particular type of load, such as passengers, furnishings, and personal effects (as in a house, office, or utility trailer).
o A special kind of cargo, goods, supplies, or materials. o Some off-highway task unrelated to highway transportation.
Public highway – A public highway includes any road in the United States that is not a private roadway. This includes federal, state, county, and city roads and streets.
Registered – A vehicle is considered registered when it is registered or required to be registered for highway use under the law of any state, the District of Columbia, or any foreign country in which it is operated or situated. Any highway vehicle operated under a dealer's tag, license, or permit is considered registered. A highway vehicle is not considered registered solely because a special permit allows the vehicle to be operated at particular times and under specified conditions.
Dual use of propulsion motor – Off-highway business use does not include any fuel used in the propulsion motor of a registered highway vehicle, even though that motor also operates special equipment by means of a power take-off or power transfer. It does not matter if the special equipment is mounted on the vehicle.
Appendix C Federal Register Notice/Public Comments
Federal Register: December 9, 2005 (Volume 70, Number 236)
From the Federal Register Online via GPO Access [wais.access.gpo.gov] --- DEPARTMENT OF THE TREASURY
Internal Revenue Service
AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Notice and request for comments.
--- SUMMARY: The Department of the Treasury--IRS, in accordance with Title XI. Section 11144 of the Safe, Accountable, Flexible, Efficient
Transportation Equity Act: a Legacy for Users (SAFETEA-LU) invites the general public and other Federal and state agencies to take this
opportunity to comment on and have their comments considered in the studies mandated by this section.
DATES: Written comments should be received on or before February 7, 2006 to be assured of consideration.
ADDRESSES: Direct all written correspondence to Thomas P. Colaiezzi, Chief, SB/SE Research-PHL, Internal Revenue Service, 600 Arch Street, Room 7204, Philadelphia, PA 19106.
FOR FURTHER INFORMATION CONTACT: Requests for additional information or copies of the SAFETEA-LU sections should be directed to the address listed in the ADDRESSES section in this document or via e-mail to
SUPPLEMENTARY INFORMATION:
Abstract: Title XI, section 11144 of SAFETEA-LU, enacted on August 10, 2005, directs the Secretary of the Treasury (Secretary) to study the use by trucks of highway motor fuel that is not used in the propulsion of the vehicle. This will include vehicles carrying equipment that is unrelated to the transportation function of the vehicle and also where non-transportation equipment is run by a separate motor. The Secretary is also proposing options for
implementing exemptions from tax for fuel used in non-transportation uses, but only if the Secretary determines such exemptions are
administratively feasible. In addition, the Secretary is estimating the amount of fuel consumed and pollutants emitted by trucks due to long- term idling of diesel engines, and reporting on the cost of reducing long-term idling through various technologies.
Affected Public: Businesses that use, produce, or distribute diesel fuel or other products referenced in this section. Also affected are state agencies that impose taxes on diesel fuels.
Thomas P. Colaiezzi,
Government Affairs 701 Pennsylvania Avenue, NW
Suite 590
Washington, DC 20004
December 4, 2006
Comments and recommendations on exemptions from tax for fuel used for
non-transportation purposes
Waste Management (WM) appreciates the opportunity to submit this summary of
comments already submitted for consideration by the Internal Revenue Service in the
course of its study pursuant to Section 11144 of SAFETEA-LU relating to Power Takeoff
(PTO) fuel use by “sanitation trucks.” For purposes of these comments, the term
“sanitation truck” means a vehicle designed to engage in the daily collection of refuse
or recyclables from homes or businesses and equipped with a mechanism by which the
vehicle’s propulsion engine provides the power to operate a load compactor.
Industry data indicate that a typical sanitation truck uses 6,578 gallons of fuel per year,
bearing a yearly federal fuel excise tax of about $1,498. Data also indicate that
approximately 30 percent of the fuel is used to operate the PTO equipment. Thus, the
actual amount of tax paid on fuel used for non-propulsion, “off –highway business use”
to power the PTO is about $ $450 per truck each year. These data are derived from a
study by the National Solid Wastes Management Association in 1984, showing that
operation of the PTO consumed 37 percent of total fuel usage, and a 1997 WM study
showing that 26 percent of the truck’s fuel was used to run the PTO compactor. At least
29 states provide an allowance for nontaxable PTO fuel use by sanitation trucks. The
allowances range from an amount determined by metering the actual fuel usage to
specified amounts of from 20 to 41 percent, with an average of about 30 percent.
WM believes that the current approach to fuel used for operation of the PTO is unfair
and inconsistent with congressional intent and sound policy.
First, it is at odds with the congressional purpose of applying the fuel tax to operations
of the vehicle that cause wear and tear on the highways. In furtherance of that purpose,
Congress exempted off-road vehicles from tax. An exemption for fuel used for the PTO
would similarly further that purpose, since the fuel is not used to propel the vehicle and
cause wear on the roads.
Second, the approach rewards taxpayers for using two, separate motors on a vehicle,
rather than a single motor to propel the vehicle and operate the PTO equipment. Fuel
used in a second motor is exempt, and fuel used for the PTO should also be exempt.
The PTO is more fuel efficient, and results in lower emissions of air pollutants than the
separate motor.
For the reasons set forth above, WM recommends that the IRS:
(1) Recommend to Congress enactment of legislation based upon the text of S 932
and HR 1513 as introduced in the 108th Congress. That legislation would provide
a $250 per year income tax credit for each sanitation truck if the owner has
records showing that the vehicle was licensed and insured for operation. The
$250 credit is a very conservative approximation of the amount of tax paid each
year that should not have been imposed, and we would welcome a credit closer
to the $450 actually paid in taxes for PTO fuel. This approach has the benefit of
being easy to administer and implement; or
(2) If IRS determines that it would be administratively workable, adopt without need
of legislation, regulations allowing the owner of a sanitation truck to claim a
refund on Form 8849 or otherwise, for the amount of excise tax paid on 30
percent of the fuel purchased for the vehicle; or
(3) Similar to (2), adopt regulations allowing the owner of a sanitation truck to claim
a refund for the amount of excise tax that is shown to have been paid on fuel
used to operate the PTO. WM believes that computerized metering equipment
will soon be available to make this option feasible and verifiable.
Robert Eisenbud
Statement by Christi Collins Executive Director, American Concrete Pumping Association for the “study of highway fuels used by trucks for non‐transportation purposes” (Section 11144 of Public Law 108‐59) On behalf of the 600 members of the American Concrete Pumping Association (ACPA) and the 10,000 people employed by the concrete pumping industry, I write to provide information and comment for the US Department of Treasury off‐road fuel use study mandated in Section 11144 of SAFETEA‐LU. The ACPA believes that, of all the mobile equipment used in the construction industry today, concrete pumps have the strongest case for an excise tax exemption for off‐road fuel use. The ACPA has been actively involved in this issue since the Internal Revenue Service proposed the complete elimination of the mobile machinery exemption in 2002, and sincerely hopes this study provides a constructive path forward to addressing it in legislation. Section 11144 of SAFETEA‐LU directs the US Treasury Secretary to accomplish two main objectives for the study as it relates to mobile machinery for which a majority of fuel use is ʺnon‐propulsiveʺ (off‐ road). First, the Secretary must determine an average off‐road fuel consumption percentage for various categories of mobile machinery, including concrete pumps. Second, the Secretary must propose administratively feasible options for exempting fuel used by those categories.
Background
The concrete pump industry has evolved over the past 30 years as an efficient and money saving technique for placing concrete in residential and commercial construction projects. It has largely replaced the bucket and crane system, whereby ready mix trucks poured concrete into large buckets, which were then hoisted by a crane up into an area to be poured, and either discharged directly or manually into the appropriate form. As a building material, concrete has many cost and structural advantages, and the development of an efficient system for pumping the concrete to multi‐floor levels has stimulated engineers to specify concrete for an increasing number of construction applications.
Concrete pumps have traditionally been exempted from federal fuel excise taxes because they meet the three‐part mobile machinery design test defined in section 4053(8) of the Internal Revenue Code of 1986. Pumps are uniquely designed as mobile machinery; in that they are not capable of transporting the load over the public highways, nor can they be economically reconverted to do so. This three‐part, design‐based ʺMobile Machinery Exemptionʺ has been in existence for nearly 30 years.
During the 1990s, the Mobile Machinery Exemption was effectively exploited by the owners of other types of vehicles such as bucket trucks and digger derricks. While these vehicles technically met the design criteria set forth in the mobile machinery exemption, in most cases the vast majority of their fuel was consumed traveling on the public highways. It is generally understood that this expansion of usage prompted IRS to propose eliminating it in 2002.
In October 2004, as part of the FSC/ETI legislation, also known as the ʺJOBS bill,ʺ Congress formally codified the current Mobile Machinery Exemption into law. However, in doing so, it limited the fuel tax portion of the exemption to equipment that travels fewer than 7,500 miles per tax year on the public highways. Generally, the JOBS bill provision was effective in its apparent objective of delineating those vehicles that use a significant portion of their fuel on the job site from those that use most of their fuel on the public highways. However, concrete pumps were the lone, notable exception. Most concrete pumps travel more than 7,500 per year, so the JOBS bill provision effectively ended their federal fuel tax exemption. However, concrete pumps consume more than half of their fuel in off‐highway job site operations. Thus, in a clear departure from the ʺuser paysʺ concept of highway tax design, concrete pump owners must now pay taxes on 100 percent of their fuel consumption, even though less than half is consumed on the public highways. Indeed, we know of no other vehicle that consumes as high a percentage of fuel in off‐highway operations that does not already enjoy some form of legislative or administrative exemption from federal fuel taxes. ACPA 2006 concrete pump fuel use survey In response to the Section 11144 study, the ACPA undertook a broad effort to provide the Department of Treasury with reliable, quantifiable data on concrete pump fuel usage patterns. Thankfully, the Engine Control Module (ECM) of every concrete pump manufactured after 1998 maintains data for all major engine performance parameters, including: total fuel consumption in gallons; total miles traveled; total vehicle operation time in hours; and percentage of fuel consumption in PTO operations. The ECM maintains this data in a master log from the time the vehicle is first put in service, and it cannot be deleted or manipulated by the user.
Over a period of three months in 2006, ACPA staff collected ECM downloads from 488 pumps throughout the United States. We then analyzed the data to address the main questions raised by the study:
Finding#1: the average nonpropulsive fuel use of concrete pumps clearly exceeds 50%. Based on the data we collected, nationwide average nonpropulsive fuel use (NFU) of concrete pumps was 56.1%. The data also shows that average nonpropulsive consumption exceeded 50% NFU in each census region of the US. We also adjusted for land area and population density and found that average NFU on a‐pump‐per‐square‐mile and pump‐per‐capita basis are both above 50%. This data point is important because Section 11144 of SAFETEA identifies “mobile machinery (as defined in section 4053 (8) of the Internal Revenue Code of 1986) whose nonpropulsive fuel use exceeds 50%” as a separate category for the purpose of proposing nonhighway fuel use tax exemptions (and assumably the related revenue estimates.)
Finding #2: the average concrete pump consumes roughly 7500 gallons of fuel per year. According to our collective data, the average US concrete pump consumes 7,489 gallons of (almost entirely diesel) fuel per year, of which 3,974 gallons are consumed nonpropulsively. As a result, the average concrete
pump owner pays $975 in federal fuel excise taxes for fuel consumed in nonhighway operations. Assuming the generally recognized fleet size of roughly 7500 concrete pumps in the US, the aggregate amount of taxes paid for off‐road fuel consumption is roughly $7.3 million per year. Implementing an appropriate fuel tax exemption for concrete pumps
The ACPA membership considered the realm of possibilities for exempting nonpropulsive fuel use from federal excise taxes and identified three major options.
First, Congress could exempt nonpropulsive fuel use on a pump‐by‐pump basis. This method would be inherently fair, in that owners would receive an exemption based on the actual fuel usage of their pumps. Documentation could be made available by either resetting the ECM ʺtrip odometerʺ on an annual basis or maintaining detailed mileage and fuel use records on an ongoing basis. However, we felt that such a method would place a high data‐gathering burden on concrete pump owners and IRS field agents. Most pump owners are unfamiliar with the capability of their ECM data log, and downloads require special equipment, software and training. As well, pre‐1998 pumps do not have ECMs capable of gathering the necessary data. Alternatively, Congress could enact a standard fuel credit equal to the fleet‐wide average fuel tax paid on nonpropulsive fuel use. Based on the data ACPA has gathered, the annual credit amount would be approximately $975 per year per pump. This method would be the least administratively burdensome for both owners and the IRS, since no record or data‐gathering would be required other than proof of ownership. However, there are several disadvantages. First, the credit allocated would be unrepresentative of actual pump usage patterns. In addition, larger concrete pumps, because they consume a larger volume of fuel generally, would be penalized, and non‐operative pumps would still be eligible for the credit, as long as they were registered.
Finally, Congress could exempt nonpropulsive fuel use through an established industry wide exemption percentage, which based on current ACPA data, would be approximately 55%. Under this approach, owners can either keep a record of annual fuel purchases for each pump, or use the ECM ʺtrip odometerʺ feature to gather fuel consumption data on an annual basis. They would then receive a credit equal to 55% of total fuel consumption. This approach has the advantage of being nondiscriminatory toward small companies and those with aging fleets. In addition, this method is similar to that of many state fuel tax exemptions, thus the process and recordkeeping requirements would be familiar to many concrete pump owners. Having considered these options, the ACPA firmly believes that the “standard industry wide fuel tax exemption percentage” is the best method to address the current federal fuel tax inequity for concrete pumps, and strongly encourages the Department of Treasury to adopt this approach when proposing options for vehicles defined in Section 11144(a)(1)(B)(i) of SAFETEA‐LU.
December 8, 2006
Mr. Reuben A. Robinson
Acting Chief, SB/SE Research-PHL Internal Revenue Service
600 Arch Street, Room 7204 Philadelphia, PA 19106 Dear Mr. Robinson:
In a 1953 private letter ruling (attached), which involved the application of the excise tax to diesel fuel used in ready mixed concrete trucks, the Internal Revenue Service (IRS) ruled that the tax only applied to fuel used in the propulsive operations of the trucks and not to the fuel consumed in operating the power take-off (PTO) units. The ruling further held that whether the trucks operated by means of a single motor for both propulsion and PTO operations, or used a second motor to operate the mixer drum, in either case, a credit or refund could be obtained for the tax paid on the quantity of diesel fuel used in the operation of the mixer drum. Thus, as early as 1953, ready mixed concrete producers were able to claim a credit or refund for tax paid on fuel used in PTO operations.
It wasn’t until 1960, when the IRS first decided to issue regulations with respect to the retailer’s tax on diesel fuel, that the agency introduced a differentiation between a one-motor vehicle and a two-motor vehicle. Under the regulations, currently Reg. § 48.4041-7, if a ready mixed concrete truck has two motors, one to propel the truck and another to operate the mixer drum, the fuel used in operating the mixer drum is exempt. It is immaterial that both motors may consume fuel from the same fuel tank. If, however, a truck has only one motor that is used both for propulsion and to operate the PTO, the fuel consumed in operating the PTO is not exempt. There is nothing in the statutory language or the legislative history of the diesel fuel excise tax to the effect that the non-applicability of the tax should be a function of whether a vehicle has one motor or two. Moreover, at the time the IRS first issued § 48.4041-7, the ready mixed concrete industry had already transitioned away from the inefficient technology of using separate motors to operate the mixer drum. Indeed, of the 31 states that currently allow ready mixed producers to claim a credit or refund for fuel used for PTO operations, none have imposed a two-motor requirement.
To ensure accuracy and administrative convenience in determining PTO fuel use for ready mixed concrete trucks, NRMCA worked closely with the IRS to develop a comprehensive and precise PTO Fuel Use Test. The NRMCA test, which was performed using 248 ready mixed concrete trucks across the United States, requires administrators to conduct four round trips using a truck representative of the company fleet. Trip #1 is a normal delivery of a load of ready mixed concrete from batch plant to customer. Trips #2-4 are simulation runs that mirror Trip #1 as closely as possible. Each simulation run varies only in the condition of the mixer drum (weighted or empty) and the status of the PTO (engaged or disconnected). The fuel tank is topped-off with a metered pump after each trip, and total trip fuel use is recorded along with time, mileage and other required information on the standard test reporting form provided by NRMCA. With the data recorded, PTO fuel use can be calculated using either a fuel use per-minute method or an averaging method. The latter method accounts for variances in traffic signals, congestion and weather.
Office of the President Robert A. Garbini, P.E.
Page 2
NRMCA’s final compiled test results indicate that 22% of a ready mixed concrete delivery vehicle’s total fuel is consumed for PTO operations. That is, on average, 22% of the total fuel consumed by a ready mixed delivery vehicle goes exclusively for the manufacturing of ready mixed concrete, but not for moving the vehicle or transporting the load of concrete. NRMCA retained two expert statisticians to evaluate the quality of the test results using a statistical method called bootstrapping, Dr. Gunnar Lucko of the Catholic University of America and Dr. Timothy J. Robinson of the University of Wyoming. In their report, Drs. Lucko and Robinson established with a high degree (95%) of confidence that the industry’s actual PTO fuel use was 22%. They concluded that NRMCA devised a well-designed test; that the data analysis was rigorous; and, that a very conservative approach was taken to ensure the quality of the results. The test also has the added benefit in that the data it produces is derived from real world ready mixed concrete delivery operations. Moreover, the rigor and accuracy of the NRMCA PTO Fuel Use Test can be attested to by the IRS fuel use study team since it witnessed the administration of the test at a ready mixed concrete plant in Las Vegas, Nevada.
With the accuracy of the PTO Fuel Use Test established, it will be eminently feasibly for the IRS to administer a 22% fuel tax credit or refund. According to the NRMCA’s 2006 Industry Data Report (which covers thirty percent of the industry’s production), over the past three years, a ready mixed concrete truck delivered an average 5,778 cubic yards of concrete. NRMCA’s 2006 Fleet Survey reports that over the same period, .95 gallons of fuel was consumed for each yard of concrete delivered. Thus, an average 5,489 gallons of tax-paid fuel is used by a ready mixed concrete truck per year. We know that 22% of this fuel, or 1,208 gallons per year, is used for an off-highway business use, i.e., PTO operations. Multiplying 1,208 gallons by the current tax rate of .243 provides an average per truck credit, or refund, of $293 per year.
It would be administratively feasible for the IRS to allow ready mixed concrete producers to claim an annual flat credit or refund of $293 per truck. To be eligible for this rebate, trucks would have to be registered, licensed and insured with their respective state motor vehicle departments.
It would be equally administratively feasible for the IRS to allow ready mixed concrete producers to claim a credit or refund based upon actual fuel used. This could be established on a per truck basis where the amount of fuel used by each ready mixed concrete truck is recorded electronically or by means of a logbook. The aggregate amount of recorded tax-paid fuel used could be calculated fleet-wide on a quarterly or annual basis. Twenty-two percent of the aggregate amount of tax paid fuel would be multiplied by the .243 rate to determine the amount of credit or refund claimed.
The flat rate and the actual fuel used claim methods can be readily supported with documentation that will show the number of gallons used and purchased during the claim period, and the number of gallons used for each nontaxable use. This documentation is already routinely kept by ready mixed concrete producers for cost accounting purposes. Moreover, both claim methods reflect current technology and would take minimal time to implement and verify.
Thank you for the opportunity to comment further on the fuel use study. If you need additional information, please feel free to contact Robert L. Sullivan, NRMCA’s Vice President of Government & Legal Affairs at (240) 485-1148 or at [email protected].
Sincerely,
