[Federal Register: April 2, 2003 (Volume 68, Number 63)]
[Rules and Regulations]
[Page 15940-15942]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02ap03-7]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 40, 48, and 49
[TD 9051]
RIN 1545-AX97
Diesel Fuel; Blended Taxable Fuel
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations relating to the tax
on diesel fuel and the tax on blended taxable fuel. This document also
makes clerical and clarifying changes to other excise tax regulations.
These regulations affect persons that remove, enter, or sell diesel
fuel or remove or sell blended taxable fuel.
DATES: Effective Date: These regulations are effective April 2, 2003.
Applicability Date: For date of applicability, see Sec. 48.4081-
3(g)(2)(ii).
FOR FURTHER INFORMATION CONTACT: Frank Boland, (202) 622-3130 (not a
toll-free call).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments to the Manufacturers and
Retailers Excise Tax Regulations (26 CFR part 48) relating to the
definition of diesel fuel, the definition of refinery, and the
application of the tax on blended taxable fuel.
On May 16, 2002, a notice of proposed rulemaking (REG-106457-00)
was published in the Federal Register (67 FR 34882). Written comments
were received but no public hearing was requested or held. After
consideration of all the comments, the proposed regulations are adopted
as revised by this Treasury decision.
Explanation of Provisions
Definition of Diesel Fuel
Existing regulations generally define diesel fuel as any liquid
that, without further processing or blending, is suitable for use as a
fuel in a diesel-powered highway vehicle or diesel-powered train. The
proposed regulations would add to existing regulations by providing
that a liquid is suitable for use as diesel fuel if the liquid has
practical and commercial fitness for use in the propulsion engine of a
diesel-powered highway vehicle or diesel-powered train.
One commentator suggested that the final regulations should provide
that a liquid does not possess practical and commercial fitness solely
by reason of its possible or rare use as a fuel in a vehicle or train.
The final regulations adopt this suggestion. The final regulations also
provide that a liquid may possess practical and commercial fitness even
though the liquid is not predominantly used as a fuel in a vehicle or
train.
The commentator also suggested that the final regulations should
describe practical and commercial fitness in a manner similar to the
description of the term in Sec. 145.4051-1(a)(4) of the temporary
regulations relating to the tax on the retail sale of certain heavy
vehicles. The final regulations do not adopt this suggestion because
Treasury and the IRS believe that such detail is not required to
determine the classification of most liquids.
Definition of Refinery
Under existing regulations, refinery generally means a facility
used to produce taxable fuel from crude oil, unfinished oils, natural
gas liquids, or other hydrocarbons and from which taxable fuel may be
removed by pipeline, by vessel, or at a rack. The proposed regulations
would remove from the definition the references to the source of
materials used to produce taxable fuel.
Taxable fuel includes finished gasoline and certain gasoline
blendstocks. One commentator indicated that because gas processing
plants and chemical plants produce small amounts of gasoline
blendstocks, the plants would be considered refineries under the
proposed definition. Thus, the commentator suggested, refinery should
exclude gas processing plants and chemical plants that mainly produce
products other than taxable fuel.
In fact, however, the gas processing plants and chemical plants
described by the commentator are refineries under existing regulations.
A facility does not lose its status as a refinery simply because it
produces only small amounts of gasoline blendstocks. Thus, the final
regulations do not adopt the commentator's suggestion.
[[Page 15941]]
Liability for Tax on Sale or Removal of Blended Taxable Fuel
Under section 4081(b), tax is imposed on taxable fuel removed or
sold by the blender. Blended taxable fuel is taxable fuel that is
created by mixing a liquid that has not been taxed with previously
taxed taxable fuel. Under existing regulations, the blender is liable
for tax on the sale or removal of blended taxable fuel. Generally, the
blender is the person that owns the mixture immediately after it is
created. Under the proposed regulations, a person would be jointly and
severally liable for the tax on blended taxable fuel if the person
sells a previously untaxed liquid as a taxed taxable fuel and that
liquid becomes a part of a mixture that is blended taxable fuel.
Several commentators suggested that the regulations provide relief
for certain unsuspecting blenders. For example, a wholesale distributor
of petroleum products might offer to sell undyed diesel fuel (a taxed
taxable fuel) to a retailer but actually deliver an untaxed liquid.
Even though the retailer bought the liquid in good faith, the retailer
would be liable for tax as a blender nevertheless because mixing the
untaxed liquid with the preexisting inventory of undyed diesel fuel
produces blended taxable fuel. Although the proposed regulations would
impose joint and several liability on the dishonest wholesaler, the
commentators are concerned that the unsuspecting retailer would still
be liable for tax at the discretion of the IRS. To resolve this
problem, the commentators generally suggested that the blender should
be able to avoid liability for tax if the blender acted reasonably and
in good faith when it relied on assurances of the seller as to the
status of the liquid it bought.
Treasury and the IRS are concerned that the suggested rule may
result in losses to the Highway Trust Fund. If retailers and
wholesalers take inconsistent positions regarding the representations
made by the wholesaler, the IRS might be unable to establish that
either party is liable for the tax. Alternatively, even if the IRS is
able to establish the wholesaler's liability, it may be unable to
collect the tax from the wholesaler. In either case, the Highway Trust
Fund would be inappropriately penalized for the retailer's choice of an
untrustworthy supplier. Accordingly, the final regulations do not adopt
the suggested rule. Although the final regulations allow the IRS to
collect the tax from a person other than the blender in certain
circumstances, blenders will remain liable (as under existing
regulations) for the tax on the blended fuel.
Other Provisions
The final regulations also make clerical and clarifying changes to
other excise tax regulations. For example, in the excise tax procedural
regulations, the final regulations remove a redundant sentence. In the
regulations relating to the taxes on communication services and air
transportation, the final regulations remove obsolete provisions that
refer to the district director.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It also has been
determined that section 553(b) of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these regulations and, because
these regulations do not impose on small entities a collection of
information requirement, the Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Therefore, a Regulatory Flexibility Analysis
is not required. Pursuant to section 7805(f) of the Internal Revenue
Code, the notice of proposed rulemaking preceding these regulations was
submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on its impact on small business.
Drafting Information
The principal author of these regulations is Frank Boland, Office
of Associate Chief Counsel (Passthroughs and Special Industries).
However, other personnel from the IRS and Treasury Department
participated in their development.
List of Subjects
26 CFR Parts 40 and 48
Excise taxes, Reporting and recordkeeping requirements.
26 CFR Part 49
Excise taxes, Reporting and recordkeeping requirements, Telephone,
Transportation.
Adoption of Amendments to the Regulations
0
Accordingly, under the authority of 26 U.S.C. 7805, chapter 1 of 26 CFR
is amended as follows:
PART 40--EXCISE TAX PROCEDURAL REGULATIONS
0
1. The authority citation for part 40 continues to read in part as
follows:
Authority: 26 U.S.C. 7805. * * *
0
2. In Sec. 40.6302(c)-3, paragraph (d) is amended as follows:
0
a. The heading is revised.
0
b. The first sentence is removed.
The revision reads as follows:
Sec. 40.6302(c)-3 Special rules for use of Government depositaries
under chapter 33.
* * * * *
(d) Computation of net amount of tax that is considered as
collected during a semimonthly period. * * *
* * * * *
PART 48--MANUFACTURERS AND RETAILERS EXCISE TAXES
0
3. The authority citation for part 48 continues to read in part as
follows:
Authority: 26 U.S.C. 7805. * * *
Sec. 48.4041-21 [Amended]
0
4. Section 48.4041-21, paragraph (b)(1)(i), is amended by adding the
language ``by the buyer for a taxable use'' after ``covered by the
statement is for use''.
0
5. Section 48.4081-1 is amended as follows:
0
a. Paragraph (b) is amended by:
0
1. Removing the language ``Sec. 48.4041-8(b)'' in the definition of
Diesel-powered highway vehicle and adding ``Sec. 48.4061(a)-1(d)'' in
its place.
0
2. Removing the language ``from crude oil, unfinished oils, natural gas
liquids, or other hydrocarbons'' in the first sentence of the
definition of Refinery. b. Paragraph (c)(2)(i) is amended by adding
three sentences to the end.
The addition reads as follows:
Sec. 48.4081-1 Taxable fuel; definitions.
* * * * *
(c) * * *
(2) * * * (i) * * * A liquid is suitable for this use if the liquid
has practical and commercial fitness for use in the propulsion engine
of a diesel-powered highway vehicle or diesel-powered train. A liquid
may possess this practical and commercial fitness even though the
specified use is not the liquid's predominant use. However, a liquid
does not possess this practical and commercial fitness solely by reason
of its possible or rare use as a fuel in the propulsion engine of a
diesel-powered highway vehicle or diesel-powered train.
* * * * *
0
6. Section 48.4081-3 is amended by revising paragraphs (g)(2) and
(g)(3) to read as follows:
Sec. 48.4081-3 Taxable fuel; taxable events other than removal at the
terminal rack.
* * * * *
[[Page 15942]]
(g) * * *
(2) Liability for tax--(i) Liability of the blender. The blender is
liable for the tax imposed under paragraph (g)(1) of this section.
(ii) Liability of seller of untaxed liquid. On and after April 2,
2003, a person that sells any liquid that is used to produce blended
taxable fuel is jointly and severally liable for the tax imposed under
paragraph (g)(1) of this section on the removal or sale of that blended
taxable fuel if the liquid--
(A) Is described in Sec. 48.4081-1(c)(1)(i)(B) (relating to
liquids on which tax has not been imposed under section 4081); and
(B) Is sold by that person as gasoline, diesel fuel, or kerosene
that has been taxed under section 4081.
(3) Examples. The following examples illustrate the provisions of
this paragraph (g) and the definitions of blended taxable fuel and
diesel fuel in Sec. 48.4081-1(c):
Example 1. (i) Facts. W is a wholesale distributor of petroleum
products and R is a retailer of petroleum products. W sells to R
1,000 gallons of an untaxed liquid (a liquid described in Sec.
48.4081-1(c)(1)(i)(B)) and delivers the liquid into a storage tank
(tank) at R's retail facility. However, W's invoice to R states that
the liquid is undyed diesel fuel. At the time of the delivery, the
tank contains 4,000 gallons of undyed diesel fuel, a taxable fuel
that has been taxed under section 4081. The resulting 5,000 gallon
mixture is suitable for use as a fuel in a diesel-powered highway
vehicle because it has practical and commercial fitness for use in
the propulsion engine of a diesel-powered highway vehicle. The
mixture does not satisfy the dyeing requirements of Sec. 48.4082-1.
R sells the mixture from the tank to a construction company for off-
highway business use.
(ii) Analysis--(A) Production of blended taxable fuel. R is a
blender within the meaning of Sec. 48.4081-1 because R has produced
blended taxable fuel, as defined in Sec. 48.4081-1, by mixing 1,000
gallons of a liquid that has not been taxed under section 4081 with
4,000 gallons of diesel fuel that has been taxed under section 4081.
The mixing occurs outside of the bulk transfer/terminal system and
the resulting product is diesel fuel because it is suitable for use
as a fuel in a diesel-powered highway vehicle.
(B) Imposition of tax. Under paragraph (g)(1) of this section,
tax is imposed on R's sale of the 5,000 gallons of blended taxable
fuel to the construction company. Even though the blended taxable
fuel is sold for off-highway business use, which is a nontaxable use
as defined in section 4082(b), the sale is not exempt from tax
because the blended taxable fuel does not satisfy the dyeing
requirements of Sec. 48.4082-1. Tax is computed on 1,000 gallons,
which is the difference between the number of gallons of blended
taxable fuel R sells (5,000) and the number of gallons of previously
taxed taxable fuel used to produce the blended taxable fuel (4,000).
(C) Liability for tax. R, as the blender, is liable for this tax
under paragraph (g)(2)(i) of this section. W is jointly and
severally liable for this tax under paragraph (g)(2)(ii) of this
section because the blended taxable fuel is produced using an
untaxed liquid that W sold as undyed diesel fuel (that is, as diesel
fuel that was taxed under section 4081).
Example 2. (i) Facts. W, a wholesale distributor of petroleum
products, buys 7,000 gallons of diesel fuel at a terminal rack. The
diesel fuel is delivered into a tank trailer. Tax is imposed on the
diesel fuel under Sec. 48.4081-2 when the diesel fuel is removed at
the rack. W then goes to another location where X, the operator of a
chemical plant, sells W 1,000 gallons of an untaxed liquid (a liquid
described in Sec. 48.4081-1(c)(1)(i)(B)). However, X's invoice to W
states that the liquid is undyed diesel fuel. This liquid is
delivered into the tank trailer already containing the 7,000 gallons
of diesel fuel. The resulting 8,000 gallon mixture is suitable for
use as a fuel in a diesel-powered highway vehicle because it has
practical and commercial fitness for use in the propulsion engine of
a diesel-powered highway vehicle. The mixture does not satisfy the
dyeing requirements of Sec. 48.4082-1. W sells the mixture to R, a
retailer of petroleum products, and delivers the mixture into a
storage tank at R's retail facility. R sells the mixture to its
customers.
(ii) Analysis--(A) Production of blended taxable fuel. W is a
blender within the meaning of Sec. 48.4081-1 because W has produced
blended taxable fuel, as defined in Sec. 48.4081-1, by mixing 1,000
gallons of a liquid that has not been taxed under section 4081 with
7,000 gallons of diesel fuel that has been taxed under section 4081.
The mixing occurs outside of the bulk transfer/terminal system and
the resulting product is diesel fuel because it is suitable for use
as a fuel in a diesel-powered highway vehicle. Thus, R has bought
blended taxable fuel.
(B) Imposition of tax. Under paragraph (g)(1) of this section,
tax is imposed on W's sale of the 8,000 gallons of blended taxable
fuel to R. Tax is computed on 1,000 gallons, which is the difference
between the number of gallons of blended taxable fuel W sells
(8,000) and the number of gallons of previously taxed taxable fuel
used to produce the blended taxable fuel (7,000). No tax is imposed
on R's subsequent sale of the blended taxable fuel because tax is
imposed only with respect to a removal or sale by the blender.
(C) Liability for tax. W, as the blender, is liable for this tax
under paragraph (g)(2)(i) of this section. X is jointly and
severally liable for this tax under paragraph (g)(2)(ii) of this
section because the blended taxable fuel is produced using an
untaxed liquid that X sold as undyed diesel fuel (that is, as diesel
fuel that was taxed under section 4081). R has no liability for tax
because R is not a blender and did not sell any untaxed liquid as a
taxed taxable fuel. R only sold taxed taxable fuel, the blended
taxable fuel bought from W.
* * * * *
Sec. 48.6427-8 [Amended]
0
7. Section 48.6427-8, paragraph (d), introductory text, is amended by
adding ``or kerosene'' after ``diesel fuel''.
PART 49--FACILITIES AND SERVICES EXCISE TAXES
0
8. The authority citation for part 49 continues to read in part as
follows:
Authority: 26 U.S.C. 7805. * * *
Sec. 49.4291-1 [Amended]
0
9. Section 49.4291-1 is amended as follows:
0
a. The language ``district director'' is removed in the three places it
appears and ``Commissioner'' is added in its place.
0
b. In the fourth sentence, the language ``same district conference'' is
removed and ``same conference'' is added in its place.
David A. Mader,
Assistant Deputy Commissioner of Internal Revenue.
Approved: March 7, 2003.
Pamela F. Olson,
Assistant Secretary of the Treasury.
[FR Doc. 03-7812 Filed 4-1-03; 8:45 am]
BILLING CODE 4830-01-P