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105 A P P E N D I X C This appendix contains edited and paraphrased summaries of many of the interview responses related to topics in this report. The responses generally are grouped according to the question in the interview protocol, but the nature of the interview process means that useful comments came from a variety of points in the interviews. Since the interviews did not allow for direct quotation, all responses should be viewed as the interviewer's interpretation of the comments and should be considered suggestive of issues rather than as verified information. The paraphrased items are in regular text and the general comments are in italics. C.1. Responses Related to the Point of Taxation and Refunds Point of Taxation A number of states have moved the point of taxation to the rack. Most report an increase in revenue associated with the move, but some do not. Texas shifted the point of taxation to the rack in January 2004. Texas has not seen a spike in collections since moving the point of taxation to the rack but the point of taxation was already close to the rack. Florida collects most of the gas tax at the rack but not all. Counties in Florida have the option to add their own tax, and the state has an additional tax that it imposes if the county imposes a tax. All tax for the state and the minimum amount collected for any county is collected at the rack. Any additional county tax is collected upon delivery to a service station or end user. Diesel has one uniform tax, which was done to join IFTA. Before that the tax was the same as for gasoline. Before moving to the rack, the point of taxation was at wholesale. Wholesalers could buy fuel without paying the tax. Taxing at the rack has been an improvement in revenue collection but it makes it easier to bootleg from Georgia. It used to be easier to spot Georgia fuel coming into the state than it is now. Also, it is harder to catch un-taxed kerosene coming into the state. The benefit of taxing at the rack is that it has essentially eliminated bad debt and failure to file. Florida used to lose $2 or $3 million per year in bad debt. The point of taxation has not been changed in Mississippi but the tax is actually above the rack. They collect at distributor for gasoline (first receipt: pipeline, tanker, before terminal, many Interview Responses
106 Distributors can sell to other bonded licensed distributors without tax, but after the third sale, the tax must be paid. Mississippi and Tennessee rivers mean that large amounts of fuel move through the state. Even federal information is below the rack since it is collected as fuel comes across the rack. If people communicate properly, coming off the barge and going into the terminal is an excellent checkpoint. It is a little less than a refinery report but a good crosscheck mechanism. Must receive and use information to stop evasion. DOT sees things that accountants and auditors do not. A dishonest terminal operator may sell taxable fuel going into a terminal as something else. One called it rocket fuel. If you cannot prove it is used in a vehicle, then it is not subject to tax. North Carolina moved the point of taxation to the rack in 1996. Prior to 1996, they were a distributor-level tax state. The change reduced the number of taxpayers from 1,400 to 300. It was noted that at the distributor levels, states deal with exemptions and tax-free exchange of products. Much of the evasion occurs when tax-free products are exchanged. The daisy chain was prevalent in the late 80s and early 90s. Before changing to the rack, the gasoline tax was on the distributor at the time of pull from terminal, so there was no ability to daisy chain for gasoline. The move to rack was a bigger difference on diesel because tax-free sales were allowed, and daisy chains were possible. Transactions at the rack allow for greater transparency and improved compliance. Tax at the rack has worked quite well. They used to have distributors who would not pay. Accounts receivables and write-offs of uncollectible debt are way down. South Carolina moved to the rack for both starting in May of 1996. There was an increase in revenue, but not as high as it might have been. They get a lot of fuel from North Carolina, which had already shifted to the rack, and the North Carolina shift helped South Carolina. Minnesota reported that they still tax the distributor, but on Sept 1, 2004, they changed the point of taxation from the last licensed distributor to the first distributor and saw an increase in collections. The change eliminates the possibility of a daisy chain. They are not convinced that a move to the rack would save money or taxes. They also feel they face a lower risk due to a smaller tax due in case of bankruptcy. Pennsylvania moved from retail to the distributor level in 1997. The number of accounts was reduced from 20,000 to 600 but there was not much revenue change. Wisconsin reported moving to the terminal rack about ten years ago and seeing an increase in revenue. They find this to be important but noted that exemptions and refunds create problems as well. would call first importer tax). Tax on gasoline is collected twice. First collection is on entry into the state. Payment is due immediately, not at a later time. Then the distributor will pay on the 20th of the next month. This procedure gives automatic volume reconciliation. It allows the state to check volume from majors against volume from distributors. The next month the majors will get credit for taxes paid. If new tax is above the credit, they must pay. Otherwise, the credit moves forward. Tanker trucks can bring fuel in without reporting, so they are not in the system.
107 Arkansas attempted to shift its point of taxation to the terminal around 1997. The first receiver (distributor) has been the point of taxation for many years. Electronic filing was instituted instead. They report that distributors are opposed to a terminal tax due to loss of the float. They think they are doing fine in terms of evasion but are amazed at the reported increase for states moving to rack. They do not believe that they would get much of a revenue increase. Idaho also reports industry resistance to moving taxation to the rack. Idaho is a first receiver state; fuel is taxed when it is sold to the supplier. The tax was moved to the first receiver status in 1996 and there was a 19 percent increase in revenue. Distributors like the float and resist moving the tax to the rack. However, the tax at first sale removed the possibilities of distributors playing shell games and achieved many of the benefits of taxing at the rack. The amount of the float was not an issue for Washington State when moving the point of taxation up to the rack because the float exists for distributors. Although Washington taxes at the rack, distributors are only required to remit taxes two days prior to the tax being due from the terminal operator, so the float continues. Nebraska reports that the tax is at the wholesale level but it is most often paid at the distributor level. Major legal changes in 1992 changed the point of taxation to receipt by wholesaler rather than sale by wholesaler. The industry does not want the tax at the rack and has fought strongly on the point. The state would like to change it to tax at the rack but they believe that if they move to tax at the rack they would also have to do other things. Some states tax at rack and do not do audits or field work. Their agreement with the industry is to not try to change the point of taxation any more. They are comfortable with this as long as they have the resources to audit. Nebraska does not see evasion as a key issue. They see evasion as more a question of how well the taxing method is enforced. New Jersey taxes at the distributor level for gasoline and the seller/user (retail) level for diesel. New Jersey has drafted legislation to move the point of taxation to the rack level because there are fewer taxpayers. There are presently 7,500 to 8,500 licensees. Taxing at the rack level will reduce the number of taxpayers into the hundreds. The FTA interviewee does not think there is a best way to collect the tax. The view was expressed that it does not matter at which point the tax is levied but there must be on-road and in-house enforcement. The interview analysis seems to confirm this conclusion with the additional conclusion that the structure of the tax system may be as important as the level at which the tax is levied in determining the potential for evasion. A number of states reported that attempts to move taxation to the rack have run into industry opposition. Alaska taxes at the distributor level and has since 1970. Changing the point of taxation has been discussed internally, but issues with refunds and quirks in the physical distribution system prevent a shift.
108 Arkansas has a refund program but it is very limited. Volunteer fire departments are the only ones who can apply for a refund but few do. Local governments can use dyed fuel and most volunteer fire departments have arrangements with local governments to buy dyed fuel. There were only eight refunds in one year. Florida issues refunds for diesel but not gasoline. The refund process has two primary categories. The ultimate vendor credit allows vendors to sell fuel tax-free and take a credit, e.g., for sales to farmers, kerosene for home heating, sales to the federal government, or export. If a construction company buys clear fuel, there is a tax return that they can file (refund document). It requires a schedule of all fuel purchased. A use tax is deducted from the fuel tax refund since sales tax is due on off-road use of fuel. Some states require payment of the sales tax and then process the refund but Florida has all of the taxes in the same department. They can also transfer the money between funds for payments to local governments. They can require receipts but they usually only look at them during an audit. The schedule has the FEI number of the vendor, so they can track the fuel if there is a question. Idaho requires receipts or withdrawal records if the fuel is taken out of bulk. In Indiana, taxpayers can file a separate form or schedule for refunds or on amended return. They require invoices and receipts. Minnesota only allows farmers to buy gasoline tax free. Construction companies, loggers, and resorts with boats can file for a refund as soon as the fuel is consumed but within one year of invoice. The power take-off refund can be for gas or diesel and must have original invoices. If questioned, it goes to auditor in that area. Distributors do not have to file invoices. Montana issues refunds for both non-taxable use and for other non-taxable fuel such as airlines (partial refund), railroads and government agencies. Refunds are issued both for gasoline and diesel for off-road use. Taxpayers must document off road use and tax paid. Commercial airlines aviation fuel is taxed at $.04 per gallon and can obtain a refund of $.02 per gallon. This is a statute and they process the refund claims. Nebraska issues many refunds. You can receive a refund for taxed clear fuel if you can show it was a non-taxable use. Refunds are often audited. The gasoline refund was set up to be a credit on income tax returns. Under the income tax, it was not necessary to submit much documentation. Last year it was changed to a direct refund. There are more requests for refunds on gasoline than diesel. The change makes it one law and brings the gasoline refund process in house with closer scrutiny. In New Jersey, receipts must accompany refund applications. Refund claims are reviewed based on a random sample. New Jersey does not believe that evasion through refunds is a significant problem. Refund claims are thought to be 99.9 percent correct. States differ substantially in the volume of refunds, the documentation required, and the amount of auditing done. Alaska requires the original invoice for fuel purchased and, if fuel is re-sold as exempt, they require a sales invoice. They also require an explanation of the off road equipment where the fuel is used.
109 information is often required. Each application is reviewed. Refunds are relatively insignificant in percentage terms. Refunds are a large concern for North Carolina. North Carolina refunds over $50 million annually. They require backup receipts and a statement of the sort of operation for which the fuel was used. There are a number of companies / individuals who can claim refunds. In the last five years, the number of refund applicants has grown significantly. There are a number of exemptions and North Carolina views this as a significant source of evasion and wants to shift to the tax or dye scenario. North Dakota provides refunds for gasoline to the consumers â agricultural use is the biggest type, construction also results in refunds. They audited three years of refund applications but stopped doing so because the audit returns were so insignificant. There were only two assessments during the three years. Diesel is either taxed or dyed. For aviation fuel, there is an 8 cent per gallon tax. If it is taxed as diesel, the user can apply for a refund but then must pay the sales tax as well. In Oregon, a refund claim related to gasoline is submitted that includes the number of gallons, the purposes for which the gallons were used and why a refund is due. An auditor reviews each claim. The auditor has an information sheet that provides estimates of how much fuel is burned for various agricultural activities. That is, a farmer should not ask for a refund on thousands of gallons of gasoline when they own a 10-acre farm. The person seeking the refund must submit original purchase receipts. The claims are entered into the system and a desk review is conducted. They often ask for more documentation. Every single claim goes to an auditor although small claims do not get a thorough review. South Carolina allows refunds for off-road use. The applicant must be registered and must provide copies of invoices. Audits can go back up to three years. South Dakota has a refund program for off-road commercial and agriculture (mostly farmers). You must submit a claim form and the original fuel tickets with data on seller and gallons purchased. It is not audited. It is accepted as reported but they must report acreage and other relevant information. They contact the claimant if it seems unreasonable. They would like to be able to audit but it is politically sensitive. There are fewer and fewer claims each year due to farm consolidation and reduced agriculture. Texas has few tax exempt uses for gasoline â school districts and the federal government. Initially, Texas allowed for refunds under the diesel program because dyed fuel was not always available. As of 2004, it must all be taxed or dyed. Utah requires an application, receipts, and the purpose for refunds. Off-road uses generate refunds for diesel fuel but all gasoline is taxable except for agricultural use. In Utah, exempt uses are often refunded through the IFTA return but they can also file a direct refund request with documentation. For example, power units used for cement mixers can be filed through IFTA. The IFTA option can only be used for off-road use in the state where the return is filed. New York requires the refund application, receipts, and a declaration of the purpose for which the fuel was used. If a red flag is raised, there is follow-up with the applicant. Additional
110 In Washington, fuel invoices are sent in with refund requests and the reports include equipment lists (including non exempt equipment) and identify exempt uses. Random checks are conducted and unusual records are flagged. Wisconsin allows refunds. Three of the auditors are refund specialists. There are both off-road and vendor refunds (the end user can sign an exemption certificate and get fuel tax-free from the wholesaler). The vendor has to list fuel use by about nine types but no other documentation is required. For agriculture refunds, you must submit the original receipt and information on the equipment used. For non-agriculture refunds, you must also submit invoices and the amount of fuel used in each piece of equipment. Refunds are usually just for gasoline but some are processed for diesel -- e.g., diesel sold for heating oil. In Canada, gasoline refunds are very limited. Commercial operators can get refunds for non- road use. There is no refund for diesel. It is either dyed for off-road use or taxed. The Navajo Tax Commission allows refunds for agriculture or for Navajo government use. Receipts must be filed for a refund. FTA believes that there should not be refunds. All fuel should be taxable but that will not happen. With refunds, if you require electronic filing and track fuel, you could use this information to trace back refund requests. Information from the supplier should already be in the database so the filer could not provide phony invoices and you would know that the tax was collected. Chevron sees refunds as a huge issue because in some states the supplier has to give the refund to the customer and then file with the state. They believe the refund should be the responsibility of the end user, but there are many differences across the country. They often have to apply on behalf of the customer. If the supplier must apply, it limits the number of requests the state must deal with but the suppliers think the end consumer should be applying. The focus is on what the end user did with the fuel. Refunds are viewed as a problem nationwide and may be one of the great sources of tax evasion. The process is the problem. The year before last, the biggest evasion case in Texas was a state employee creating fictional refund claims. Often, only the first refund claim is checked carefully. The state employee would then enter false ones. It happened in other states as well. Issuing refunds as an income tax credit reduces fictional ones but not all states have income taxes. The Petroleum Marketers Association does not think states do as well with refunds as they wish. For states taxing at a low point of distribution, there are almost no refund issues, just a few consumer ones. This works fine from the industry perspective. As you raise the level it raises refunds dramatically. The state must adjust and set up a system. The system should be worked out with taxpayers. The IRS has a claims process for refunds. If you are a taxpayer and file an IRS Form 720 you can take the refund as an offset. Otherwise, you must file separately for a refund and have proof of purchase and proof of use.
111 The ATA finds that filing for refunds is a large concern for trucking companies at the state level. There is an occasional complaint that the IRS can be slow to make a refund, but it does not seem to be a big issue. Most major carriers farm out state refund claims to third parties, who charge a percentage of 35 percent to 50 percent. The size of what they let collectors keep is an indication that states can be difficult to deal with on refunds. States probably over collect the fuel tax due to the difficult process for refunds. C.2. Responses Related to Coordination Issues Variation in Tax Systems between States The interviews confirmed that differences in tax systems create potential for evasion. Arkansas definitely perceives this to be a problem. Missouri and Tennessee have destination state taxes. The tax is charged for whatever state is listed when the fuel leaves the terminal. Arkansas loses revenue when a load is pulled with a low-tax destination and the destination is later changed to Arkansas. It might not be true intent to evade the tax, but that is the consequence. Drivers know a tax was paid but do not pay attention to the state. Also, if you are not a licensed exporter in Missouri or Tennessee, they will charge their own state tax, but the fuel may be exported anyway. Arkansas would like to have this data in electronic form. Indiana finds that differences in tax rates are not big enough to make it worthwhile to bootleg. Points of taxation differences may be a problem. They pass a lot of information between states and need strong laws. States have come a long way since 1989 when uniformity began. However, uniformity also requires industry cooperation. Electronic filing is more important than uniformity. If you know what neighboring states do then you can deal with it. Agents must know what goes on in their state. Track fuel in a timely manner and you can deal with it. Electronic filing is important but many big oil companies do not file electronically unless mandated. There is an expense to the company but it is important to the states. Industry has to want some of these things to happen. Taxes in Mississippi are lower then in some surrounding states but they tax more fuel types, such as jet fuel and dyed diesel. Jet fuel out of Louisiana is not taxed. They levy a 5.7 cents tax on dyed diesel but not in other states. The State Tax Commission does not communicate with other states on amounts of fuel exported. They found one instance of over half a million gallons reported going to another state but it turns out it was not a licensed distributor in the other state. Uniformity creates an avenue for communication. North Dakota noted that the information is presented differently from state to state and this makes it more difficult to cross-reference. For example, Minnesota is a destination state. Minnesota doesnât require all the racks to report data, but North Dakota does because they are an origin state.
112 Texas is not totally uniform with bordering states, and agreements are in place to allow them to share information. If fuel is purchased in a border state and destined for import to Texas, agreements are in place to require the border state to collect the tax and transmit it to Texas. Thus, the lack of uniformity is not seen as a significant issue. Texas runs discrepancy reports and is also attempting to develop a motor fuel tracking system. There was one large case of evaders who were claiming fuel for export to New Mexico and then selling the fuel in Texas. In Canada, the coordination issue is somewhat different than it is in the United States. They have uniform returns across the provinces but the federal returns are different. The national government and the provinces collect different data due to the different bases for the taxes. The provincial taxes are retail taxes while the federal tax is an indirect tax on the manufacturer rather than a retail tax. Other comments seemed to reinforce the perception that differences in tax rates and tax systems create the potential for evasion, but that the key to actually stopping evasion was sharing information. The interviewee with OIG of the US DOT reported that the FHWA had the first motor fuel tax evasion meeting in October 2004. Twenty-four states were represented. Each state operates differently but they also do not feel that they have the resources to address the problem. More uniformity in regulations and audits would be helpful but it is even more important to share information. States could have the same problem with the same companies but they would not know it because the information is not shared. Mississippi has the DOT involved while Louisiana has the DOR. At the federal level the DOT is responsible for criminal investigations while the IRS has the responsibility to collect the taxes. Each state has different revenue laws. Some will share information with the federal DOT and some will not. It is neither consistent nor uniform. There needs to be an information sharing strategy between states. Some states have established communications with neighboring states but many companies work across the nation. States need a mechanism that allows for information going to the right people who will act on it as well as seeing that it is sent. Information often goes to those who cannot act on it. Variation in Tax Rates between States Tax rate differentials seem to create the biggest problems for high-tax states. Florida noted that we would hear a great deal about Georgia, Wyoming, and New Jersey, and Oregon for diesel. Interviews did indeed verify this perception. We interviewed respondents in several states near Wyoming, and there was general concern that Wyoming's low tax rate created a potential for tax evasion. Montana perceives a problem due to the sizable difference in tax rates between Montana and Wyoming. It is reportedly easy to pay the Wyoming tax and sell the fuel in Montana. Wyoming sends export information; but if the Wyoming tax is paid, they do not expect the fuel to be exported, and do not report it. Hence, there is no paper trail. This makes it hard for Montana to monitor imports. There is no sharing of information between Montana and Wyoming on fuel that is tax-paid. However, some states feel that they have addressed exchange of information with other states to mitigate tax evasion.
113 Utah also views Wyoming as being such a low-tax state that import/export schemes are a significant issue, with fuel purchased in either Utah or Wyoming. There are five refineries in Utah, and they are not a significant importing state. An exporter could claim an export to Wyoming and pay the Wyoming tax, but leave the fuel in Utah. There is no reporting at the retail level, so an unlicensed retail outlet also could purchase fuel in Wyoming without being exposed. Nebraska has a concern because of both Wyoming and Missouri, a couple of states with low rates. Nebraska used to have rates much higher than most of the surrounding states, but some of their neighbors have raised rates so the difference is less of an issue than in the past. Despite the low-tax neighboring states, it is not perceived to be a big problem as long as enforcement is kept up. South Dakota is another neighbor of Wyoming that does not seem overly concerned by the rate difference. They noted that Wyoming has a lower tax, and they engage in some enforcement efforts along the Wyoming border. However, it is not considered a big issue. Both Nebraska and South Dakota noted that enforcement can offset the rate difference. For example, South Dakota is looking at a business they believe is bringing fuel into the state and not reporting it. They believe that only surveillance can identify this fuel. They will need to set up special reviews of BOLs and other reports but it can be done. Washington has a problem because Oregon does not tax most diesel fuel, and the tax that is levied is at the retail level. The Oregon system has been improved in the last two years. If you are exporting to another jurisdiction from Oregon, you must be licensed in the import state. To import into Oregon, you must be licensed in both jurisdictions. Recently, Oregon enacted the change and that significantly assisted in deterring evaders in Washington. Before, companies were licensed in Oregon and exporting to Washington without paying tax. Washington shares export schedules with border states, and believes that careful tracking of fuel into and out of the state reduces the potential for evasion. Several other states noted that tax rate differences were a concern. Wisconsin reported being a high-tax state and having problems with the reporting of where fuel was delivered (e.g., Minnesota at $.20 versus their $.291). Kansas has a higher tax rate than Oklahoma, so they believe it is profitable to divert fuel by an exporter claiming fuel is going to another state while selling it in Kansas. New Jersey is another low-tax state, and it recognizes that its low rates present challenges. Export information is shared with neighboring states, as requested by other states. Georgia is also noted for its very low rates and the problem that causes for other states. North Carolina is the high-tax state in their region. The North Carolina fuel tax is 24.3 cents per gallon while Georgia is at 8 cents per gallon. Hence, North Carolina is a good state for evaders to divert motor fuel to after paying the tax in Georgia, and North Carolina sees this as an important problem.
114 Florida also borders Georgia. They have a problem with bootlegging from Georgia, where the Georgia tax is paid, and the fuel then goes to Florida. They even have unlicensed trucks picking up a load and bringing it into Florida, or reverse bootlegging where they claim the fuel is for Georgia but it stays in Florida. Florida has taken actions to limit the loss of revenue. They believe that the most revenue impact comes from perfecting legislation rather than from enforcement. The interviewee stated that dealing with evasion through enforcement is usually too late. Under their old laws, if they found that fuel came from Georgia, they might not be able to collect the tax anyway. They changed the laws to be more effective. One provision makes it mandatory for the seller to itemize state and local taxes paid. The purchaser owes the tax if the invoice does not have itemized detail. This causes retailers to force vendors to pay the proper tax. Invoices used to say all state and local taxes paid, but they were paying the Georgia tax not the Florida one. A seller in Georgia could evade the Florida tax, and it would be hard to prosecute in another state. The change in the law allows for easier enforcement. Another problem noted was that many states with taxes at the rack have destination state taxing but distributors must be licensed. Under current law, Florida does a full criminal background check on every registrant. A licensed distributor can pay the Georgia tax but must have records to show where the fuel is actually delivered. Florida has a failure-to-provide-records penalty of $5,000. If you file and report a fuel delivery in the wrong county, the penalty is up to 100 percent for underpayment. Florida requires everyone who hauls fuel to report. Most states do not. There are so many transactions that there are likely to be errors. Sometimes there are problems with the terminal records. For example, the terminal has a barge scheduled from Texas so it shows the fuel in inventory, but it was not actually delivered, so there is a discrepancy. Carrier records can be very helpful in tracking fuel or proving evasion. International Borders International borders are perceived to be a problem by some of the interviewees but it did not seem to be as much of a concern as borders with other states. The key issues were the same as for state borders. Montana borders Canada and sees this as a big problem. They are getting information from Treasury about what crosses the border but it is not currently usable because the data is in tape form, and they are not currently able to process it. They are in the process of building a system to translate tapes to track fuel. North Dakota also is concerned about border crossings. North Dakota lacks the staff to investigate customs data and data from other states. North Dakota does receive detailed information from Saskatchewan, and Saskatchewan did find a North Dakota distributor evading the Saskatchewan tax. In this case, the fuel would cross the border to North Dakota and then go back to Saskatchewan. Mississippi is very concerned. They are on the Gulf Coast and international freighters can come into the Gulf and lighter (offload to barge from seagoing vessel â 80 to 100 barges and one barge
115 can fill 60 tanker trucks). Fuel being offloaded is seen and a record is made but do they know anything about fuel tax evasion? A barge can go to Cairo, Illinois before there is mandatory reporting of the barge cargo. On the other hand, other interviewees did not perceive the border with Canada to present a problem. Wisconsin shares a border with Canada but does not believe there is a problem due to Lake Superior. Washington addresses British Columbia issues with customs documentation. Minnesota gets some fuel coming from Canada. It is a bigger issue for diesel and they track it. They now have formal tracking agreements, and get information from Inland Revenue on exports from Canada to Minnesota. Customs data is old, and there is a disclosure issue since their state data is all public information Ohio is on Lake Erie, and it also borders Canada. They keep in contact with folks in Canada, but it is not much of an issue. If anything, fuel is going from Ohio to Canada. Alaska perceived the issue to be a problem in the other direction. Canada has a higher tax rate, so there may be some fuel from Alaska going there but there is no direct evidence. The Canadian Fuel Tax Council did not see border differences as a significant issue. Differences across provinces are only around a penny or less a liter. There are a few pennies to be made across borders between the United States and Canada, but their high tax rates make evasion more attractive in Canada than in the United States. Import/export scams (buy fuel and claim to export but not export) are a problem. Not as much of this scam is occurring at the international borders because the United States has stepped up enforcement efforts. However, it is easy to find unmanned border crossings. Efforts have been stepped up along these unmanned areas due to 9/11. One area to be aware of is a large Native Canadian reservation in Quebec where there are allegations with respect to smuggling across the U.S. border at this location. FTA noted one border case with Revenue Canada. A trucker would start to fill and then stop and restart. The trucker would then prepare two BOLs, one for 2,000 gallons and one for 8,000 gallons. He would simply declare the 2,000 gallons when going into Canada. This is a problem for tax at the rack states. Nobody looks at actual weight versus what is declared. Weigh stations do not look at what is on the BOL. Also, if the truck is supposedly coming back empty they are not weighed and may have some fuel being returned. Mislabeling has also been experienced. There was one report of gasoline labeled as mineral spirits that came from Canada. The Mexican border does not appear to be an issue in terms of evading U.S. taxes because fuel is more expensive in Mexico. One interviewee noted that there are new federal laws, effective January 1, 2005, that should further reduce border tax evasion. They require customs agents to collect taxes, as well as customs duties, on fuel.
116 Inter-Governmental and Intra-Governmental Cooperation In general, the interviewees indicated that there is substantial room for improvement in both sharing information across jurisdictions and within states. FTA sees information sharing as a significant problem for most states. Eighty percent of the states share import/export schedules but only 10 percent do it electronically. Other types of cooperation have turf problems. DOT does not want to work with revenue, etc.; and the other interviews largely confirmed this problem. Some states felt that they received adequate information from other states and acted upon it. For example, Alaska noted they exchange paper import/export reports with Washington pretty regularly, with Washington mostly reporting to them. There are not many, so they follow up. Also, they occasionally get information from Oregon and maybe California. Michigan insists on sending detailed reports, including cars shipped with a couple of gallons of fuel in their tanks. The Navajo Tax Commission has information on the Intergovernmental Agreements with Arizona, New Mexico, Utah, Texas, Nevada, and California that cover mostly paper information sharing. Arizona keeps its information in Excel files by county and fuel type, but New Mexico saves its information on paper. Information from New Mexico was used to catch discrepancies for one distributor. The tax by the Navajo Nation has helped the neighboring states. Complete reporting by distributor, carrier, and retailer is very helpful. They caught two non-reporting distributors. Other states had varying perceptions of the amount of data shared and its usefulness. Arkansas noted information sharing as a goal, but it is not currently done. They are putting together procedures. Florida will share information, talk on the phone, hold task force meetings, and will share information on people applying for licenses. All fuel tax information is public information and posted on the web. It is a tremendous tool to be able to readily access the information. However, almost all of the information they receive is either paper or verbal. They hope to go electronic at some point. They expect to have the system running by February or March of 2005. They do not exchange a lot of information because it is in different formats. Everything they receive from other states is on paper. Other states reported similarly that they share information but that it is often on paper and difficult to use. For example, Nebraska reported that much information is traded with neighboring states, but many provide the information on paper. One neighboring state has a large terminal near the border and sends all of the information by paper. Nebraska keys in all of the paper information. This way it is available for auditors and can be used to cross match with in-state reports. There were varying perceptions of intra-state cooperation and sharing of information. Arkansas reported an internal problem since some states provide import/export data to the Arkansas Motor Fuel Tax section but the Highway Department does not get it. Yet it is the Highway Department that is responsible for audits. Integration of functions can alleviate some of these problems. In
117 Washington, licensing and collection are all done within the bureau of licensing. It is a joint operation and co-located, so they report no problems with information transfer. Montana reports it shares information between neighboring states, but believes there needs to be better coordination and communication between the IRS and Montana. In general, there are different perceptions of the relationship between the federal government and the states. IRS states that they share information with states and work with states on dyed fuel. However, other federal agencies and the states do not perceive IRS as being cooperative outside of the dyed fuel program. A representative of the U.S. DOT-OIG has a variety of comments relating to the sharing of information at the federal level and between the states. In the past year, they have talked to state motor fuel revenue or enforcement officers. Through these contacts, they are starting to get more information on allegations from the states. States will provide information on the problem and ask if DOT would like to be involved. DOT-OIG will determine if another agency should be involved and ask them. They then either coordinate or go it alone. An OIG investigation in Florida expanded to the police, postal service and EPA because as the investigation went on they saw more problems. They ended up with a better investigation to prosecute. OIG would like to see all motor fuel allegations coordinated with appropriate agencies. They believe IRS should coordinate with OIG even if OIG isnât directly involved; they believe they should be aware of what is happening. Currently, there is no process that requires it. OIG is working with the IRS and states to see if they can do it better. OIG believes it will improve criminal investigations and tax audits. Not all investigations have to be criminal as audits are important too. Many companies have a presence in many states. If an entity is caught in one state, it would be good if other states were notified to take a look. Native American Issues A variety of states reported that either there was no problem with Native American sales or that they had appropriate agreements in place. This is not perceived to be an issue in Florida since fuel is taxed at the rack. Native Americans are immune from tax on their personal use and can apply for a refund. In keeping with Supreme Court requirements and an Oklahoma case, the tax is specified as a tax on the consumer, not the tribe. Florida law specifies that the incidence is on the consumer even though the tax is collected at the rack. Hence, non-tribal customers are subject to the tax. Indiana has no Native American land. Minnesota reports no problem. They have signed agreements with all tribes and share the money. Mississippi has no issues. The Choctaw Indians have casinos as an important revenue source, so the fuel tax is not an important issue.
118 Nebraska has three tribes and has agreements in place with two of them for three years. Agreements are reported to work well, and the other tribe is very remote and sells little fuel. Before the agreement, there was a public perception that one tribe was not paying the tax due. It seems to have been more perception of a problem than a real problem. The tribe sells in several states both on and off the reservation. Now they pay the full tax for off reservation sales and a partial tax for on reservation sales. North Carolina has an agreement. The number of vehicles licensed on reservations to enrolled members is used to estimate reservation use and calculate a refund. South Carolina has no fuel sold by tribes. Texas has three tribes but does not perceive fuel taxes to be a problem. Montana has agreements with six of seven tribes and believes that it is very effective to have such agreements. They help with enforcement. Utah has two Native American tribes and agreements are in place. One tribe purchases the fuel tax paid and then gets a monthly refund for tribal sales. The Navajo tax is 18 cents/gallon, and they levy taxes of 24 cents/gallon total and then provide the difference (6 cents) to Utah. Other states view sales on Native American reservations as a substantial problem. North Dakota believes that there is significant evasion from a single station that sells fuel at a casino by a tribe based in South Dakota. They also have a blending plant, and North Dakota has no agreement with the single plant. The upper limit on the impact of this single station is estimated to be $100,000. South Dakota has tax agreements with four tribes. Under the agreements, the tribes report total sales less exempt sales. They receive a refund based on an estimate of all taxes paid by tribe members based on population. However, there is no agreement with three tribes, and one of these three owns its own stations. The state requires refund claims for taxed fuel, but the one tribe may be importing untaxed fuel. The U.S. Supreme Court ruled that fuel sold on a reservation to tribal members is exempt from tax. South Dakota sees it is a taxable transaction until the fuel is sold to a reservation member but the tribe can buy in bulk and bring it directly onto the reservation and then sell to non-tribal members. This tribe views all sales as non- taxable. South Dakota is concerned about possible court positions on this. Some states are not sure of the impact. There are eleven tribes in Wisconsin but not all have fuel stations. Tribes are selling in some cases and can claim exemption but the state cannot audit them, so there may be abuse. While some tribes have taken an adversarial position, the Navajo Tax Commission has motor fuel tax agreements with three neighboring states and information agreements with three others. Their rates are the same as Arizona (18 cents). New Mexicoâs rate is 17.5 cents and Utahâs
119 24.5 cents, but the differences are not seen as a problem. All reports seem to indicate that this arrangement is working well. The ATA is concerned that there are Native American truck stops that advertise along highways and sell a lot of fuel to mostly independent operators in which they indicate that tax is paid. However, the tax is paid to the tribe and not the state. The driver may not be aware of the fact that the tax is paid to the tribe and not to the state and the company then could pay penalties on an audit. They would like to see a list of Native American truck stops by state so they can warn drivers and companies. It isnât always obvious from the name of a truck stop that it is Native American owned. Companies can identify where drivers bought fuel and whether tax was paid if they have a list. Canada also has a problem with Native Canadian Tribes creating an evasion opportunity. Taxed gallons are going into the reservation and huge refunds are being issued to individuals. There are no opportunities to audit the Canadian tribes. IFTA Most states find IFTA to be an effective system, although there are some suggestions for improvement, such as all electronic reporting. The biggest disagreement was on the effectiveness of the 3 percent audit rule, with some states arguing that it diverts resources from more productive activities while others argue that states failing to maintain the audit standard are undermining the whole system. Alaska is exempt. Arkansas finds IFTA is effective because it has simplified tax reporting for truckers. Audits have been effective. It could be improved by having the IFTA auditors in the highway department. When the auditors are in a general revenue department there is little emphasis on these audits because of low revenue. Idaho reports that roughly 30 percent of the jurisdictions arenât meeting the 3 percent annual audit requirements. Idaho takes IFTA compliance very seriously but some states may not be as thoughtful. Mississippi believes that IFTA has been effective but they need to pay yearly rather than quarterly. This is addressed in the JOBS bill. Truckers can make the first quarter payment to get a sticker (good for a year) and not make any more payments. Montana believes it has been effective, but that everything can be improved. In this case, it would be more effective if all reporting were done electronically. States can determine how to collect the data. North Carolina believes IFTA is effective and the base-state concept is effective. They would like to see IFTA establish a national database that identifies companies that owe funds or have been found to be in violation.
120 North Dakota noted one situation where an individual was using IFTA to evade fuel taxes. The person claimed that the fuel tax was paid through IFTA when pulling from their own supply. IFTA is handled through the DOT but fuel tax is collected by DOR. The DOR does exchange information with the DOT so they do not view this as a significant problem. Ohio enforces it from a criminal standpoint along with the highway patrol. They copy down IFTA numbers to check with other states to see if the mileage is shown in Ohio. They find a few not reporting. Oregon DOT compares IFTA reports to weight-mile reports for accuracy. IFTA reports are collected for Oregon-based carriers although Oregon collects little fuel tax. South Dakota believes that IFTA is only effective within the audit program. They believe it would improve by getting outside information. For example, tax return information could be compared to IFTA reports or reports of sighting of trucks to see if IFTA mileage is reported. Canadian Fuel Tax Council views IRP and IFTA as a successful invention. Prior to IFTA, Quebec would audit truckers all over North America. Interviewees did suggest that perhaps there could be more penalties if states/provinces are not performing adequate inspections. IFTA audits around 3 percent of the taxpayers and that is a fairly low number but he still believes that this is reasonable. The Navajo Tax Commission does not participate in IFTA. FTA believes the program has been effective but that the rules on auditing are confusing. States end up putting too many resources into IFTA audits that do not generate much money. The percentage of audits should be reduced and redirected to other audits. The Petroleum Marketers Association notes that in the early 1980's, trucking firms in the North American Gasoline Tax Conference began a movement to get uniformity in how they report taxes across the country. Two regional experiments came out of this. The one in the West became IFTA; it was an attempt to simplify and unify rules on highway use and to change one basic precept of the tax, moving to the base state concept rather than each jurisdiction administering its own tax. By 1993, there were about 20 states that were voluntary members. A rival association, RIFTA, had three states. Then Congress mandated that all states join one by 1996. They merged and all states (except Alaska and Hawaii) were forced to join. It has been a success in bringing uniformity, lowering cost, and increasing revenue. Think of tax revenue as a pie with 49 slices (states plus DC), and the tax system is moving pieces; it redistributes revenue rather than raising revenue. The ATA views IFTA as enormously effective. It has made a good deal of difference by cutting out casual evasion by pretending that you do not know you need to file for the fuel use tax. An increase in compliance was reported by all states as they joined IFTA. It could be further improved by getting all states in the IFTA clearinghouse (on line exchange of information from carriers that are filing). Only about 2/3 of states participate. It is a simple program that needs some upgrading. Once in, states must look at the information people send them and make sure they send good data. It probably requires one full time auditor.
121 C.3. Responses Related to Fuel Tracking Systems, Licensing, and Forms Some states have electronic tracking systems and they generally find them effective. They are particularly effective if all filing is done electronically but some states still use paper and key in all of the data while others use paper and do not enter much of the data. Alaska has had all electronic filing since January 2000 but it does not have a tracking system. Arkansas has an electronic tracking system and thinks it is very effective because they can follow load-by-load movement of fuel. The biggest problem is unreported fuel that starts outside of the state. They contract with ACS State and Local Solutions for their tracking system. Florida had a tracking system but they needed a new one when they moved the point of taxation. They are in the process of putting the new system in place. In order to have an effective tracking system, you must have all returns electronic and you must perfect the data. The system must reject incorrect transactions. Otherwise, you have too many issues to resolve. Tracking is relatively simple if the data is perfected. Indiana has a system but believes it is not as effective as it could be if all records were submitted electronically. Kansas has had an automated system for seven months and it was done manually before that. The new system kicks out discrepancies and is very effective. Nebraska has an electronic system and it is effective. Their biggest challenge is that suppliers report differently than buyers report, especially due to blending. This creates problems for the tracking system. Montana developed an in-house motor fuel distributor processing system over the last year and started using it in December. Up to then cross matching was done by hand. With the new system they can cross match using the system. They are currently in a transition period. The new system cannot deal with prior year returns, and the statute of limitations is three years. Hence, they are checking previous years. Electronic filing is not mandated; it is voluntary. Mississippi just instituted an electronic tracking system. In 1999, revenue was dropping. They found that in 1992, the legislature had moved weight enforcement officers and put language in statute that DOT would furnish personnel and resources for fuel tax enforcement but none were provided. So they developed a group in 2000. They saved up over six years of TEA-21 and added some of their own funds to pay for the tracking system. They contracted with ACS. Last month was the first with electronic reporting, with 65 percent reported with no problem. The number should increase to 90 percent fairly rapidly. They require electronic reporting for taxpayers with over 25 loads per month. There are a few operators below this limit. State fuel tax receipts were $276 million in 2000, and had increased to over $400 million last year. Some was due to increases in miles traveled but mostly due to enforcement.
122 North Dakota is in the process of creating an electronic data interchange (EDI)/Excel system, with the Excel spreadsheet downloaded onto EDI. From paper returns, information will be entered into an Excel spreadsheet. EDI is voluntary for the schedules. Historically, the face sheet has been entered. North Carolina is looking to create a motor fuel tracking system â an RFP has been issued. Pennsylvania does not have a system but all paper data is keyed in. South Dakota has the software but not the data. The main area of tracking is the monthly terminal data. The system is used to track reporting inconsistencies but they just started. Washington is trying to do more electronically. They still only code the main information. The rest is put on microfilm and used for audits. Oregon gets all reports in paper format and they are keyed into the computer system. The motor fuel reports contain three pieces of information: â tax report (total gallons, reductions and taxable gallons and tax); â inventory reconciliation; and â supplemental schedules detailing where the fuel is purchased, tax paid and distribution schedule. Oregon DOT has reviewed electronic funds transfer (EFT) filing but no funds have been made available. An analysis has been done by the information technology (IT) experts at ODOT; and, based on this analysis, ODOT estimates that it would take several years to recover costs. The payback period on the investment would be high. ODOT contacted other states to examine the impact on collections of shifting to EFT and EDI reporting but no states were capable of producing an estimate of the impact of EFT and EDI on collections. In New York, beginning inventories, purchases (in-state, out-of-state), ending inventory, inventory adjustments, total gallons sold and exempt use of the fuel are all included in the motor fuel tax form. Supporting schedules that list out payments show specific shipments of fuel. Pre- paid sales tax is cross checked with fuel tax information. The reports are keyed into the computer system. A whole unit does data entry. In Utah, gas taxes are collected at the distributor level and diesel fuel taxes are at the rack. Reporting is done through paper filing. EFT is allowed for payment but all reports are paper. The face of the return is keyed into the system but the detailed supporting documents are not. There are numerous missing returns and missing schedules because, with the paper returns, the face sheet is keyed into the system and the schedules are filed away. There is a law on the books that if there are incomplete returns, a penalty could be leveled. However, this is not enforced because schedules are not input into the system. It is a manual system that is also incomplete. It can be 2.5 years before they request missing schedules due to an audit. Wisconsin does in-house tracking.
123 Canada does not have a tracking system. They had considered setting up an agreement with the U.S. to access ExSTARS but they have been hesitant to date due to the complexity arising with international agreements/compacts. FTA believes that tracking systems are definitely helpful. Arkansas is a good example. They have a full tracking system that works very well. They can call up information easily and can find all sources for a company audit. They have used the system for four years and it is going well. It has provided a high return on the investment. The Petroleum Marketers Association notes that ExSTARS is not a tracking system. It is a 1099 system, an information reporting system that can be used to monitor returns. It takes a while for a 1099 system to be brought up. The IRS wins the battles over time but it takes time to work. States that piggyback will get good audit selection data. The ATA finds that almost all of the states require the appropriate data but they should pay attention to what they ask for. Schedule C is required (fuel shipments) but not looked at in many cases. One of the major areas for evading the fuel tax is paying the wrong state tax. If fuel is taxed at the rack, then you can steal fuel and save the price plus tax but you do not have to steal the fuel to take it across state lines to save the tax. Licensing Some states have strict licensing requirements while others have almost no standards. In the late 1980s, Texas put a great deal into auditing marketers and changed the permitting process. At the time, getting a permit only required a $1,000 cashierâs check and an application. Jobbers could purchase fuel without a license. In 1989, Texas changed the permitting process so that an enforcement officer was actually sent to the site, examined the facility and communicated with the licensee. In North Carolina all are bonded. Bond requirement is $2 million for all majors (still would not cover one monthâs tax). Accounts receivables are low because taxes are paid at central locations and they do not have distributors defaulting. Distributors are licensed. An intra-state license is optional. If the distributor is licensed then they pay tax to the supplier at the time the supplier is supposed to pay. If distributor defaults, they refund the tax to the supplier and hit the distributor bond. For Washington, taxing at the rack was the most significant change to the program. The number of motor fuel excise taxpayers declined from 1350 licensees to 260. The licensing process has been changed. The Department of Licensing (DOL) now requires significant documentation, including fingerprinting cards. The intent to revoke and immediately suspend licenses if unlawful activities appear to be occurring acts as a strong deterrent for some taxpayers. Most states go through an administrative process that takes months. DOL can put a company out of business if evasion is occurring and the business appears unwilling to regularly comply. The potential to use this mechanism puts
124 fear into evaders. DOL can pierce the corporate shield and go after personal assets if evading is occurring, and the officer who is listed on the application is held liable. When individuals are applying for licenses, the names of the officers are checked to ensure that they donât owe money from other companies. On the other hand, Utah would like some revocation ability for licenses. They find that the up- front filing is too easy -- $30 plus application. They believe that fraudulent out-of-state companies move to Utah to take advantage of the easy licensing procedures. They cannot refuse a license due to a license revoked in another state. There are also differences in whether imports and exports require licenses in the other state. Motor fuel is exported to other states from Oregon. Exports are tax-exempt. There is a new law requiring that if fuel is exported, the company must be licensed as a fuel importer in the destination state. This is to stop companies from reporting bogus exports and selling the motor fuel tax-free. Oregon shares the names of the importer with the state into which it is imported. Taxpayers have some problems with the use of electronic reporting. Chevron finds that electronic data allows for more processing by the states -- e.g., late transactions. Normally a light-products terminal is open 24/7 and the accounting staff goes home at 5:00 p.m. So, some transactions are posted the next day. Some states now pick this up as a late payment. C.4. Information and Documentation for Motor Fuel Excise Tax Forms Many states follow uniformity guidelines closely while others have a variety of reporting guidelines. Alaska's forms are loosely based on uniform forms. They tried to be as uniform as they could, but there was some resistance from the community. The uniformity standard is to ask for load- by-load information but they could not get it. So they get totals by customer and supplier. Documentation is requested for specific items for refund or credit -- e.g., if a distributor uses some fuel for off-road use. They might request invoices. For refunds, invoices for tax paid are generally required. In the past they have gotten reports from the DOT on airports, with information on gallons by airlines, to check the accuracy of the jet fuel numbers. They get customs data and use it as time permits. Arkansas follows FTA uniformity on their schedules. They have a unique situation, border zone rights for gasoline. Certain border cities have lower tax rates for gasoline. Idaho is in conformance with the FTA standards. There are three types of returns: paper, EDI and a diskette system (IDA Fuel). The floppy disks are sent in. There are 240 distributors: 80 file EDI or diskette (85 percent of the data are filed EDI) and the rest file paper returns.
125 Minnesota has forms which are filed electronically, everything as of July 1st. The try to tie into uniformity as much as possible but they use a limited number of product codes. They do not go as specific as some. The state will go to mandated bio-diesel as of August 1st, but they will not use the bio-diesel code unless it is pure since the law does not require separation and it is taxed at the same rate. BOLs will be matched on the new electronic tracking system. It will probably be fully working in six months. Now they pull manifests to match. Mis-reporting is the biggest problem. Data is coming in electronically. If over 1 million gallons per year, they must put detail in the manifest but others do not (about 5 percent send summary). Local governments may have to pay tax on dyed diesel. Montana requires the same information that is suggested by FTA uniformity guidelines. The taxpayer can file by paper, through EDI, or through the web. Paper gets entered into the system. It is an ACH system. For paper returns, they enter the summary data and cross match the schedules by hand. With the new system all schedules are entered. With transition and no mandate, they are trying to convince the big ones to do it voluntarily. Some taxpayers do not have access for electronic filing. There are approximately 130 licensed distributors and about 63 percent file electronically. Before the new system it was about 30 percent. Two of the large companies are still using paper forms. One company has indicated that it will not go electronic until the state mandates it. The licensed distributors file monthly but any unlicensed purchaser must buy the fuel tax paid. Nebraska follows uniformity. They could not cross match data from paper returns. They put much effort into electronic filing and it is now required. In Florida, suppliers must report all loads purchased or sold, but a wholesaler can summarize sales to retail stations by county. They collect both using paper and electronic on a monthly basis. They have statutory authority to require everyone to file electronically, but they could not process it, so they do not require it. About two-thirds file electronically. With conversion to a new system, they will require all electronic filing. They provide filing software for wholesalers. If they have fewer than 100 transactions per month, it costs less for them to handle the paper than to pay for the software, so they probably will still accept paper from small filers. Kansas taxes at the distributor level, and they require monthly returns from distributors only. They receive reports from retailers but no tax is paid. Their reports require net gallons of gasoline, gasohol, and special fuels received. They file net instead of gross and include receipt and disbursement schedules. Schedules of manifest show imports, exports and other items. They try to follow uniformity but may not match exactly. There are often small differences among states based on individual state statutes. North Carolina requires receipts, disbursements and reporting schedules. Taxing at the rack reduced the number of taxpayers from 1,400 to 50. The next two fiscal years added 2 percent additional growth ($40 million) over motor fuel consumption. At the same time, there were other joint audits/investigations and greater federal efforts. South Dakota has fifteen different license types - not all pay tax (about seven for tax and formal reporting). Suppliers file returns (all fuel from terminal). Many out-of-state suppliers are
126 licensed but it is not required. The tax from an out of state supplier can be collected by the supplier or paid by the customer. Big suppliers collect the tax for convenience. Washington receives a monthly paper return with monthly report schedules with load-by-load comparisons. Summary information is keyed into a database and more detailed records are kept for exempt users. They have no motor fuel tracking systems. Imports/exports could be tracked, with the exception of those coming in from Oregon. There are discrepancy reports involving differences between reported sales and purchases of tax-free fuel in Washington. Wisconsin is a terminal rack state. There are sixty suppliers and 120 restricted suppliers (companies on borders). There is no reporting at retail or wholesale. They moved from wholesale to the rack about ten years ago and got an initial bump up in revenue. They require the BOL, date, gross and net gallons and origin-destination. The documentation is just the return as they do not require back-up data. Paper and electronic filing are used, with the same information on each. Suppliers are 100 percent EDI and it is encouraged among restricted suppliers (around 20 file using EDI and 100 use paper). In Canada, both at the provincial and federal level, the returns are paper. The provinces must always tax the consumer. Thus, the payment is collected at retail but followed through the distribution chain and submitted to the federal agency. The wholesaler remits the tax but is reimbursed down the distribution chain. There are no refunds for the diesel tax but there are for the gas tax. The Navajo Tax Commission requires that the distributor, carrier, retailer, and refiner all provide reports. Required information includes where the fuel was picked up, where delivered, type, etc., by county. They tax dyed fuel. They would like to review federal data but cannot. They would like to coordinate more with Arizona and New Mexico, but they only have one data person. States do not share export data (they would like information from two refineries in New Mexico). FTA believes that returns should be filed electronically. States cannot keep track of the information by paper. All information should be required to be electronic. States could set up a web page to enter information for small companies. Mom and Pop operations used to complain, but it does not seem possible for them to currently operate without computers. The Petroleum Marketers Association believes that states need to follow the suggestions of the FTA uniformity committee. If they ask for documentation following this standard, they have a better chance of getting the information they want and of getting it electronically. More uniformity makes it easier for clients to comply and provides more useable data to the state. The IRS currently has some filing done on paper. It is a monthly system through the electronic filing process. When first conceived, they thought it would be authorized for all electronic, but Congress left a paper option. This will end in 2006 for anyone with more than 25 transactions per month. This should increase accuracy. The goal is for the IRS to have electronic filing available for all returns, but the budget is not there and they do not know when it will be implemented. The primary data system is ExSTARS now. It is the main information source that
127 they have. They would like to expand with additional information on products that can be blended. Within ExSTARS they do not have accounting of fuel until it is first entered into a terminal. There is a belief that there is a possibility for some leakage from refinery to terminal primarily by offloading from barges. They have had some cases, but they cannot quantify it. It appears to be isolated instances. C.5. Responses Related to Enforcement Issues Public Awareness and Involvement Programs Some states are very active in outreach and/or public relations. When Florida implemented tax at the rack, they did workshops all over the state with marketers. They do public outreach with any major law changes, and they have people in their office to do workshops on an as-needed basis. They always have booths at the marketersâ conference and tax workshops. For any major changes in the tax, they do TV commercials. Outreach is very effective, and they have a good relationship with the marketers. They believe that the best way to get results is for everybody to work together. Evasion is worse for legal sellers than it is for the state. They have pressure from marketers for them to increase audits. Idaho has established a distributor advisory group. They make presentations to the petroleum industry and they contact the industry whenever there is a change in tax codes or reporting procedures. They communicate well with the trucking and petroleum industry. Idaho puts a lot of time into training for the CPAs who do the income taxes and fuel tax refunds through the income taxes. They have e-filing for the distributors and truckers. Because Idaho performs so much cross checking and motor fuel tracking and enforcement, distributors turn in trucking companies and other distributors who cheat the system. They do this because they believe that the evasion will be caught and they could be assessed. Indiana believes the DOR public affairs department does a good job, especially when there is criminal prosecution. The real problem is that most people do not understand that the tax is only one piece of what is stolen. Successful defrauding of the fuel tax also defrauds federal highway dollars. The state loses fuel tax money and loses federal highway dollars. Minnesota has presented information to various industry groups. For example, well drillers are allowed a specific type of refund and they will present to them. They also present to farmers groups, and remind them about tax requirements. Petroleum marketers know who their auditor is. If there are any major changes, they offer training classes. Mississippi feels it is very important to inform other agencies of what they are looking for, e.g., wildlife and marine enforcement are in the field and help with information. They need to let you know if they see a big freighter offloading into barges. They have a paper going out twice a month to farmers and contractors, and run a dyed diesel alert in the paper. Mississippi DOT is working with the IRS and provides an 800 number. It works well. They are always working
128 with contractors and rental equipment. Many users are coming in from other states where they get away with dyed diesel violations. Montana perceives that their outreach impact is good. There is an 800 number to report dyed fuel users, and they run ads each year for a dyed fuel campaign, usually in spring and summer, on both radio and TV. DOT goes to fairs explaining safety. This year, they also provided trinkets, like stress balls, with information that dyed fuel is not for road use. North Carolina has an on-going program of education. They conduct seminars for taxpayers that discuss current laws and changes to laws. Ohio tries to make sure the public is aware. They have used local media sources to disseminate information regarding motor fuel excise tax collection issues. Washington has a tax evasion poster that they send out every other year to distributors. The poster displays information about the types of evasion and the penalties concerning evasion. They offer seminars but the irresponsible companies do not show up for the training. Only around 5-10 percent of all distributors show up for training. Problem returns may result in an auditor heading out and doing some training on-site with the offending company. The forms and instructions can be downloaded off the internet. Notices are sent out whenever there is a tax change. Every licensee gets an overview of the tax codes. They have had the press attend searches, showing how the tax can be evaded. The media has placed a camera at a card lock station to document use of dyed fuel. They also have a tip line, which is publicized and used quite often. Some states provide information on a sporadic basis or when there are major changes in the tax laws. Nebraska has not performed public service announcements. They used to publish a poster and had an 800 number for reporting dyed diesel. Now, education is provided when out visiting retailers. New Jersey performs outreach on an as-needed basis. When significant changes occur, they meet with relevant trade associations, which in turn meet with their clients. North Dakota does seminars (with major changes in tax code) and newsletters. Alaska conducted a few all-day workshops a few years ago for taxpayers. They were helpful, and they received good feedback, but they are not performed regularly. Also, they sent newsletters when the fuel tax program changed. Arkansas wishes they had an actual education program for motor fuel tax licensees. They are making plans to implement something. Otherwise, it is just word of mouth. They have no public education programs but an information packet is sent to every new account.
129 Oregon has conducted no significant public outreach programs, except in terms of information provided to operators of diesel vehicles. South Dakota provides some education, but most of the information is on the sales and use taxes rather than the motor fuel tax. They hold occasional seminars and there is a manual. South Carolina has met with petroleum marketers but does not do so on a regular basis. In 1999 and 2003, after law changes, Texas conducted seminars to educate taxpayers. Also, they send information out regarding the changes to the law. Texas once had a fraud hotline but there were only two calls. Utah does not do ongoing training for the fuel tax. There are forms and instructions located on the internet. Significant changes to the tax code result in the generation of notices that are sent to the taxpayer. Wisconsin does not have much advertising or media coverage. There are press releases on large evasion cases. They are very pro-active with registered taxpayers on new forms. In Canada, neither the federal nor the provincial agencies have invested a great deal of effort into public awareness and involvement campaigns. FHWA has financially supported an FTA training course. They had a fuel tax evasion highlights program. There were once five individuals in the office but now they are down to just one. The Navajo Tax Commission has a Tax Compliance Department that has five staff to inform and contact but they do no advertising. FTA believes education is very important. It is easy to do and there is a deterrent effect. Chevron finds wide variation in terms of engagement of tax specialists within the industry. Some are very open, while others are almost secretive in what they are trying to accomplish. Some states will reach out to industry for changes in laws but others will not. California, Arizona, Texas, and New Jersey do this. Other states only do the minimum outreach required by law. The industry can help states avoid errors. Chevron likes to see press coverage when there is prosecution for evasion because of the great deterrence effect. The Petroleum Marketers Association believes that states that have made an effort for public outreach get results in positive benefits for the state. Some do outreach and others do not when their law is changed. Outreach gets a good response. Those who simply publish in a code of regulations experience poor compliance and receive a poor reaction. In-field education seminars pay dividends. The IRS believes that outreach always has a benefit but that it is hard to quantify. Regardless of information, there will be tax evasion, and outreach is not a solution. People have intent and will continue despite outreach.
130 The ATA believes that on the whole, states do a fairly good job of informing truckers, even with small fleets, through IFTA mostly. The smallest operators are hard to contact on anything, but operators with ten vehicles or more are generally well informed. Tax Forms Many states report that they try to follow the FTA uniformity guidelines. Alaska's forms are loosely based on uniform forms. They tried to be as uniform as they could but there was some resistance from the community. The uniformity standard is to ask for load- by-load information, but they could not get it, so they get totals by customer and supplier. Documentation is requested for specific items for a refund or credit, e.g., if a distributor uses some fuel for off road use. Sometimes they request invoices. For refunds, the applicant is generally required to show invoices for the tax paid. Arkansas follows FTA uniformity on schedules, motor fuel tax forms and instructions. They do have a unique situation, "border zone" rights for gasoline. The tax rates for gasoline are lower in certain border cities. Idaho is in conformance with the FTA standards. There are three types of returns: paper, EDI and a diskette system (IDA Fuel). There are 240 distributors: 80 file EDI or diskette (85 percent of the data are filed EDI) and the rest file paper returns. Montana gets the information that is suggested by FTA uniformity guidelines. Nebraska also follows uniformity. They put a great deal of effort into getting electronic filing, and it is now required. They could not cross match data from paper returns. Other states responded with specific information on the type of information that they collect but did not specifically indicate that they follow uniformity guidelines. Nevertheless, there are likely to be some attempts to do so. Kansas receives information on net gallons of gasoline, gasohol, and special fuels received. They file net instead of gross and include receipt and disbursement schedules. Schedules of manifest show imports and exports. They try to follow uniformity but may not match exactly. There are often small differences among states based on individual state statutes. In Florida, suppliers report all loads purchased or sold. Wholesalers can summarize sales to retail stations by county. New York collects information on beginning inventory, purchases (in-state, out-of-state), ending inventory, inventory adjustments, total gallons sold, and exempt use of fuel. All are included in the motor fuel tax form. Supporting schedules that list out payments show specific shipments of fuel. Pre-paid sales tax is cross checked with fuel tax information.
131 North Carolina requires receipts, disbursements and reporting schedules. Taxing at the rack reduced the number of taxpayers from 1,400 to 50. The next two fiscal years added 2 percent additional growth ($40 million) over VMT motor fuel consumption. At the same time, there were other joint audits/investigations and greater federal efforts. North Carolina is looking to create a motor fuel tracking system â an RFP has been issued. South Dakota has fifteen different license types. Not all pay tax (about 7 for tax and formal reporting). Suppliers file returns (all fuel from the terminal). Many out-of-state suppliers are licensed but it is not required. The tax can be collected by the out-of-state supplier or by the customer. Big suppliers collect the tax for convenience. Washington requires bills of lading, dates, gross and net gallons, and origin-destination. The documentation is just the return; they do not require back-up data. Paper and electronic are used with the same information on each. Suppliers are 100 percent EDI and it is encouraged among restricted suppliers (about 20 use EDI and 100 paper). In Canada, the returns are paper at the provincial and federal level. The provinces must always tax the consumer. Thus, the payment is collected at retail but followed through the distribution chain and submitted to the federal agency. The wholesaler remits the tax but is reimbursed down the distribution chain. There are no refunds for the diesel tax but there are for the gas tax. The Navajo Tax Commission requires that the distributor, carrier, retailer, and refiner all provide reports. They require information as to where the fuel was picked, where delivered and type. They tax dyed fuel. FTA believes that you should be able to track fuel from top to bottom. Moving the tax to the rack loses much of the information. Both taxable and exempt must be tracked with all documentation (e.g., trucker identification number). This information can be used for on road enforcement as well. If it is in the database, on road enforcers should be able to access and add to the information. In ExTOLE, there is a module for on road information and all states have access to that information. Only six are using it. IRS did some training in late 1990's but nothing since. Petroleum Marketers Association believes that states need to follow the suggestions of the FTA uniformity committee. If they ask for documentation following this standard, they have a better chance of getting the information they want and of getting it electronically. More uniform forms are easier for clients to comply with and provide more useable data to the state. The ATA represents fuel drivers and has not had any complaints. Drivers must now get a state license to transport fuel. Some were surprised about the licensing. Most just pay the tax. The industry wants enough money to build and maintain roads and they want all to pay their share.
132 C.6. Responses Related to Audits A number of states admit to little auditing effort with respect to motor fuel taxes. This is typically because the auditors are responsible for all taxes and view motor fuels as being relatively unimportant. Florida does very little auditing. They did a lot before moving to the rack but not much now due to confusion as to who to audit. Currently, they do mostly e-auditing and are starting a project to do electronic software audits for fuel. They are a functional agency with 550 auditors and 50 other analysts, mostly sales tax. Nobody just does fuel. Alaska has an audit staff of one part-time auditor for motor fuel taxes. Motor fuel taxes were three percent of total collections in 2003 and are expected to go down as a percentage due to a cigarette tax increase. Motor fuel does not get a lot of attention, especially with Alaska's low rates and most state revenue coming from big oil companies with severance and income taxes. Also, money that flows into their DOT does not allow for more federal match. They have a minimum guarantee. Other states have an incentive to collect more taxes to get more federal money but they do not. In Mississippi, the auditing is done by the DOR, and there are no assigned fuel tax auditors. They are collecting $33 to $35 million per month in fuel taxes, but if DOT wants an audit, they must go to the audit section and find someone. New Jersey performs most audits at the seller/user level. When sales tax audits occur, they look at the motor fuel taxes as well. There are selection criteria that indicate that an audit should occur: 20 percent decrease in taxable sales or failure to file a return for a certain period of time. Audits also occur through other audit findings or tips from competitors. If there is a criminal investigation, they use the state police. New York has forty-five auditors who focus on IFTA, Tobacco, Cigarette and Alcohol taxes. In contrast, some states report extensive auditing efforts focused on fuel taxes. In Arkansas, the audits are done at the Highway Department. There are a group of field officers for the Department of Finance and Administration but they have not been active in motor fuel for many years. In 1979, The Highway Department was given the authority to audit. They currently have seven auditors that can audit both IFTA and motor fuel, but only four work actively in motor fuel. The method of audit is very different since electronic filing was required as of January 2000. Because they already had a motor fuel tracking system, they can audit with a cross match process. Their state constitution only allows for an audit every three years, so they do a review monthly and only audit when problems are noted. They effectively audit every month by cross check. Their seven auditors act as agents of the Commissioner of Revenue. Hence, they can look at records that the Highway Department does not have access to. Idaho reviews 100 percent of the terminal, pipeline and distributor reports and they use an electronic program that compares reports and identifies discrepancies. When a discrepancy
133 occurs that cannot be resolved, an assessment is sent out to the company. The company must justify the discrepancy. Auditors check discrepancy reports for a 3-year period and will take unresolved discrepancies to the company. The auditor resolves internal controls, ensures dyed diesel sales are appropriate, and other similar tests. Indiana has approximately 20 field auditors assigned to fuel tax. Nebraska has eleven auditors and two audit managers that work full time on audits. In addition, they have a group of employees who are account representatives that follow specific accounts. They get information reports from terminals. They also visit retailers. They do not require returns but they visit to make sure that all fuel can be verified and has Nebraska tax paid on it. The goal is to audit every company in a border county every three years and every five years for others. Site visits give them a chance to look at records and to educate and answer questions. In addition, there is one full-time investigator for motor fuels who is on the road constantly and checks terminals. North Carolina audits all major carriers every two years. Other accounts are randomly selected for audit. All reports are filed in paper format and are keyed into the computer system. North Carolina is conducting on-road inspections, checking for diversions and dipping tanks. North Carolina can seize the truck and the product in the case of diversions. There is a 5-person enforcement staff that dips tanks, examines rail shipments, audits airports and examines barges. Post 9/11 jet fuel sales did not drop off even though there was a drop off in air travel. Jet fuel is not taxed in North Carolina and they view this as a significant potential source of evasion. North Dakota chooses accounts for audit based on problems with a specific account or as a random check. None are routinely audited due to size. Step 1: Send out a letter. Step 2: Field auditor is assigned. Step 3: Contact taxpayer and tell them what information is required. Step 4: Check the cross-checking to verify discrepancies. Step 5: Compare tax return to information presented on-site. There are some desk audits but it is very limited. According to statute, the highway patrol would have to perform the inspections and surveillance for an investigation, but they do not view it as a significant source of revenue. Pennsylvania uses field audits. They try to audit once every three years, so they audit about 250 per year. They also spot check and review new accounts with desk audit. They use cross- matching as well. South Dakota has three full-time agents and six auditors. An agent's role is education and license or compliance services. It is less extensive than an audit, with more education. There is not normally an assessment. If the agent finds problems, then they will audit.
134 Texas has no income tax, so the focus is on sales tax audits. There is no sales tax on fuels but there is on blend stocks. There are around 1,000 taxpayers in Texas at the rack level. The most significant taxpayers are selected for audit every year. The smaller taxpayers are audited based on: a) a complaint filed about the company, b) an anomaly in their report, c) a random selection process. There is no tax on aviation fuel in Texas. Utah has eight auditors and one technician. They handle all the auditing and enforcement. No surveillance is conducted. Field audits are performed to follow-up on discrepancies. Manual cross-references are conducted at least three months per year (three separate one-month periods). This means that every load for every company for three of the months will be reviewed. Where discrepancies exist, Utah will use this information as an audit lead. Washington notes different collection types: Non-audit collections (e.g., late payments). Audit collections (errors caught during audits). â â â Evasion collections. Evasion collections result from enforcement officers who catch blatant attempts to evade taxes. The evasion unit is staffed with law enforcement officers and they handle criminal activities. Once there were eight detectives. Now there is only one officer. Wisconsin audits based on monthly reports. They have six office auditors and eight field auditors. Major suppliers are on a two-year audit cycle. Restricted suppliers are on a four-year cycle, although audits are conducted more often if there are problems. These can result from third party tips, other state information, or internal error checks based on data from carriers and suppliers. The Navajo Tax Commission conducts field audits and reviews data as it is received. Seven field audits have been done already (the audit program is two years old). They have seven auditors for all six taxes that they levy. They have not recovered much from audits done so far. FTA believes that states should have dedicated staff auditing just for fuel tax. In twenty-two years they have seen all types of audits, and motor fuels are always left behind. The size of the audit staff depends on the state and volume. States should use more weight and safety enforcement officers for fuel tax enforcement, especially with tankers coming with fuel. Montana increased gas tax collections by 10 percent by taking a copy of the BOL. State weigh- station and on-road enforcement not at scales should check for BOLs and send the information to the fuel tax collectors. Cooperation depends on where motor fuels tax collection is housed. If it is housed in a revenue department and there is not a good relationship, then nobody looks at weigh stations. With DOT, weights and measures are the same agency and they understand the program, they also get the revenue. It does not cost more, but with a Revenue Department, there may be a turf issue. FHWA is trying to get DOTs to talk to revenue departments. There is money at federal level for state enforcement efforts.
135 Chevron views audits as an integral part of the business process. Depending on the base price of fuel, taxes can be 25 percent of the sales price. Audits tend to look more at the process of how the data was collected. Quirks in state laws seem to cause most problems. The Petroleum Marketers Association thinks audit practices are going in the wrong direction. In the old days, states tended to use full-time fuel-tax auditors. Over time, state âbest practicesâ have been to move to a centralized functional approach, with auditors looking at all taxes. This is a move in the wrong direction. The quality of audits is down and the number of problems is up. This is avoidable with special purpose auditors. The current system is spread thin in terms of auditor knowledge of the many taxes they must monitor. Fuel requires specialized knowledge to do a good job. Auditor knows too little detail about the specifics. They make assessments based on general knowledge. Many assessments that could have been settled at audit now go to appeal. The IRS is in the process of trying to put together agreements with some states for a Joint Operating Center for National Fuel Compliance. North Carolina, Texas, and California are working with them to take the concept from idea to reality, a national clearinghouse for fuel across the country. As of today, the IRS has 238 agents across the country doing excise tax audits. They are in the process of creating a fuel tax territory, a national organization with 50 agents only doing fuel tax. Now there are 40 other taxes that they try to enforce. Joint Audits Few states engage in joint audits either with each other or with the IRS. Most do not view them as productive as audits but rather for the information exchange. Alaska has not done joint audits with other states. They did one with the IRS, but they did not believe that it worked well. Arkansas reports that they have not done a joint audit but they have worked on two where they exchanged information with Louisiana and each did a separate audit. Florida used to do joint audits with the IRS but has not done so for a long time. None are done with other states, although they do exchange information, e.g., with Georgia. Idaho reports that it frequently does joint audits. Indiana does both, but more with states than with federal agents. States are interested in different elements than the federal government. For example, the federal government is not interested in state to state movement of fuel but states are. Minnesota has done joint audits with Iowa and Wisconsin, and they are gathering information with South Dakota due to an Indian Reservation. Fuel goes from North Dakota to South Dakota
136 with no one willing to admit where it comes from. They do not have a great deal of interaction with the IRS except for 637H data on jet fuel without any tax on it. Mississippi does joint enforcement all the time. They will call Louisiana and tell them they will stop everything carrying fuel. They fill out a fuel tax form for each truck, with all information on cargo, obtain information from fuel manifests (licensed distributor required), and find out where itâs going or if itâs being blended. The state has 200 officers for weight enforcement, drug interdiction, safety and fuel tax. They enforce more laws than any other state. Commercial vehicles include barges, rail and trucks. Nebraska reported doing a few joint audits with other states and the federal government. They did not work very well, especially with the IRS. They are not concerned with which state fuel goes to. New Jersey finds joint audits help by: a) keeping the lines of communication open between the states, b) serving as a tool to keep your audit person aware of whatâs happening in other states. North Carolina does participate in joint audits, mostly with other states, such as Virginia and Tennessee. With the IRS, it involves more joint enforcement programs, such as terminal audits and port audits. They also stop trucks to see if the BOL has a destination state. There is a $5,000 penalty if fuel is offloaded in the state without a listing on the BOL. They executed a project with $800,000 assessed. North Dakota performed one joint audit with Minnesota. Texas works effectively with the IRS and is the head of the regional Joint Federal/State Tax Force. Texas has agreements with other states and the IRS. Also, the FTA meetings allow for more coordination and discussion. Utah is not involved with the IRS but they do joint audits with other states. The focus of this effort is the import/export schemes relating to interstate transportation of motor fuels. Utah provides export information to the other states (recently started). Some neighboring states provide these forms to Utah. Wisconsin does about one per year, but does not view them as productive. Canadian provinces all have agreements to share information, and some do perform analyses between the various data. Export/import data are collected from the feds but shared with the provinces. Some provinces donât check to see if the exporters are licensed in the province that they are importing into. The Navajo Tax Commission looked at joint audits with Arizona but has not done any yet. They share information. Nothing is done with the IRS because they are not recognized. They would like to share information but the IRS cannot share with a tribe.
137 FTA believes joint audits are a good idea in concept; but when the IRS is involved, states do most of the work and the IRS does not share with the states. IRS must have a change of frame of mind with joint audits. They must do it together and not shut states out once the data has been collected. IRS often ends up with all of the money. IRS takes their money first so states may get nothing if not all that is owed is collected. Joint audits with other states work well. Only a few do it. Chevron has never seen a joint audit in the sense of true audits. It would be difficult due to differences in taxes. Probably could not be done but it is done on targeted issues. Not sure joint audit would be preferred method for either the IRS or the industry or whether it would be productive. The Petroleum Marketers Association representative has defended a few joint audits. In general, they are just another audit. There should be benefits to states with multi-state audits, but state auditor knowledge of interstate commerce, both exemption and taxation, tends to be poor so the audits do not work well. This is more a criticism of state audit training than of the auditors since the states focus on their own tax structure. Auditors receive minimal training on nexus. (Nexus requires that a state can only tax a business with a physical presence in the state. For example, a state could not force a terminal in an adjacent state to collect tax for it unless the terminal also had operations in the first state.) The focus is on how to use it to get âourâ tax rather than on true exemptions in interstate commerce and how neighboring state systems impact on their state. Knowledge for state auditors is minimal, and federal auditors have no knowledge of interstate commerce because it is irrelevant for them. The IRS views joint audits as a mixed bag. Some were less effective when a state does not have the same taxing point. If a state is taxing at retail, it does not work well. They question benefits that would be achieved. A joint operating center would increase participation. They would like to have more cooperation and coordination. They work with 50 sovereign entities and need to be sensitive to their needs. Audit Issues The most important item mentioned in this section was the auditing of fuel that crossed state borders. A number of states identified it as the most important audit issue. The industry representatives were mostly concerned with auditors having good training and being prepared In Alaska, the particular problem is to hold the distributor liable for improper tax-exempt sales. The state must prove that the fuel was used for a taxable purpose. They would have to check with the user and then go back to the distributor if the fuel was sold as tax exempt. It is a quirk of the way the statute is written. They would have to start over to get good legal structure since current laws are problematic. Most administrators would implement best practices if they knew what they were. For Arkansas, the major issue is cross border information. They do not receive information from other states in a format they can use. It is hard to get information on imports and exports. As far as best practices, they chose not to make many pieces of data mandatory and now they wish
138 they had. There are many errors, such as a wrong federal identification number. There are more errors caught due to electronic reporting, but it may create opportunities for more errors due to the filing method. For Florida, the issues are Georgia and cocktailing or blending. One thing they do is require everyone who hauls fuel to report. Most states do not. Carrier records can be very helpful in tracking fuel or proving evasion. Indiana noted that the number of invoices and amount of documentation are a major issue. There is a lot of paper to process. Movement of fuel across states is also very important. Mississippi sees the big questions as third party information and how it is used. It is a big issue. States should have DOR communicating with other agencies. Transportation reports can be used to document taxes and fuel use but auditors may not know this. Auditors can go to retail outlets and check. Fuel tax audits takes longer and are harder than other audits, and DOR agents are skeptical of their returns. For Nebraska, imports and exports are their biggest concern. They have good data from Nebraska terminals, but not on others. Also, they had to collect an environmental fee that took up much of their audit time. This is being changed. New Jersey investigates the entire business operation. For example, if there is a service station that shows a small amount of diesel fuel but they show a great deal of information from gross receipts or the cost of goods, the gross receipts may show something. Records from the gross receipts tax returns are then compared with motor fuel tax returns. New Jersey stresses with the auditors that they should review applications, forms and historical business practices before they actually meet with the taxpayer. North Carolina listed returns not filed correctly, prior period adjustments, and lack of adequate records as the major issues. They are willing to prosecute but find that motor fuels cases are difficult to prosecute. If an audit is completed, it is civil rather than criminal. South Carolina sees verifying exports and exemptions, making sure low sulfur dyed fuel is not used on road, and checking on diverted products as important audit issues. Also important to verify taxes were actually remitted. For South Dakota, the major issue is tracking fuel. The terminal has fewer licenses and they can focus on big taxpayers, but they lose track of some. They cannot enter all of the tracking information. Importing can easily be misrepresented. Also, there is some fraud. For Wisconsin, the biggest audit issue is gallons originating in one state and going to another one. This represents 50-75 percent of adjustments. Monthly export schedules are sent to neighboring states.
139 FTA believes the biggest problem is information. Agents must have audit information and other compliance data. Otherwise, it is almost impossible to follow the information. Auditors need proper tools. From the Petroleum Marketers Association perspective, the quality of the auditor and prior preparation are the most important issues. An auditor must have some idea of both how the laws work and how the industry works. Often, the industry must train the auditor, and they do not like that. Also, the auditor must do prep before showing up. The auditor must have some idea of how the industry does business and how the product moves in his state. Also, it is important to abandon worst-case practices that some states employ. They say you will be billed for the audit if the auditor must visit you. To prevent this you must send records to the state. Oil is not an intrastate activity. The top eight taxpayers for federal taxes pay 38 percent of the deposits to the federal trust fund. They will also pay the most to any particular state but the chance of their being located in that state is small. When the auditor goes to that taxpayer's facility and bills for time and travel, it is just wrong. Having the taxpayer ship their records to the state is equally wrong. They do not know what the auditor will want to see, but also there is no one to explain how to interpret what is provided. Often the taxpayer would be sending a tractor-trailer load of paper. The Petroleum Marketers Association believes that compliance costs are huge for the industry. In jurisdictions that allow either a collection allowance or a reasonable float, the overhead costs are largely offset. However, about half of the states allow no collection allowance and some have very short collection periods. In these states, the collection overhead costs are huge. They could be as much as 5 percent of collections for a big operation or 50 percent for a small operation. For some operations, like trading company operations, cost of compliance is greater than the tax paid. Generally they do not pay any tax but they must file many reports and forms. For the IRS, the biggest audit issue is the actual use of fuel. The closer the tax is to the end user, the more difficult it is to audit. Moving the point of taxation to the terminal rack is recommended. The major issue is to identity fuel as taxable versus non-taxable. Audit does not track what happens to the product after it leaves the terminal. C.7. Prosecution of Motor Fuel Cases Most states have limited experience with prosecution of motor fuel tax evasion cases. A number of states expressed concern about whether prosecutors were knowledgeable about motor fuel tax laws, either because they had no recent experience or because they were more interested in other types of cases. Arkansas did prosecute a couple of cases in the early 1980s of specific loads of fuel from out of state. One was upheld and one was not. Arkansas does not believe that prosecutors have a good understanding of motor fuel tax law. Florida has not prosecuted any fuel tax cases in the last seven or eight years. They used to prosecute almost monthly with the retail tax. Prosecutors probably do not have a good understanding of the fuel tax laws since no cases have been prosecuted recently.
140 In Idaho, the Attorney Generalâs office prosecutes the evasion cases and the staff has an understanding of the issues. Montana, Nebraska, South Dakota, Utah, and Wisconsin expressed various degrees of concern about whether prosecutors had the knowledge and / or willingness to pursue motor fuel evasion cases. In New Jersey, all of the fraudulent activity is turned over to the criminal investigations unit. To obtain an effective motor fuel tax prosecution program, an agency needs a lawyer that is dedicated to motor fuel excise tax division. More specialization allows for great knowledge and improved focus. North Carolina has not had cases recently. Some were sent for investigation but not taken. Ohio has prosecution with dyed fuel. No multi-million dollar cases, but smaller cases help keep it open. The Utah tax commission has referred two cases to the criminal unit, but the criminal unit has not responded. The tax commission finds the evidence of evasion during an audit and this fact is viewed as a tainted lead. The FTA believes that prosecution is a problem because prosecutors go after glamorous crimes. The best thing for motor fuel administrators is to contact prosecutors and educate them on the issues. Texas has the best practice. All county prosecutors have training. Chevron notes that the industry is perplexed by the lack of state prosecution. Industry would support stiffer penalties to make it worthwhile to prosecute tax evasion cases, and that would really deter evasion. C.8. Responses Related to Motor Carrier Enforcement Dyed Fuel Inspections In general, the interview responses indicate that dyed fuel inspections take place but there seems to be substantial variability in terms of how these are conducted in each state. Some of the interviews reveal a very minimal staff while others indicate an aggressive enforcement program. Coordination with the IRS seems common. Light vehicle use of dyed diesel can be inspected by the IRS but most states do not check. In Arkansas, there are two highway police investigators that concentrate on dyed fuel testing. They require import/export permits on fuel crossing state lines and have enforcement at weigh stations. Weigh station enforcement has varied. They hope to have more officers trained as part of their regular duties. In Kansas, they used to have dyed fuel inspection programs with their own inspectors and the Highway Patrol and had good success. In 1999, the DOR was reorganized and the funding for
141 fuel inspectors was lost. Since then they have to rely on the Highway Patrol, weights and measures and the IRS. Overall, it is less effective. In Texas, road blocks were used to conduct on-road inspections where dipping of tanks was completed. At first, Texas would catch 16 or 17 evaders per 1,500 inspections. Texas now focuses on responding to complaints. The Texas permit is viewed as a privilege, thus subjecting a company to the regulations. Texas can inspect facilities, especially if a compliant has been filed. An example is a tow trucking operation where dyed fuel was used by the tow trucks on- road. In Canada, Quebec has several inspectors and Ontario is adding on-road inspectors. However, some of the provinces are spending less on on-road enforcement programs. There is a constitutional question concerning whether or not there is a probable cause to perform the inspection. However, if you view black smoke coming out of the tail pipe, there may be grounds to stop and inspect the truck. Or, if you view someone purchasing tax exempt fuel at a card lock station illegally, an inspection can follow. Arkansas had two officers. They are down to one now due to retirement. The year 2004 had the lowest number of tests. They are training two officers per district in five districts. When they all are trained there will be ten regular officers who can test and the audit officer will coordinate activities. Floridaâs DOR does not perform inspections. The DOT examines a limited number and agriculture operations but they do not have sworn officers in their agency. They coordinate with the IRS. They try to work from an audit standpoint but it is difficult with small trucks. The IRS finds a lot of pickup trucks with dyed fuel but Florida does not investigate light vehicles. They receive information from the IRS but only the IRS checks for dyed fuel in small vehicles for Florida. Indiana stops vehicles to test for dye and they can stop small vehicles. They find some violations. They used to do joint audits with IRS but have not performed any in some time. In Minnesota, dyed fuel is growing in terms of emphasis. The state has thirty commercial vehicle inspectors, some state police, and others certified to perform inspections. Weigh station testing is viewed negatively. Mobile enforcement is preferred. Montana noted that inspections are performed through weigh stations and roving motor carrier safety officers. However, the primary function of these enforcement officers is safety, not fuel. They do routinely dip, and they have a quota for dipped tanks each month. In Montana, for vehicles over 26,000 pounds you do not have to have a reason to dip; but you must have probable cause for vehicles under this weight. Nebraska said that years ago, the federal government provided money to the states. The state spent the money on equipment for carrier enforcement. They have an agreement for a certain number of checks every month. They are usually done with portable scales, rarely on interstates
142 or at weigh stations. Word of mouth regarding inspections is awesome. Their program is effective but they could do more. Temptation gets higher with higher prices. North Carolina DMV officers are certified investigators. They have red alerts every month with concentrated enforcement, off of main roads. This generates a substantial number of dyed diesel penalties. There is a criminal penalty for dyed fuel in Ohio. It is a first degree misdemeanor, six months and $1,000 maximum on the first conviction plus penalty at the same rates as the IRS. Violators can pay up to $2,000 to Ohio. South Dakota had one joint IRS dyed fuel enforcement effort. They also looked at shipping papers but the IRS picked poor locations (did not consult with state). They feel it was a waste of time and hope for more cooperation in the future. Some states rely on IRS to do all inspections and enforcement Idaho does not perform on-road inspections but rather relies on the IRS inspection program. If someone is caught by the IRS and does not report to the Idaho DOT, the person is assessed a 7- year backlog for all dyed fuel uses. The person must prove that the 7 years worth of dyed fuel was used for tax-exempt purposes. The State Police and other referrals are also used to catch evaders. Wisconsin is capable of dyed fuel enforcement, but it is not done often. It is only done when there is probable cause. They have worked with IRS once or twice. Carrier enforcement people do not want responsibility. Sometimes they will sample and notify but this is not common. The IRS agents can randomly stop trucks. There are 140 to 150 officers across the country charged with enforcing the dyed fuel laws. They inspect on roadside primarily at state identified weigh stations or will work with state officials that stop trucks. They will check on whether fuel is dyed properly and will check retail stations, storage facilities, farms, and businesses with storage tanks. Effectiveness of Dyed Fuel Programs In general, the consensus is that dyed diesel programs are effective although how effective is not known. In Nebraska, they adopted dyed diesel in 1995, and diesel fuel tax collections went up. The State of Idaho performed a study on total tax evasion. They found 1 percent of the evasion by distributors and 6-12 percent evasion of dyed diesel. That is 6-12 percent evasion based on dyed diesel gallons. ATA stated that trucking companies are not the problem. Dyed diesel violations usually result from construction firms or farmers.
143 Arkansas cannot put a dollar estimate on dyed fuel abuse but there is a lot of farming. Mostly they find pickup trucks but not large trucks. Word of mouth spreads quickly when they are in an area. They can stop pickup trucks to check. They do not stop eighteen-wheelers just for a fuel check. Florida said that dyed fuel was effective primarily because it facilitated the ability to tax diesel fuel at the rack. Without dyed fuel, everyone would have to buy taxed fuel and file for refunds. This would never have passed. Putting the tax at the rack and dying diesel fuel works. It stops many people due to the high penalty. For a first offense, one can pay a $1,000 federal and $1,000 state fine. Thus, even a small enforcement level can be effective. Word spreads if someone pays the penalty. In Kansas, it was effective when they had inspectors to enforce it but it is less so now. They need dedicated inspectors. They obtain data from the IRS. The IRS works with the Highway Patrol. A few officers will stop trucks just to check, but most only check when there is another violation. Montana said that dyed fuel has been effective to some extent. One thing that happened is that government agencies can run on dyed fuel and the agencies used a credit card. The credit card was bid out to a non-oil company and they did not take the federal tax off. Thus, governments ended up paying the federal tax, and government agencies then got dyed fuel at retail stations. Now there is ready access to dyed fuel on the highways and this created a problem. The second area of concern relates to dyed fuel delivered to farms but used in pickups. South Dakota noted that dyed fuel enforcement was effective. IRS enforcement helped but they needed state enforcement. The Motor Carrier Services enforcement section of the State Highway Patrol deals with all motor carrier issues. Wisconsin said that it is effective because of the IRS and the severity of the penalty. They do not think it is a huge issue but evasion does occur. FTA said that it has been effective but lack of on road enforcement is a problem. They also see a need for enforcement on light vehicles. API did not have any statistics but understands that it is very effective. After tax or dye rules, kerosene numbers shot up. So people were taking kerosene and saying it was for non-taxable uses. Kerosene was brought into tax or dye in 1997, so it has been eliminated as a problem. IRS said that dyed fuel enforcement is effective. When first in use, it produced close to $1billion per year. Fuel dyeing began in 1994 and there is still evidence of people using it when they should not, so continued enforcement is needed. OIG said that they can only comment based on interaction with the states. There are two working groups that the OIG representative attends. Southeastern AASHTO feels there is still a problem with dyed fuel. There are not enough resources to have an impact with dyed fuel. North Carolina is trying to be more proactive in motor fuel tax evasion. Representatives went
144 and inspected 24 stations that sold dyed fuel, and all 24 failed the test. North Carolina has concrete data and is documenting what they are doing. Chevron indicates that there is a tremendous deterrent effect by dipping for red dye at weigh stations. Some states do this consistently but others do not. Some try to compare what is in tanker to the BOL. This is useful for the deterrent effect even if it produces little revenue. Returns on Enforcement Activity States typically report high levels of returns to their audit and enforcement activities. Arkansas has assessed $6.9 million since they obtained their motor fuel tracking system. Every tax return has been checked for 4 years. It would have been impossible with paper returns and regular audits. They canât put a value on the improved reporting due to better tracking or on compliance because of the tracking system but they know it has had a significant effect on problem accounts. Some taxpayers may have gone bankrupt because they were forced to pay the tax due but the state stopped the loss of revenue. Indiana believes that there is a benefit to states for auditors and investigators in the field whether they generate revenue or not. States must have a presence in the field to maintain voluntary compliance. When they find a scheme or a situation of fraud, it creates a lot of interest if prosecution occurs. They not only get money from the prosecution but also gain in terms of public perception. Others are less likely to evade. The Mississippi figure is probably close to the national average, $10 per dollar spent on enforcement. One group in Jan 2004 created a snapshot of what was moving in the state by stopping every truck and filling out forms. Word of this snapshot traveled quickly and the states experienced a 13.5 percent increase in tax collections over the previous January. Another time they went to major truck stops (over 1.5 million gallons per month) and convenience stores and asked to see manifests of fuel from the month before (should have been reported). Following this inspection, the state experienced a 19 percent increase in motor fuel excise tax collections over the previous March and April. On road enforcement increases tax compliance. The state passed a law regarding barges and now these barges can only offload fuel at registered IRS terminals. There are penalties for the captain and owners if it is offloaded at other places. Before the law change, they flew over the Mississippi river with the FBI and found 50 facilities with tank farms or other facilities to offload fuel. A barge must be equipped with pumps to offload fuel (takes up to six hours). They would like to check certain areas at night but do not have the resources yet. Sometimes, the loads are labeled as something other than fuel when offloaded. There is around $1 million in tax liability per barge load (federal plus state taxes). They have pictures of old tank farms once used for crude oil storage. They stored crude on its way to a refinery but it can be reversed now. Initially, they flew the Mississippi looking for roads to offload fuel onto trucks. Instead, they found the tank farms and recent improvements. They think it is a big problem and just spent $600,000 for a helicopter to work on the issue.
145 Nebraska has put a big effort in tracking and cross matching. Error listings were huge with paper. They are now using electronic filing and working to obtain cleaner files from taxpayers. They refund almost as much money due to cross matching as they collect but the perception is that it makes a difference. If people are not caught, then there is an incentive to increase evasion over time. Voluntary compliance has improved due to this deterrent affect. During the last 6 years, Oregon DOT has focused primarily on the big budget item â the gasoline tax. Occasionally, they discover retail diesel outlets that donât know they must collect taxes. There are ways to calculate return on investment in terms of the auditing efforts and one is simply using recoveries as the numerator and total tax collection as the denominator. Most recoveries are due to oversight. ODOT doesnât catch many fraudulent tax forms. They share lists of potentially high-risk taxpayers with other states and the IRS. Because Oregon doesnât collect diesel taxes on heavy trucks, motor fuel tax evasion is not perceived as a significant problem in Oregon. Net recoveries in Oregon for the 1999-2001 biennium for the motor fuel tax (gasoline, gasohol) were $922,000. Use fuel tax audits generated $1.1 million. For the 2001-2003 biennium, fuel- use tax recoveries were $900,000 and around $670,000 for motor vehicle fuel. Use fuel tax is easier to avoid and evade. Wisconsin believes that the audit staff is effective with $250,000 to $1 million collected per quarter, mostly due to errors and omissions. The Navajo Tax Commission audits find that their enforcement efforts are effective; and estimates an evasion rate of about 3-4 percent. FTA thinks the return to audits is high in general. States used to have to report data to the federal government and will have to report when federal money is again available. They were finding high returns on audits. States with actual convictions got very high returns. Reporting is not required today but it will be in the new highway bill. The IRS return on its fuel program is $14 per dollar spent. No additional data is available. DOT OIG has two ongoing cases that are significant. They are likely to obtain a strong return on investment in terms of fines and recoveries but do not know yet. They expect that some of the new cases are bigger then they first appeared.
