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S U M M A R Y This report was completed as part of a National Cooperative Highway Research Program (NCHRP) project that proposes to identify and quantify state motor fuel tax evasion in order to evaluate options for closing the gap between total tax liability and actual tax collections. This report covers the process of developing a methodological framework to examine and reliably quantify state motor fuel tax evasion rates. Chapter 1 critically assesses physical, administrative, and enforcement characteristics of state practices and identifies how these characteristics have traditionally correlated with certain types of evasion. Chapter 2 compiles and summarizes the results of interviews completed with state motor fuel tax administrators and other relevant organizations including oil industry represen- tatives and federal fuel tax authorities and explores key issues identified during the interview process including: evasion techniques, fuel tracking, point of taxation, state fuel tax collection and enforcement procedures, coordination and uniformity among states, and issues related to motor carriers. Chapter 3 describes various models and approaches that have been used to quan- tify fuel tax evasion in the past, and discusses the strengths and weaknesses of each approach. Chapter 4 provides a review of the data available for these types of analyses. Chapter 5 presents a detailed methodology for estimating state motor fuel tax evasion using readily available data and documents the data required to perform each estimation procedure. Chapter 6 presents conclu- sions and recommended methods for disseminating the outcome of the project. The literature review provided in Chapter 1 indicates that major motor fuel tax policy changes (i.e., moving the point of taxation and diesel fuel dyeing) have had significant and measurable impacts on compliance. These changes have been adopted largely by states. For state fuel tax administrators, one of the most frequently discussed issues is related to the uniformity between state policies and programs. The Federation of Tax Administrators (FTA) has initiated a collection of best practices and uniformity principles to be used as a guide to combat motor fuel tax evasion through enhanced uniformity. At this point, the biggest effort at the state level appears to lie in moving state programs toward the ideal policies set forth in the 11-point plan in the FTAâs Uniformity Project. The interviews conducted in support of Chapter 2 helped identify factors that contribute to evasion. The interview team conducted 35 interviews with state tax administrators and industry representatives. Interviewers heard evidence suggesting that an assortment of issues impact eva- sion, including policies related to alternative and blended fuels as well as the geographic prox- imity to low-tax states. The issues identified in the interviews are explored in Chapter 2, which covers a number of topics under six primary categories, including: evasion techniques, the point of taxation, fuel tracking, enforcement, uniformity, and motor carrier issues. Chapters 3 and 4 provide a review of the methodologies and available data related to motor fuel tax evasion. The methodologies reviewed include the literature review approach, various econometric approaches, and the audit review approach. These chapters describe the strengths and weaknesses of various approaches and the datasets available. Identifying and Quantifying Rates of State Motor Fuel Tax Evasion 1
2Based on information presented in Chapters 1 through 4, Chapter 5 presents a methodolog- ical framework to quantify state-level fuel tax evasion. The approach described in Chapter 5 pro- vides a methodology to estimate the error, omission, and evasion (EOE) level for each type or groups of types of evasion described in Chapter 2. The methodology provides a strategy that allows the sum of the individual types of EOE to equal the amount of total EOE, as demonstrated in the following equation: where E = Estimated EOE in State i; EM1 . . . EMn = Estimated EOE for technique 1 through n; and 1 . . . n = Evasion techniques (use of dyed fuel on-road, tampering with fuel dye equip- ment, illegal removal of dye from exempt fuel, abuse of the International Fuel Tax Agreement (IFTA) return process, false refunds or credits, import-export schemes across state lines, illegal importation of fuel from foreign refineries, abuses due to the presence of Native American reservations, false product labeling, cocktailing, failure to remit tax payments, and daisy chains). The strategy implies that no one approach in and of itself can be used to accurately estimate overall motor fuel tax EOE in a state. The level and quality of compliance and enforcement dif- fers by state and therefore, the approach to calculating EOE will differ. For states with significant enforcement and compliance efforts and good databases, the approach can provide a much more accurate EOE estimate, while states with less enforcement and compliance activities will have less accurate answers to EOE for their state. Tiered Approach to EOE Estimation The approach focuses on measuring the tax dollars lost to EOE, or the amount that is under- reported whether intentional or unintentional. The estimate will contain the amount of tax dollars intentionally or fraudulently evaded, as well as errors and omissions. This report highlights state-by-state variation in the data quality and quantity available, considering some of the following factors: ⢠Varied motor fuel tracking systems, ⢠Differing data on aspects of audits and inspections (i.e., some states have considerable data and some do not), ⢠Differing characteristics that lead to evasion (i.e., some states have Native American reserva- tions and/or on-road diesel programs while others do not), ⢠Level of fuel tax compliance and enforcement in a state, and ⢠Varied requirements regarding access to existing (but restricted) data. There are three approaches outlined in Chapter 5 to estimate EOE: audit and inspection, tracking, and statistical analyses of sales approaches. Various approaches could be used to exam- ine audit and inspections data, including statistical sampling, and regression techniques such as ordinary least squares (OLS), Tobit, and logit analysis. The second approach, tracking, uses tracking systems to follow fuel from terminals to taxpayer and calculate the difference of fuel supplied to taxes paid. The third and final approach is recommended for estimating evasion losses due to the presence of Native American retail outlets. The approach recommended com- pares the amount of gallons in question and calculates a percent of the total fuel consumption E n= + + + +EM EM EM . . . EM1 2 3
3for that state that is associated with the nonpayment of taxes. If more variables and associated data are available, more sophisticated techniques can be used to calculate the amount of taxes forgone. Chapter 2 identifies nine evasion methods and provides recommended approaches for estimating EOE associated with each evasion method. Chapter 5 also presents a decision tree to assist states in conducting analysis of EOE and provides detailed data collection recommenda- tions. In addition, Chapter 5 includes a list of data needed to undertake estimation of EOE. Chapter 6 presents study conclusions and concepts for disseminating the outcome of this research project. Chapter 6 proposes a two-step process to disseminating the outcomes of the project. The first step would include developing a website that included the report. The second step would include hosting sessions at the 2009 Transportation Research Board (TRB) Meeting and the 2008 FTA Motor Fuel Tax Section Annual Meeting.
