Gasoline wholesalers should consider opportunities presented by special gasoline tax refund procedure.

Letter Ruling (TAM) 9505001 addresses a statutory procedure that permits a gasoline wholesaler to sell gasoline at a price exclusive of the Federal gasoline tax to certain exempt users - such as state and local governments and nonprofit educational organizations - and claim a refund of the Federal excise tax on that gasoline. Although the ruling concluded that, in the particular facts addressed, this procedure could not be used, taxpayers engaged in wholesale gasoline distribution might consider this procedure as an opportunity to expand sales to various exempt institutional purchasers.

Generally, the 18.4 cents-per-gallon Sec. 4081 Federal excise tax on gasoline is imposed when gasoline is removed from a "terminal rack" - the end-point of a refinery/pipeline/tankfarm system. The amount of the tax is usually included in the price of the fuel in any sales "downstream" in the distribution system, through to the ultimate sale to a retail customer. Sec. 6421 allows certain persons ("tax-exempt users") who use gasoline in certain uses to claim a credit or refund of the tax paid "upstream" on the fuel. As an alternative, Sec. 6416 allows "the person who paid the tax" to claim a refund or credit for the tax if there are assurances that the benefit of the tax exemption is passed on to the fuel's ultimate tax-exempt user. The "person who paid the tax" is generally the person who had the liability for the tax at the terminal rack.

Sec. 6416(a)(4) provides a special procedure that treats a "wholesale distributor" of gasoline, on which tax has been paid upstream, as the "person (and the only person) who paid such tax" when the wholesale distributor sells the gasoline to certain tax-exempt ultimate users. The practical effect of this special procedure is to allow the wholesale distributor to claim the tax refund when the gasoline is sold to a state and local government, non-profit educational organization or certain other exempt users; thus, the wholesale distributor can sell the gasoline at a price that excludes the Federal excise tax, or can reimburse the tax-exempt user after receiving the tax refund.

(The existence of the Sec. 6416(a)(4) procedure does not forbid a tax-exempt user that purchases tax-inclusive gasoline from instead claiming its own gasoline tax refund or credit using the procedures in Sec. 6421. A tax-exempt user would normally claim a credit on a Form 4136, Credit for Federal Tax Paid on Fuels, attached to its annual income tax return; users that do not file an income tax return would claim a refund on Form 8849, Claim for Refund of Excise Taxes, at the end of the year. Depending on the amount of tax involved, a Form 8849 can be filed by any tax-exempt user claiming a refund at the end of any of the first three quarters.)

In TAM 9505001, the taxpayer owned and operated several convenience stores and was also a franchisor of several convenience stores. The taxpayer was also a gasoline wholesale distributor, purchasing tax-paid gasoline and delivering it - in the taxpayer's trucks - to the convenience stores. The franchise stores purchased gasoline at a tax-inclusive price from the taxpayer. All of the convenience stores sold gasoline to retail customers. At both the owned stores and the franchise stores, sales were made to various state agencies using credit cards issued by the taxpayer. The taxpayer then billed the state agencies for their purchases at a price that did not include the Federal excise tax (and presumably reimbursed the franchise stores for the usual full, tax-inclusive retail price).

The taxpayer claimed a refund under the procedure in Sec. 6416(a)(4) for the amount of gasoline tax that had been paid on the gasoline sold to the state agencies, at both the taxpayer's own stores and at the franchise stores. The ruling held that, because the sales to state agencies at the franchise convenience stores were not sales directly by the taxpayer, the taxpayer could not use the Sec. 6416(a)(4) procedure to claim the tax refund on those sales. Even though the taxpayer billed the state agencies on behalf of the franchisees, the Service ruled that the franchisees were selling their own fuel to those agencies.

This TAM appears to be the first IRS ruling on the Sec. 6416(a)(4) procedures, which were enacted in 1988. It is extremely vague; though under its specific facts, it appears to be correct: Sec. 6416(a)(4) requires the wholesale distributor to sell the gasoline to its ultimate purchaser, and the intermediate sale to a third party destroyed the necessary nexus.

This conclusion raises a sticky issue: which party (if any) does get to claim a refund? The franchisee that made the direct sale of gasoline to the state agency is presumably not a wholesale distributor, so it cannot claim a refund under Sec. 6416(a)(4); the franchisee is also not the person who actually paid the tax (payment is typically deemed to occur upstream at the point the gasoline was removed from the terminal rack) and therefore is barred from claiming a refund under the more general rules of Sec. 6416. Sec. 6421 gives the state agency the right to claim a refund, as the ultimate user of the gasoline, even though the state agency presumably did not bear the cost of the tax in the price it paid to the taxpayer. Thus, the wholesale distributor could face some significant losses in this situation - especially if it has already reimbursed its franchisee for the full, tax-inclusive price of the gasoline the franchisee sold to the state agency. The wholesale distributor's hope for a satisfactory conclusion appears to rest in reaching some accommodation with the state agency to turn over any refund the state agency receives under Sec. 6421.

The fact that the wholesale distributor in TAM 9505001 could not claim the excise tax refund should not discourage others from exploring opportunities to use this procedure. The ability to make sales of gasoline at a tax-exclusive price to institutional buyers (such as school districts, local governments or police departments) is a competitive advantage over persons who sell only at retail. Many wholesale distributors should have the capacity to make pump or volume sales directly to such users.

There are issues involved in the Sec. 6416(a)(4) procedure that were not addressed in TAM 9505001. It is essential, for example, that the taxpayer qualify as a "wholesale distributor." Regulations have not been issued under Sec. 6416(a)(4); Notice 89-29 does provide some guidance on this and other issues, though not all of it is conclusive. Also, other than state and local governments and nonprofit educational organizations, the gasoline purchasers for whom the Sec. 6416(a)(4) procedure can be used are limited to exporters, certain narrow categories of ship and aviation users, and persons who are producing special fuels described in Sec. 4041; notably, Sec. 6416(a)(4) is unavailable for sales to farmers or to off-highway business users.

It should also be noted that the Sec. 6416(a)(4) procedure is quite separate from the rules that allow only a "registered ultimate vendor" of undyed diesel fuel that sells to a state or local government or farm user to make a refund claim for the tax on that diesel fuel; see Sec. 6427(1). The Sec. 6416(a)(4) procedure is not available for refunds of diesel fuel tax.