International fuel tax agreement.

Each state imposes a tax on commercial motor carriers for fuel consumed on its roads and highways. A carrier pays tax at the time of purchase. However, the carrier may not entirely consume the fuel in the state in which purchased. For example, a carrier pays tax to all the states in which its drivers travel on long hauls, even though they do not refuel until they return to their state of origin. However, the carrier can obtain a refund from states in which the driver traveled, for fuel not consumed in that state.

Prior Reporting Practices

A carrier or other fuel consumer traveling through various states used to file several motor-carrier returns and refund claims. In the early 1990s, states began to look at ways to consolidate the filing of motor-carrier returns into one report. The result was passage of the International Fuel Tax Agreement (IFTA). The IFTA eased the burden on carriers who filed motor-carrier returns for each state in which they traveled. However, it did not ease the burden of complying with each state's regulations. The states are not uniform on the tax rate or as to the tax. Certain vehicle types are not subject to the IFTA, and these exemptions differ from state to state.

Current Reporting Practices

A taxpayer must apply for an IFTA fuel tax license. A carrier operating in two or more member jurisdictions must have a license under this agreement.

Under the IFTA, a taxpayer files one report for all jurisdictions (U.S. and Canada) in which its drivers travel; currently, 48 states (excluding Alaska and Hawaii) and 10 Canadian provinces are IFTA members. The fuel tax rates apply to the gallons of fuel consumed, and differ in each state or province. Six states impose a surcharge (in addition to the tax imposed at the pump), based on gallons of fuel consumed. The carrier pays the tax to the IFTA organization, which acts as a clearinghouse and distributes the tax collected to the appropriate state. The information required on these forms is uniform from state to state and generally includes the following:

* IFTA member jurisdiction. Each state in which the vehicle traveled or purchased fuel.

* Fuel type. The type of fuel used in the vehicle (e.g., diesel, propane or gas).

* Total miles traveled in each jurisdiction. The miles traveled in each state, based on odometer readings or other means.

* Taxable miles traveled in each jurisdiction. The miles driven in each state, net of any exempt miles.

* Taxable gallons used in each jurisdiction. The gallons of fuel consumed in each jurisdiction, net of any exempt gallons.

* Tax paid on gallons placed in vehicles in each jurisdiction. Actual tax paid in each jurisdiction.

* Net taxable (refund) gallons. The difference between gallons consumed and gallons on which the carrier paid tax in each jurisdiction.

* Tax due (refund). Based on the statutory tax rate that each state imposes.

Filing Requirements

The IFTA requires reports from commercial motor carriers traveling in interstate commerce using a qualified motor vehicle. A qualified motor vehicle is a vehicle that:

* Has three or more axles, regardless of weight;

* Has two axles and a registered or gross vehicle weight exceeding 26,000 pounds or a combined weight or combined registered weight exceeding 26,000 pounds;

* Is a passenger vehicle with more than nine individuals, plus the driver.

Compliance Procedures

Carriers file IFTA reports on a calendar-quarter basis. Reports are due on the last day of the month following the close of the reporting period for which the return is due. A licensee whose total miles traveled for the year are less than 5,000 miles (or 8,000 kilometers) in all member jurisdictions other than the base jurisdiction may request to file annually. If the last day of the month falls on a Saturday, Sunday or legal holiday, the next business day becomes the final filing date.

The IFTA requires a taxpayer to maintain detailed mileage records. These records must include trip sheets, odometer readings and fuel receipts or bulk-storage withdrawals. The carrier completes the IFTA reports based on this information. All records and receipts must be original documents, not photocopies.

Audit Procedures

The IFTA requires each member state to audit 3% of its IFTA motor carrier population per year. A state must equally weight the population with short- and long-distance accounts.

At least 30 days before conducting a routine audit, the state contacts the carrier or licensee in writing, advising the carrier of the approximate date that it plans to conduct an audit and the time period the audit covers; the notification includes the records that the taxpayer must supply. The state completes the audit using the best information available. The burden of proof is the licensee's responsibility.

Audit sample. Unless a specific situation dictates, states conduct audits based on sampling. The IFTA audit manual has sample guidelines.

* A sample must be representative of the licensee's operations.

* Sample period(s) may be different for member jurisdictions, due to seasonal operations.

* The licensee should help select the sample if legitimate reasons exist.

* The licensee and the state auditor should sign an agreement that the sampling method is appropriate.

Verification of total miles or kilometers or both. Auditors verify fleet miles or kilometers or both with source documentation (e.g., trip sheets, odometer readings, hub reports, etc.) for the audit test period. The audit manual suggests (but does not require) that source document verification exists for miles/kilometers for at least three representative quarters. The examination of three quarters allows the auditor to take into consideration unreported miles reported in a subsequent quarter, seasonal fluctuations in miles traveled, changes in personnel responsible for maintaining mileage records or fluctuations in the customer base and the states traveled. The auditor has a responsibility to make every reasonable attempt to verify reported miles/kilometers.

Verification of purchases. Auditors must also verify over-the-road fuel purchases or bulk fuel withdrawals, using original source documents, such as sales receipts, credit-card receipts, automated vendor-generated invoices or transaction listings.

Verification of tax-paid fuel credits. Auditors must verify all credits, using original receipts, such as invoices, credit-card receipts, automated vendor-generated invoices or transaction listings.

Review of internal control procedures. An auditor reviews the system of reporting miles traveled and fuel purchased and plans the audit procedures based on the reporting system's reliability.

Sample projection. Based on the units sampled, auditors establish an acceptance (error) rate, projected over the remaining audit period.

Audit distribution. After audit completion and review, the auditor sends a complete audit package to each jurisdiction in which the taxpayer traveled for the period under audit. Depending on the date the state adopted an IFTA, a motor-carrier liability might exist for the early years of the audit. A state may send an auditor to the taxpayer's place of business to collect that additional motor-carrier tax.

Audit Issues

The IFTA enforces compliance procedures and audit manual guidelines on a jurisdiction-by-jurisdiction basis. Therefore, acceptable reporting procedures in one state may not be acceptable in another.

Who is responsible for reporting? IFTA reporting is the responsibility of the individual to whom the IFTA carrier has issued a decal. For corporations with in-house trucking services, the responsibility of filing fuel tax rests with the corporations.

Filing responsibility is a major problem for leasing companies and independent contractors. In addition to the license-ownership issue, the type of lease (short-term or long-term) has an impact on who is responsible for reporting fuel tax. In the case of a short-term lease (i.e., less than 29 days), the lessor is responsible for reporting and paying fuel tax, unless:

* The written rental contract designates the lessee as the responsible party; and

* The lessor obtains a copy of the lessee's IFTA license.

In the case of a long-term lease of a vehicle without a driver, the lessor and lessee have the option of designating the reporting party. In the absence of a written agreement, or if the document is silent as to responsibility, the lessee automatically becomes the designated reporting party.

Lack of adequate records. Each jurisdiction determines the definition of adequate records. In the absence of adequate records, a jurisdiction can apply a four miles-per-gallon (mpg) standard to the entire fleet. Extensive research reveals that most single-axle, tandem-axle and straight trucks get more than four mpg. Applying the four-mpg standard is really a penalty provision for those entities or individuals who never reported or remitted fuel taxes.

In the absence of adequate records, the IFTA audit manual identifies other methods on which to base liability. If a taxpayer's records are lacking or inadequate, the state has the authority to estimate fuel on factors such as:

* Taxpayer's prior experience;

* Taxpayers with similar operations;

* Industry averages;

* Records available from fuel distributors; and

* Other pertinent information an auditor may obtain or examine.

A West Virginia State Tax Commission decision (WV Adm. Dec. 97-585) allowed a taxpayer to provide documentation that supported a standard greater than four mpg for the proper situation. The carrier did not have data on each individual vehicle in its fleet. Instead, on a quarterly basis, it ran each of the routes to determine actual miles driven in each state. All fuel consumed was purchased in West Virginia. The auditor accepted the miles driven, total fuel purchased and tax paid, but rejected the carrier's average mpg, instead calculating a liability on the four-mpg standard. The court determined that the carrier's quarterly mileage studies were sufficient evidence to support the miles reported.

Many trucks manufactured today have computers that document the amount of fuel an engine consumes while traveling (including idling), average trip distance, average load factor, average driving speed, etc. The data, which can be downloaded to a PC and combined with a current odometer reading, can result in a more accurate mpg calculation.

The mpg calculation has both a positive and negative impact on an audit, depending on the sample period and number of units in the sample population. For example, a new vehicle will get a lower mpg during its breakin period. The calculation also takes into consideration all types of weather conditions and the use of winter versus summer fuel. Driver habits also have an effect, as experienced drivers maintain a better shifting technique.

The American Trucking Association Maintenance Council publishes The Fleet Manager's Guide to Fuel Economy, which outlines estimated fuel consumption for a Class 8 tractor-trailer with an 80,000-pound gross weight, operating at standard highway speeds with various options and under various driving conditions.

Computer vendors make software that calculates miles traveled, using starting and destination points. Carriers should exercise caution, however, as the program may base its calculations on miles between cities, instead of miles from specific locations within cities.

Copies of fuel receipts. Carriers must support over-the-road fuel purchases with original receipts. A sales receipt, invoice, credit-card receipt or transaction listing from a vendor is valid documentation. Carriers can retain records on microfilm, microfiche or other computerized record storage system. On request, a taxpayer should be able to provide such documentation to an auditor. A photocopy is not an acceptable form of documentation in the IFTA procedure manual. In addition, receipts that appear altered are invalid, unless a taxpayer can demonstrate otherwise.

Projection method. The projection method calculates fuel consumed and miles traveled, based on a projection of the sample units over an audit period. An error rate is calculated for both missing miles and fuel, relative to total miles and fuel reported. It is possible for carriers to report all the fuel for a unit and still have a deficiency for that particular unit, if they cannot establish the total miles traveled. Sometimes, the carrier documented total miles and fuel, but an auditor, on determining that the carrier's mpg is unreasonable, applies the standard four-mpg, triggering a deficiency. The auditor then allocates the missing miles or fuel (or both) to each jurisdiction, based on the percentage-to-total as originally reported.

New York has developed software that several taxing jurisdictions use. It examines the data from verified reported miles and fuel purchases, and calculates an acceptance rate based on unreported miles/fuel versus reported miles/fuel.

Close-Out Conference

A documented close-out conference should be held with a taxpayer to discuss audit findings, recommendations for improving compliance and appeal rights.

Summary

The IFTA audit is relatively new territory for taxpayers and taxing jurisdictions alike. The problems that arise during an audit are issues for all parties involved. Major problems occur when there is a difference in the interpretation of the IFTA procedures. Lack of precedents can be both beneficial and detrimental during the audit.

Carriers can use three information sources to help them implement a reliable compliance system: the IFTA'S articles of agreement, procedures manual and audit manual. Taxpayers would be smart to realize an audit's impact and, therefore, establish the necessary compliance procedures in accordance with the IFTA.

FROM SUSAN KINNEY-HUFFMAN, MBA, GRAND RAPIDS, MI

Frank J. O'Connell, Jr., CPA, J.D. Crowe Chizek Oak Brook, IL