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IRS publication #378, fuel tax credits and refunds.

It will come as no surprise to fleet managers or contractors that the federal government imposes a substantial excise tax on fuel - 24.4 cents a gallon on diesel, 18.4 cents a gallon on gasoline. Local and state governments can buy fuel, for their exclusive use, in on- or off-road vehicles, tax-free. Private contractors, even those performing services tinder contract to a municipality (such as those collecting waste or sweeping streets) cannot purchase fuel tax-free. They may be eligible for tax credits or refunds on fuel that is used for specific purposes or in certain categories of equipment. And there are instances where contractors and state or local governments can use tax policy to save money. Some agencies and contractors may not be taking full advantage of this opportunity.

Contractors may be able to purchase fuel directly from a municipality for use in performing its contracted operations and thus avoid paying the excise tax. The determining factor as to whether or not this is legal is who takes the risk on the possible increase in the price of the fuel. If the municipality is purchasing the fuel from a supplier, then it is taking the risk, and the fuel used by the contractor while performing contracted services is tax exempt as long as the original bill for the fuel is directly sent to and directly paid by the municipality or state agency.

The fuel used by contractors in off-highway operations, such as mowing and construction, is exempt. Off-highway business use also includes fuels in power saws, compressors, and bulldozers. Even the fuel used in a separate motor to operate equipment such as a generator, pump, or mixing unit, may qualify for a credit or refund if tax was paid on the initial fuel purchase. If the fuel is drawn from the same tank to operate both the vehicle and the special equipment, it is necessary to calculate the quantity of fuel used by the separate motor. "Reasonable estimates" based on operating experience and supported by detailed records are acceptable to the IRS.

Hopefully, because the contractor is saving money, it will pass those savings on to the municipality in the form of lower fees. The contractor's profit remains the same, and the municipality saves money.

As with all taxation policies, it's a complicated issue. IRS Publication #378 discusses the uses of fuels that qualify for a refund or credit; the kind of fuels that qualify for a refund or credit; how to claim a refund or credit for fuel taxes; and the alcohol fuels credit. It also gives examples of cases that qualify and do not qualify for credits or refunds.

Publication #378 and forms for refunds or credit are available on the Internal Revenue Service's web site at Of course, consultation with your agency's or company's tax attorney and accountant will clarify the requirements and restrictions of any particular situation.

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Publication:Public Works
Date:Jul 1, 1999
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