airline employees, hurt airlines, hurt airports, and therefore in the long run, hurt this country. The Air Line Pilots Association greatly appreciates that many members of Congress have recognized that imposition of the fuel tax would be unconscionable and that legislation has been introduced in both the Senate and House to repeal it. We strongly support S.304 as introduced by Senator Santorum (R-PA) and H.R. 752 as introduced by Representative Collins (R-GA), and urge favorable action as soon as possible. By repealing the fuel tax, the Congress will demonstrate its commitment to this beleaguered industry and its employees and give them the opportunity to remain competitive in the global marketplace. Thank you for your consideration. STATEMENT OF THE NATIONAL ASSOCIATION OF CONVENIENCE STORES Hon. BOB PACKWOOD, Chairman, Committee on Finance, U.S. Senate, Dirksen Senate Office Building, Washington, DC. August 4, 1995 Re: Comments for July 18, 1995 Hearing on Deficit Reduction Fuel Taxes and Diesel Dyeing Requirements Dear Mr. Chairman: This letter is submitted on behalf of our clients, the National Association of Convenience Stores ("NACS") and the Society of Independent Gasoline Marketers of America ("SIGMA") for the record of the Senate Finance Committee hearing on July 18, 1995 on deficit reduction fuel taxes and the diesel dyeing requirement. These comments address only issues arising under the diesel dyeing requirement, which directly affects NACS and SIGMA members. NACS is a national trade association representing approximately 1,700 retail members that operate more than 65,000 convenience stores. Of these stores, more than two thirds are engaged in the sale of motor fuels. In 1993, the average NACS member engaged in the sale of motor fuels sold 73,000 gallons per month per store. Interestingly, the volume of gasoline sold varied relatively little based on the number of stores operated by a particular company and appears to have little correlation to the number of stores. For example the average per store sales volume for a company that operated 11-50 stores was 80,000 gallons per month, while the average per store sales volume for a company that operated 201-500 stores was 74,000 gallons per month. Many NACS members also wholesale motor fuels. SIGMA is a national trade association comprised of approximately 250 independent marketers and chain retailers of motor fuels. SIGMA members market motor fuels in all 50 states, plus the District of Columbia and Puerto Rico. In 1993, SIGMA members accounted for an estimated 18 percent of all motor fuels sold at retail. In 1993, SIGMA members sold approximately 19.4 billion gallons of gasoline and six billion gallons of diesel fuel. Some SIGMA members are through putters or terminal operators who will register as "position holders," which, under the Omnibus Budget Reconciliation Act of 1993 (the "1993 Act") and the Revenue Reconciliation Act of 1990 (the "1990 Act"), are generally liable for the federal excise tax on gasoline at the time gasoline or diesel fuel destined for a taxable use is removed from a terminal and delivered into a tank truck. Many SIGMA members also qualify as "registered ultimate vendors" under the 1993 Act to sell undyed diesel fuel tax-free to farmers and state and local governments. The changes made in the 1993 Act and the 1990 Act were designed to reduce evasion and allow honest businessmen to compete on a level playing field. The legislation: (1) moved the point of collection of the federal excise tax on gasoline and diesel fuel to such fuels' removal from the terminal; and (2) imposed the tax on the person identified on the books of the terminal operator as holding the inventory position. In addition, the 1993 Act required that diesel fuel that was not taxed upon removal at the terminal be dyed so that it could be visually identified as untaxed fuel if it were found in a taxable use. Finally, the 1993 Act allowed marketers that purchased clear diesel fuel, tax-paid, to register as "ultimate vendors" of diesel fuel to farmers and state and local governments, sell the undyed fuel to those customers at a price that did not include the tax, and obtain a refund of the tax. This structure avoided burdening farmers and state and local governments with the refund proc ess. NACS and SIGMA. believe these changes have had a constructive and substantial impact on motor fuels tax evasion. NACS and SIGMA members that operate in markets where they believed that untaxed gasoline and diesel fuel were sold for taxable uses report that market conditions have improved in these areas due to a reduction in such cheating. NACS and SIGMA believe that these improvements are due to the structural changes imposed by the 1993 Act and the 1990 Act, the enforcement efforts of the Internal Revenue Service and the Department of Justice, and the work of the Federal Highway Administration's Joint Federal/State Motor Fuel Tax Compliance Project. Moreover, collections of the diesel fuel tax during the first year of implementation of the 1993 Act demonstrate the effectiveness of the program as the government collected more revenue in one year than the approximately $700 million that Congress projected would be collected over five years. While this system currently is very effective, the Service's enforcement policy has left open a significant opportunity for evasion. The 1993 Act defined diesel fuel as any liquid suitable for use as a fuel in a diesel powered highway vehicle. Kerosene satisfies that definition.” Nevertheless, the Service has refused to treat kerosene as diesel fuel, despite specific requests from industry groups to do so. As a result of this policy, no kerosene is taxed until it is either blended with taxable diesel fuel or delivered into the fuel tank of a highway vehicle. Nor is any kerosene dyed if it is destined for a non-taxable use. This policy provides an enormous opportunity for evasion. A tax cheater can simply purchase kerosene in a tank truck tax-free, blend it with diesel fuel, and deliver it to a truck stop without paying the tax. It is extremely difficult for the IRS to identify untaxed kerosene used in a taxable use because it does not contain the dye that is required for untaxed diesel fuel. The Service must rely entirely on paper records and self-reporting to enforce the tax. These methods alone have not proved successful in stopping evasion in the past, which is the reason the system was changed to allow enforcement through visual inspection for dye in fuel used in a taxable use. The only way to combat this type of evasion of the tax on kerosene is to require that it be taxed or dyed at the terminal rack as mandated by the 1993 Act. NACS and SIGMA urge Congress to direct the Service to implement the dyeing requirement with respect to kerosene as required by the 1993 Act. It is the understanding of NACS and SIGMA that although the Administration supports the dying of kerosene, it is concerned about consumer safety issues relating to the sale of dyed fuel to space heater users. This concern does not arise because of incompatibility of dyed fuel with space heaters. There is no evidence in the record of the Service's rulemaking implementing the 1993 Act that reflects such a concern. Rather, space heater users have been educated to use only clear kerosene. If only dyed kerosene were available, the Service is concerned that space heater users might switch to fuels which are not dyed but which are incompatible with space heaters. Use of such fuels in a space heater could be dangerous. To the extent that these concerns are valid, NACS and SIGMA would support legislation to create a "registered ultimate vendor" of kerosene. These vendors would be permitted to sell clear kerosene tax free in small quantities through a short hose from storage that is separate from an outlet's motor fuel storage. The Service would pay refunds to such vendors for taxes paid on clear kerosene that is sold in this manner. Such a procedure would allow the dyeing of the vast majority of diesel fuel that is truly destined for a nontaxable use and prevent the diversion of that fuel into the stream of taxable fuel. Finally, the 1993 Act has created some competitive distortions that Congress should correct. In particular, marketers have great difficulty competing with their integrated oil company competitors for sales of gasoline to state and local governments. Under IRC § 6416, a gasoline wholesaler is the only person that is eligible for a credit or refund on gasoline that is purchased tax-paid and sold by that wholesaler to a state or local government. Prior to enactment of the 1993 Act, an independent marketer, as a registered wholesaler that incurred tax liability for sales of diesel fuel, was able to take a credit against its diesel tax liability for the taxes paid on gasoline sold to a state or local government. Because the 1993 Act imposed the diesel fuel tax on position holders in a terminal at the time the fuel is removed from the terminal, most independent marketers no longer incur a liability for diesel fuel taxes because they do not qualify as position holders: As a result, they can no longer take a credit against such liability and must apply to the Service for a refund and wait for that refund to be processed. Because integrated oil companies incur liability as position holders, they remain able to take a credit against their tax liability for the taxes paid on sales to state and local governments. This difference alone makes competition by independent marketers difficult. In addition, many marketers that sell gasoline to state and local governments do not qualify as wholesalers under the current definition. Under current marketing programs, retailers are able to supply state and local government vehicles, such as police cars and school buses, by delivering gasoline directly into the vehicle fuel tanks at retail outlets. These programs allow schools and police departments to avoid the administrative burden and potential liability of operating an underground storage tank. These retailers have difficulty competing with both wholesalers and major oil companies for state and local government business because retailers must sell gasoline tax-paid and cannot obtain a refund or credit for those taxes. NACS and SIGMA urge Congress to correct this problem by creating a "registered ultimate vendor" for gasoline sold to state and local governments that will be entitled to obtain a refund of excise taxes paid on such gasoline and by requiring that interest be paid on such refunds if they are not paid within 20 days. Allowing only a wholesaler to obtain the refund relies on an obsolete concept from pre-1993 law relating to diesel fuel tax collections. The 1993 Budget Act abandoned the distinction between wholesalers and retailers of diesel fuel for tax enforcement purposes. Registered ultimate vendors of diesel fuel currently are entitled to refunds, plus, if not paid within 20 days, interest, on taxes paid on fuel sold to state and local gov■ernments and farmers. NACS' and SIGMA's proposed system would be identical for gasoline sold to state and local governments. In the alternative, NACS and SIGMA urge that the definition of wholesaler be changed to include a chain marketer i.e. a firm that operates at least ten retail motor fuel outlets. Such chain marketers deliver the same efficiencies as a wholesaler in sales to state and local governments and would provide the service with an adequate scale of operations for enforcement. NACS and SIGMA appreciate this opportunity to comment. Sincerely, R. TIMOTHY COLUMBUS, J. KEITH AUSBROOK, Counsel to Society of STATEMENT OF THE NATIONAL BOATING FEDERATION (SUBMITTED BY JAMES B. WEBSTER, VICE PRESIDENT) The NATIONAL BOATING FEDERATION consists of nineteen Yacht Club Associations who are regular voting members of the NBF. Founded in 1966, NBF is the largest nationwide alliance of recreational boating organizations and associate members. NBF Officers and Directors are dedicated volunteers. We represent no commercial interests and sell no products. We represent over 2,000,000 recreational boaters nationwide. In 1993 the marine diesel tax was selected as an "offset" for the luxury tax that had put the entire Boating industry in recession. The NBF fought hard and long, even severing ties with old allies, but NBF opposition to the "offset" failed to stop it. We were not consulted nor did we support the legislation when it was drafted. Our objections fell on deaf ears which were tuned wholly to the cause of taxes for deficit reduction. Now that tax equity is being considered it is again time to highlight the deficiencies in the Marine Diesel tax. These are: (A) It was an offset to not only the new-boat luxury tax, but to the luxury tax on airplanes, furs and jewelry as well. That's right boaters are paying the taxes for those who buy private planes, furs and jewels. How unfair! (B) The IRS implementation is flawed with Recreational Boaters unable to find the pre-taxed fuel and having to travel miles out of our way just to find the proper color dyed (taxed) fuel. (C) Marinas were forced to choose between commercial and recreational customers which reduced sales, profits, and taxes whichever way they chose. For the Government, the income is small, and for boaters' and marina operators' dissatisfaction is growing and will not go away. (D) Not one cent of this marine diesel tax, unlike the marine gasoline tax, goes back to benefit boaters through the Wallops-Breaux Trust Fund. At a minimum these tax funds should be permanently included in the W-B Trust Fund. This diesel tax is discriminatory against diesel boat owners. (E) A portion of this tax is earmarked specifically for deficit reduction. Boating is the only industry in the country so taxed. If any tax is amended, repealed or reduced, the Marine Diesel Tax should be the first choice. We ask that this Committee lead in the repeal of the Marine Diesel tax as part of your deliberations on the matter. Mr. Chairman, the NATIONAL BOATING FEDERATION stands ready to answer any questions or provide technical support to your staff in any way requested. STATEMENT OF THE NATIONAL BUSINESS AIRCRAFT ASSOCIATION AND THE GENERAL AVIATION MANUFACTURERS ASSOCIATION (SUBMITTED BY RICHARD S. BELAS) Mr. Chairman and members of the Committee, I am Richard Belas. I am a partner in the law firm of Davis & Harman and am submitting this statement on behalf of the National Business Aircraft Association and the General Aviation Manufacturers Association. The National Business Aircraft Association, Inc., is a not-for-profit corporation formed to promote the aviation interests of corporations and other businesses in the United States and its possessions. NBAA represents 3,600 member companies which utilize approximately 5,000 business aircraft. The General Aviation Manufacturers Association represents fifty-one domestic manufacturers of general aviation aircraft, engines, instruments and components. GAMA members are the manufacturers of the vast majority of the general aviation aircraft flying in the United States today. NBAA and GAMA are pleased that you have decided to hold a hearing on transportation excise tax issues, but would like to add for your consideration, an additional technical problem involving aviation excise taxes. The issue involves the determination of whether the fuel tax or the tax on transportation for compensation or hire (the ticket tax) applies in certain circumstances when aircraft are operated by members of an affiliated group of corporations. Specifically, the Internal Revenue Service's interpretation of Internal Revenue Code Section 4282 creates unwarranted differences in tax treatment between affiliated groups and other corporations, is contrary to Congressional intent, and creates a significant trap for the unwary. NBAA and GAMA urge that the Committee clarify that Section 4282 is to be administered in a manner consistent with the general principle that the determination of whether the fuel tax or the tax on taxable transportation applies should be determined on a flight-by-flight basis. This clarification was included among other simplification provisions which Congress passed in 1992. Unfortunately, the legislation included other, unrelated provisions which then- President Bush found unacceptable, and the bill was vetoed. BACKGROUND Flights of corporate aircraft result in liability for an excise tax on fuel under Internal Revenue Code Section 4041(c) or on the amount charged for the transportation under Section 4261(a). Generally, when employees fly on their employer's aircraft, the Section 4041(c) fuel tax applies since the corporation is not considered to be in the business of transporting passengers for compensation or hire. On the other hand, when a company transports other passengers for compensation or hire, the Section 4261(a) tax on the amount charged will apply. It is clear from the legislative history that the decision as to which tax applies must be made on a flight-by-flight basis. The IRS does not challenge this general rule. Rev. Rul. 72-360, 1972-2 C.B. 542. Thus, a corporation knows that it must determine which excise tax applies for each flight taken by each aircraft it owns and operates. The flight-by-flight rule is a longstanding procedure which is well understood and followed by operators of corporate aircraft. It follows that it is also well understood that, even though a corporation may fly employees of a third party corporation and receive compensation triggering the tax under Section 4261(a), it may, on a subsequent flight, transport its own employees and be subject to the fuel tax pursuant to Section 4041(c). The Internal Revenue Service, however, has created a trap for the unwary if a business operates as affiliated corporations, rather than as divisions of a single corporation. In 1970, Section 4282 was added to the Internal Revenue Code to clarify that carriage of employees of affiliated corporations would not trigger the tax under Section 4261. Thus, employees of affiliated corporations were to be treated the same as employees of the corporation owning the aircraft. The trap results because the Service has interpreted the use limitations of Section 4282 on an all-or-nothing basis for affiliated employees. That is, if an aircraft is available for hire by persons outside the affiliated group, all amounts paid for transportation, including charges among members of an affiliated group, are subject to Section 4261. Rev. Rul. 77-405, 1977-2 C.B. 381; Rev. Rul. 76-394, 1976-2 C.B. 355. UNWARRANTED DISCRIMINATION AND TRAP FOR THE UNWARY The result of the Service position is that, if a business operating in the form of divisions within one corporate entity wants to make the most efficient use of its aircraft by allowing other corporations to use the aircraft when it otherwise would be on the ground, such third party use will not prejudice treatment as noncommercial use the next time the aircraft is used to transport the corporation's own employees. The flight-by-flight rule applies. On the other hand, if a business chooses, or is required to operate by means of various subsidiary corporations (as is the case with certain regulated businesses), the same efficient use of the asset would cause it to lose the ability to transport employees of its affiliates on a later flight without incurring tax under Section 4261 because of the all-or-nothing rule. This is not only a trap for the unwary, but also a distinction for which there is no policy justification. Furthermore, the Service's position is not required by the statute. In fact, the Services position is in direct conflict with Congressional intent expressed at the time Section 4282 was enacted. CONGRESSIONAL INTENT Prior to the enactment of the Airport and Airway Act of 1970, the Internal Revenue Service evidently had asserted the position that Section 4261 applied to flights where a corporation provided air transportation to employees of affiliated corporations and charged the affiliates for the service. Section 4282 was enacted to provide an explicit exemption from liability under Section 4261 for transportation of employees of affiliated companies. If Section 4282 is applicable, employees of affiliated companies are treated as though they were employees of the corporation that operates the aircraft. The tax imposed by Section 4261 does not apply to any payments from one member of an affiliated group to another in connection with the use of a corporate aircraft. Section 4282 applies when one member of an affiliated group is the owner or lessee of an aircraft, and the aircraft is "not available for hire by persons who are not members of the group." Section 4282 does not expressly address whether the section applies on a flight-by-flight or all-or nothing basis. A question, therefore, is presented whether the affiliated group exemption remains available for flights involving employees of affiliated corporations when a corporation may also, on certain occasions, make the aircraft available to corporations or others outside the affiliated group. To put it another way, is Section 4282 applied on a flight-by-flight basis or must the aircraft be limited to carrying solely employees of the affiliated group for all flights? The committee reports accompanying the enactment of Section 4282 indicate quite clearly that there was no intent to deviate from the general flight-by-flight approach established in the same legislation. In its report accompanying the Airport and Airway Revenue Act of 1969 (ultimately enacted in 1970), the House Ways and Means Committee explained why it had agreed to add Section 4282 as follows: A situation that has come to the Ways and Means Committee's attention involves the use of a single aircraft by several members of an affiliated group of corporations. In such cases, the aircraft frequently is legally owned or leased in the name of one member of the group. The cost of the use of the plane is frequently apportioned among members of the group either by actual payments or by appropriate book entries. In such cases, it was determined that only one set of user taxes should apply and that it was most appropriate that the fuel taxes apply in such cases. Accordingly, such cases involving affiliated groups are exempted from the ticket and property taxes but are subjected to the fuel taxes. House Committee on Ways and Means Report to accompany the Airport and Airway Revenue Act of 1969, H. Rep. No. 601, 91st Cong., 1st Sess. (1969), 1970-1 C.B. 376 at 383. The report went on to say that the change was not intended to affect the disposition of disputes that arose prior to the effective date of Section 4282. Id. It is very clear from the legislative history that Section 4282 was intended to extend the Section 4041(c) fuel tax to flights of affiliated groups and not to limit the flight-by-flight rule. On this point, the Ways and Means Committee stated the following: |