One small refiner reported storage problems arising when volumes are inadvertently dyed. This again points to the lack of justification for construction of duplicate storage tanks when 96% to 98+% of the diesel is sold for tax-exempt purposes. Diesel fuel for pleasure boats is taxed but not for fishing vessels. Virtually every marina in Alaska relies on common tankage, making segregation impossible absent significant investments for injection systems at every marina. The current requirements for dyeing 96% to 99% of the diesel fuel in Alaska seems to fly in the face of reason. The irony was noted by an article in the Anchorage Daily News that quoted a local Alaska IRS agent. The gentleman, responding to the issue of the lack of storage tanks for both taxable and nontaxable diesel, said one component of the diesel tax funds the removal of leaking underground fuel tanks around the country. The agent said, "It serves one purpose, but defeats another (increasing demand for more tanks)." 2 2 Thank you for the opportunity to provide my comments to the committee. 2 Anchorage Daily News, January 7, 1994 PREPARED STATEMENT OF JOHN H. CHAFEE Mr. Chairman: I want to thank you for holding this hearing. As you know, I am concerned that, as a result of the dyeing requirements imposed in 1993, recreational boat owners are having difficulty finding diesel fuel. OBRA 1993 changed the diesel excise tax collection point from the wholesale level to the terminal rack. This change made collecting the diesel fuel tax similar to the system used for gasoline taxes. The goal in making this change was to improve taxpayer compliance and help the Internal Revenue Service administer the diesel fuel tax. Mr. President, collecting the tax at the terminal rack works well for gasoline because all of the uses of that fuel are taxable. That is not true for diesel fuel. Home heating oil, which is essentially diesel fuel, is not taxable. Also, diesel fuel used in off-road vehicles and by commercial boaters is not subject to the tax. Moving the collection point for the tax to the terminal rack makes it necessary to find a way to differentiate between taxable and nontaxable fuel. Dyeing was implemented to do this. Mr. Chairman, I fully support efforts to increase compliance with our tax laws. However, in administering those laws, we must be cognizant of the problems they create. While diesel fuel powers many types of boats, the vast majority of its use is in commercial boats, such as fishing vessels. Diesel fuel sold for these purposes is exempt from the tax. However, the identical fuel used in a recreational boat is taxable. Under the current dyeing regime, fuel sold to a recreational boater must be "clear" to indicate that tax was paid. Fuel sold for commercial purposes is dyed to show that it was not taxed. Under no circumstances may dyed fuel be sold to someone who is subject to the tax, even if the retailer collects the tax and remits it to the federal government. The obvious problem created by this regime is that a marina or dock that services both commercial and recreational boaters must have two separate storage tanks to service these customers. It may not be economically feasible to install a new tank, and often it is physically impossible to do so. A marina has few options available to it if maintaining more than one tank is not feasible. One possible solution is to limit its sales to commercial boaters and forfeit the pleasure boat business. The anecdotal evidence suggests that this is the option that many marinas are choosing because sales to commercial boaters dominate the market. That has sent recreational boaters throughout this country scrambling to find fuel. An alternative is to buy clear fuel and pass the tax on to all diesel fuel purchasers. Those who are exempt from the tax must then apply for a refund. However, this creates significant cash flow problems for commercial boaters. Since they represent such a large portion of a marina's diesel sales, it is not likely that a retailer will choose this option and inconvenience so many of its customers. To solve the immediate problem of fuel shortages, S. 1034 imposes a two-year moratorium on the collection of the boat diesel excise tax. More importantly, it also requires the Treasury Department to study the various options for collecting the tax and report its findings to the Ways and Means and Finance Committees. In performing this study, Treasury must consult with boat owners and diesel fuel retailers. It is our hope that this study will identify an alternative to the current collection system that will ensure compliance without creating problems for the recreational boating community. I am disappointed that Treasury opposes S. 1034 and feels that nothing will be accomplished by working with those adversely affected by the dyeing regime to develop a workable alternative. If we are successful in getting this legislation enacted, I hope that Treasury will approach this effort with a more open mind. Again, Mr. Chairman, I want to thank you for holding this hearing. PREPARED STATEMENT OF PHILLIP R. CHISHOLM Mr. Chairman, on behalf of the Petroleum Marketers Association of America, PMAA, I would like to thank you for holding these hearings on diesel fuel excise tax laws. PMAA is a federation of 41 state and regional trade associations representing more than 11,000 independent petroleum marketers throughout the United States. These marketers sell in excess of forty percent of the gasoline, 75 percent of the home heating oil and 60 percent of the diesel fuel consumed in this country. Eighty-nine percent of PMAA's membership is classified as small business under size categories established by the Small Business Administration. On August 10, 1993, President Clinton signed into law the Omnibus Budget Reconciliation Act (OBRA) which mandated a new collection point for diesel and established that all diesel sold from a terminal would be subject to the full excise tax unless it was dyed. This change was designed to ease the administrative burden for the Internal Revenue Service, eliminate evasion, and provide ready access to tax free diesel for tax exempt purchasers such as home heating oil customers, farmers, state and local governments, and reduced rate buyers such as buses. We do not believe that the legislation that we are now subject to has achieved those goals effectively and efficiently. The underlying theory for this change was that industry would convert to a tax or dye system, and that paperwork and the administrative burden for both IRS and the petroleum industry would decrease. We do not believe that this has occurred. Instead we see a transformation from a system that relied on marketers to make tax payments, to a system that relies on marketers to file refund claims on behalf of their customers. The impact on marketer cash flow as a result of switching from a tax remitter to a company that depends on the IRS for refunds has been tremendous and extremely harmful to the petroleum marketing industry. Additionally, many auxiliary benefits of being a remitter have been lost, including the ability of marketers to issue a check to the IRS which represented their true liability of taxes owed. Another of those auxiliary benefits related to gasoline excise taxes and sales to state and local governments. Prior to 1994 our members who sold gasoline which was purchased tax paid and then sold tax free to state and local governments took a credit for the taxes against their diesel tax payments. The procedure had a minimal impact on their cash flow and was easy to administer. That option is now no longer available, and marketers must now apply for refunds on these sales. Again, the IRS must check and evaluate every claim, and prepare appropriate refund checks. A good example of the extra burden imposed by this system is the fact that marketers must fill out separate claims for diesel and gasoline and mail the claims to different IRS processing offices, even though the gasoline and diesel may have been sold to the same customer in one transaction. Processing these gasoline claims within a specified time is not required by law and the IRS has in many cases taken several months. This delayed processing of refunds has brought many of our members to the brink of ruin. Moving the point of collection to the rack was designed to reduce the number of remitters to several thousand. The theory was that by reducing the number of taxpayers the administrative burden on the IRS would be reduced. This reduction in administrative burden would release sufficient resources to monitor the system, and provide for effective tax administration. We would note that the IRS and its employees understand the vital nature of these claims and the necessity to process them expeditiously. It appears that the employees have worked hard to reduce the time periods for processing and have met with some success in their efforts. It appears from our informal surveys that they are now processing most claims in 30-60 days. However, the IRS's performance varies between marketers and between service centers. While PMAA appreciates the efforts and applauds the work of the IRS personnel, it is still not good enough. Our members cannot sustain the negative cash flow created by these refunds and Congress must establish a way to eliminate this problem. From the marketer's perspective, this change in law has been an administrative nightmare. The end result has been an explosion in the number of forms to be filed and their frequency. And given that the IRS has taken as long as four months to process the paper that they have received from my members, I must assume it has been an administrative nightmare for them also. So we must assume that all the resources that were supposed to eliminate evasion are now being used to input the data being collected and prepared by marketers. Another concern of independent marketers resulting from this change is their ability to freely and fairly compete with competing major oil companies who are continuing in their role as position holders. This change has essentially shifted the working capital generated by the taxes from marketers to these competitors. The negative cash flow resulting from applying for refunds on behalf of farmers and state and local governments has for many marketers deprived them of several hundred thousand dollars and forced them to dramatically increase their credit lines. This financial burden makes it extremely difficult to compete. We believe that the Congress should have examined this competitive inequity prior to enacting these changes. While, we believe that the petroleum marketer has borne the brunt of the costs of this program, there are other parties that are affected. Fuel costs have risen to pay for the dye which is part of the program. In many areas of the country, tax free dyed fuel was unavailable during the extremely cold winter of 1994 and marketers selling home heating oil either had to forfeit their tax payments or pass this motor fuels tax on to their home heating oil customer. It is clear that Congress did not provide an effective method to avoid these results, and we believe that Congress should reexamine this issue and allow the marketer to become the refund agent for his home heating oil customers. Operators of non-commercial boats have also been affected by this new system. As you know, OBRA extended the diesel tax as well as the dying system to noncommercial boats. As a result marinas who serve both commercial and non-commercial vessels should have installed an additional tank and pump to handle an additional diesel. Unfortunately, adding a tank, obtaining insurance for the tank and obtaining approval for a petroleum tank adjacent to a waterway is never easy and many in petroleum distribution simply decided to not serve non-commercial vessels. As a result, recreational boats must often travel additional distances to obtain the proper fuel for their vessel. PMAA continues to be gravely concerned with the long term ramifications of this dye system on the environment, and on petroleum distribution and storage. As you know, this dyed tax system was layered onto an EPA requirement for diesel fuel contained in the Clean Air Act Amendment, under which diesel was split into dyed regular diesel which could be used in off-road vehicles and home heating and undyed low sulfur diesel which could be used in motor vehicles, off-road vehicles and in oil burners. This EPA rule confronted many marketers with the decision as to what type of fuel should they sell, the new improved and environmentally superior low sulfur diesel for all their customers or should they sell this new fuel only to their trucking customers. Many decided that it would be environmentally advantageous to sell only the low sulfur fuel and it would also eliminate many of their needs for additional storage and transportation. However OBRA undermined this decision, since the new low sulfur fuel was at least $.24 more expensive because it was now a tax paid fuel, and therefore the unregulated fuel was suitable for only off-road uses and the new regulated fuel could only be used in motor vehicles. We believe that this change in tax laws undermined the voluntary efforts of many marketers and their customers who would have opted for the environmentally superior fuel. PMAA believes there must be a better way to collect the tax, one which will be less burdensome on industry and more easily administered. We believe that the Congress should begin to examine the fuel excise tax laws in an effort to find such a system. Without actively pursuing alternatives, it is likely that this new system will be compromised and the criminal element will have several years to profit at the expense of the honest petroleum marketer. We recognize that the criminal element is very entrepreneurial and are confident that they will eventually find a way to avoid any security that the dye system affords. When that day comes, this whole system will collapse. The task of developing a superior system should thus begin today, we should not wait until it is too late. Under the current tax laws a significant portion of the diesel fuel sold in this country is not subject to tax. Whether the fuel should be taxed or not can only be determined at the last sale. If it is going to a truckstop, it should be taxed, if it is going to a homeowner's heating fuel tank it should remain untaxed. Any decision made prior to that point provides an opportunity for the untaxed product to be diverted to taxable uses. The farther away this decision occurs, the less likely that such a diversion will be detected. For these reasons, PMAA believes that the more appropriate point of collection for diesel taxes is the retail or end use level. We would note that New Jersey recently implemented such a tax and revenues increased substantially. In recent years, we have heard from representatives of the IRS and congressional staff that such an approach is not workable and imposes too great an administrative burden on the IRS. We disagree. We believe that an information system can be developed that would allow the federal government to monitor fuel sales and purchases electronically. We would note that the credit card companies effectively and efficiently track millions of purchases, their customers and the sellers daily. In our industry, much of the fueling that now occurs is tracked electronically. Why can't the IRS embrace this technology and use it for motor fuels tax collection? With such a system they could continuously audit and monitor all fuels transactions, unmask unusual buying patterns that could indicate fraud, verify that all tax free sales are being made to tax exempt buyers, and ensure that they collect all the taxes made on sales of tax paid fuel. We believe that such an approach is far superior to stationing IRS agents at weigh stations around the country and off the interstate. Avoiding such stations has never been particu larly difficult, and it is likely that truckers who are willing to buy illegal fuel will find an alternate route if such inspections are occurring. PMAA is pleased that diesel excise tax collections have increased over the past two years, and that the efforts of the Department of Justice and the Internal Revenue Service in attacking the criminal element have been extremely successful. However, the increased collections are a product of many changes, the Environmental Protection Agency's changes to the diesel product, more effective enforcement by the Internal Revenue Service and the Department of Justice and technical changes to the method of collection. We do not believe that the current system is perfect and cannot be improved, and given the impact on marketers, we believe such changes should be considered. We would also like to bring the Committee's attention to another issue regarding motor fuels excise taxes that will to be addressed by the Congress. State excise taxes have been as critical a component in financing highway construction as the federal taxes we have discussed today. Unfortunately, the current legal system and how it treats native Americans and commercial activity on reservations is endangering this important source of funds for highway construction. New York has fought for many years to impose a tax on fuel used by non-native Americans who fuel at reservation truckstops and then use New York highways. To date, even with two positive Supreme Court decisions they have not been able to successfully collect the tax. Oklahoma recently had its tax and its application to native American activities reviewed by the Supreme Court, and the Court decided that the tax could not be applied to sales by native Americans to non-native Americans. The inability of a state to collect fuel taxes is disastrous to petroleum marketers who are competing with native Americans, and who must sell the fuel tax paid. It is also disastrous to anyone who depends on the nation's highways for commercial or recreational activity. PMAA believes that a federal solution to this problem will be required, and looks forward to working with the Congress in this effort. Finally, PMAA would note that a provision allowing marketers to claim refund claims for ethanol expires on September 30, 1995. This provision will need to be extended as soon as possible. Failure to extend that provision well in advance of September 30th will create substantial confusion and be very disruptive to marketers who distribute ethanol. In conclusion, PMAA encourages the following changes to the diesel and gasoline excise tax statutes: • A statutory time period for processing marketer gasoline refunds. • A statutory time period for processing all refund claims. • Allow marketers to claim refunds on behalf of their heating oil customers. • Eliminate the dye enforcement system for sales to non-commercial vessels. • Allow kerosene to be blended into diesel without additional dye. • Provide a refund system for accidental blending of dyed and undyed fuel. PREPARED STATEMENT OF JOHN J. COLLINS The American Trucking Associations (ATA) appreciates the opportunity to present views on fuel tax policy and tax administration issues. We wish to make three points: • Highway fuel taxes should go into the Highway Trust Fund and be spent promptly on urgent highway needs, especially the National Highway System. In particular, the 4.3-cent general-fund fuel tax paid by highway users should be repealed or placed into the highway account. • In light of the $1.1 billion the federal government is spending in 1995 on rail assistance (including freight rail), it is appropriate for railroads to continue to pay a small fuel tax. We would not oppose placing those amounts in a separate trust fund. • The changes in diesel fuel tax collection point, dyeing and refunds have apparently brought about the increase in receipts they were intended to. IRS officials charged with administering the new regime have shown good faith and done a good job. However, there are still problems with the regulations that must be resolved promptly through final rules or Congressional action. I. ATA REPRESENTS THE TRUCKING INDUSTRY ATA is the national trade association representing trucking companies of all sizes, industry segments and regions. More than 37,000 companies belong directly to ATA or to our 51 state and 12 specialized national affiliates. These companies range in |