The Lord gives and the Lord takes away. Taxpayers often find the same thing for the government. In some cases, the tax law only grants an exemption from material tax liability to make it procedurally difficult or even procedurally impossible to claim the exemption. This may be the case with US federal excise taxes, one of which is the subject of this warning. Tax policy is generally understood to mean that exported taxable fuels are exempt from the United States. However, taxpayers may want to review the procedural requirements for this exemption in order to avoid potentially significant pitfalls that could make it difficult to avoid tax liability. With proper planning, a taxpayer can potentially mitigate or avoid such problems.
The § 4081 consumption tax and the export exemption
Pursuant to Section 4081 of the Internal Revenue Code 1986, as amended (code), an excise duty is generally levied on (1) the removal of a taxable fuel from a refinery or terminal, (2) the registration of a taxable fuel in a tax United States for consumption, use, or storage; and (3) the sale of a taxable fuel to an unregistered person unless there has been prior taxable removal or entry into the United States. The rate of excise duty depends on the type of taxable fuel in question. For diesel fuel or kerosene, the tax rate is 24.3 cents per gallon plus an escrow tax of 0.1 cents per gallon Leaking Under Ground Storage Tank (LUST) for a total excise duty of 24.4 cents per gallon.
With a special legal exemption, the consumption tax according to § 4081 does not apply to diesel fuel or kerosene which are intended for non-taxable use. For this purpose, the term “non-taxable use” includes any use that is exempt from tax imposed in Section 4041 (a) (1), except as a result of prior tax collection.
Section 4041 (a) (1) generally provides a tax on liquids other than gasoline that are sold or used as fuel by an individual to an owner, renter, or other operator of a diesel-powered highway vehicle or train, such as those Vehicles. However, Section 4041 (g) (3) exempts the excise duty of Section 4041 (a) (1) “the sale of liquids for export or for shipment into the possession of the United States” if the liquid is “so exported in due course or shipped. “Since diesel fuel or kerosene sold for export and so exported in due course is exempt from Section 4041 (a) (1) excise duty, it should also be exempt from Section 4081 excise duty.
Pursuant to Section 4082 (f) (1), exemptions from the consumption tax under Section 4081 generally do not apply to the LUST tax. However, there is an exception to this rule for fuel intended for export.
Accordingly, exported diesel fuel or kerosene is completely exempt from excise duty in accordance with Section 4081.
Since exported diesel fuel or kerosene are exempt from excise duty under Section 4081, a taxpayer should never have to pay the tax, right? If only the tax law were that simple! The main obstacle that a person seeking the export exemption must overcome is Section 6427 (l) (1), which generally provides for a person to use diesel fuel or kerosene on which the excise duty has been levied under Section 4081 In the case of non-taxable use, the IRS pays the “end user” a refund of the tax.
Neither the Code nor the Treasury Regulations define the term “end user” as used in Section 6427 (l). In Valley Ice & Fuel Co. v USA, 30 F.3d 635 (5th Cir. 1994), the Court of Appeal for the fifth circuit interpreted the "end user" for the purposes of section 6427 (l) as "the buyer in the flow of trade who is supposed to use the product themselves – as opposed to a middleman who wants to resell the product. “If this definition were adopted in relation to export exemption, no person liable for excise duty under Section 4081 could ever invoke export exemption to reduce their excise duty. The only way for this person to recoup the tax is to pass the costs on downstream, which may not always be economically feasible. The non-US end buyer may then be able to claim an excise tax refund if they are aware of the export exemption and can overcome various other hurdles.
The Valley Ice court examined this, but on the facts of the case declined to decide whether an exporter of fuel could be the end customer within the meaning of section 6427 (l), as the taxpayer there was a retailer rather than an exporter. However, the guidelines suggest that the Internal Revenue Service (IRS) considers exporters to be end users for the purposes of Section 6427 (l). IRS Form 8849 Excise Reimbursement Eligibility is used to request a reimbursement of excise duties, including Section 4081 Excise Duties, that have been paid to the IRS but for which an exemption is available. Appendix 1 to IRS Form 8849 is used to report claims based on the non-taxable use of fuels, including uncolored diesel fuel and uncolored kerosene. The Internal Revenue Manual, a comprehensive guide for IRS staff to the procedures and guidelines that govern all aspects of the IRS, states that "Appendix 1 claims may only be made by the end user of the fuel," but adds that "(I) In the case of export, the exporter is the end user" (emphasis added).
Who is an exporter? Neither the Code nor the Treasury Regulations specifically address this issue as defined in Section 6427 (l). Treasure. Reg. § 48.0-2 (a) contains definitions that apply generally to manufacturers and retailers. And honey. Reg. § 48.0-2 (a) (9) defines the term "exporter" as "the person named in the export waybill as the consignor or consignor". In the absence of any definition to the contrary in the Treasury Regulations, it appears that a person should be considered an exporter, and hence an end buyer, for the purposes of Section 6427 (l) when referred to as a consignor or consignor on the consignment note.
Other conditions for claiming the export exemption
In addition to being the end user, an applicant must also meet certain other requirements in order to apply for the export exemption. Above all, this includes the fact that the applicant manufactured or bought the diesel fuel or kerosene and did not sell it in the USA. An export exemption applicant would therefore like to ensure that ownership of the exported diesel fuel or kerosene only passes to foreign buyers outside the United States.
The applicant must also keep proof of export in their records. Such evidence can be one of the following:
- A copy of the export bill of lading issued by the carrier
- A certificate from the agent or representative of the exporting company showing the actual export of the item
- A landing certificate signed by a customs officer of the foreign country to which the item is being exported
- If the foreign country does not have a customs administration, a declaration from the foreign consignee stating the receipt of the item, or
- If a department or agency of the United States government is unable to provide any of the above four types of export documentation, a statement or attestation on the stationery of the department or agency carried out by an authorized officer that includes those listed or identified items have in fact been exported.
Without exception, an exporter will seek exemption under Appendix C, Claims, on IRS Form 720, Quarterly Federal Excise Tax Return, as compensation for their current Section 4081 excise duty. If the exemption is not used, the exporter may be able to obtain a cash refund of the excise duty liability under Section 4081 by filing IRS Form 8849, Excise Reimbursement Eligibility. Otherwise, the applicant may reclaim the excise tax liability under Section 4081, if at all, only in the form of an income tax credit by filing an IRS Form 4136, Credit for Federal Tax Paid on Fuels.
Exported diesel fuel or kerosene is exempt from Section 4081 excise duty of 24.4 cents per gallon (including the LUST tax of 0.1 cents per gallon). However, the taxable person may not be able to apply for an export exemption if they are not considered an “end user” or if they do not meet other requirements of the Treasury Regulations. Tax advisers should be consulted to maintain such a claim, especially when it is not economically feasible to pass the cost of excise tax on to buyers outside of the United States.