Federal Diesel Tax: Exemptions and Refunds
Understand the circumstances under which you can claim a credit or refund for the federal diesel tax and the process for recovering overpaid funds.
The federal government imposes a uniform excise tax on the sale of diesel fuel, currently set at 24.4 cents per gallon. The revenue from this tax is the primary source of funding for the federal Highway Trust Fund. This fund finances transportation infrastructure projects, including the maintenance and construction of highways and bridges nationwide. The tax is incorporated into the final price at the pump.
Taxable Events and Collection
The federal excise tax on diesel fuel is not collected at the retail pump but earlier in the supply chain. The tax is imposed during a “taxable event,” which is the removal of diesel fuel from a registered terminal facility at the terminal rack. The tax applies to undyed diesel fuel intended for highway use.
Responsibility for remitting this tax to the Internal Revenue Service (IRS) falls upon the “position holder.” The position holder is the entity that holds the ownership rights to the fuel within the terminal, such as a fuel supplier or distributor. This entity pays the tax directly to the government upon removing the fuel.
This collection method simplifies the process for the government, as it deals with a smaller number of large taxpayers. The cost of the tax is treated as a business expense by the position holder and built into the wholesale price. Retail gas stations then pass this embedded tax cost on to the final consumer.
Uses Exempt from the Tax
Certain uses of diesel fuel are exempt from the federal excise tax, a distinction signified by the fuel’s color. Diesel fuel intended for off-highway purposes is dyed red to distinguish it from the clear, on-highway diesel that is subject to the tax. This dyed diesel is sold without the federal excise tax included in its price.
The primary exempt uses are for activities where the fuel is not used on public highways. These include:
- Fuel used on a farm for farming purposes in tractors, combines, and other machinery.
- Diesel fuel purchased for the exclusive use of state and local governments, such as for city buses or snowplows.
- Fuel used to power trains.
- Fuel purchased by non-profit educational organizations for their vehicles and equipment.
Required Information for Tax Credits or Refunds
When a consumer purchases undyed diesel fuel and uses it for a tax-exempt purpose, they are eligible to claim a credit or refund for the tax paid. To do this, record-keeping is necessary. The claimant must maintain detailed records that include the number of gallons purchased, the dates of the purchases, and the names of the sellers.
These records must also document how the fuel was used. The records must specify the allocation of gallons to each non-taxable use. For example, a farmer would need to differentiate the gallons used in a farm tractor from any gallons used in a personal diesel vehicle. This detailed breakdown is needed to substantiate a claim.
The IRS provides two forms for making a claim: Form 4136, Credit for Federal Tax Paid on Fuels, and Form 8849, Claim for Refund of Excise Taxes. The most current versions of these forms and their instructions are available on the IRS website. The gathered records provide the data needed to complete these documents.
The Process for Filing a Claim
The process for submitting the claim differs depending on which form is used. Form 4136 is not filed on its own but is attached to the claimant’s annual income tax return, such as a Form 1040 for individuals or a Form 1120 for corporations. The total amount from Form 4136 is claimed as a tax credit, which reduces the total income tax liability.
Alternatively, a claimant can use Form 8849 to request a direct refund from the IRS separately from their income tax return. This form can be filed for any quarter in which the total refundable amount is $750 or more. If the claim is less than $750 in a single quarter, it must be carried over to the next quarter or claimed on an annual basis.
If Form 4136 was used, the credit is realized when the income tax return is processed, resulting in a lower tax payment or a larger tax refund. For claims made with Form 8849, the IRS will process the form and issue a refund check directly to the claimant.