Refunds Available for Qualifying Diesel Purchases Going Back Three Years

2024-05-20

Reading Time: 3 minutes When buying diesel fuel at a gas station, part of the price is a federal highway use tax of 24.4 cents per gallon. However, if the diesel is purchased to fill construction equipment such as front loaders and road graders used exclusively off highways, a contractor can claim a tax credit … Continued

Reading Time: 3 minutes

When buying diesel fuel at a gas station, part of the price is a federal highway use tax of 24.4 cents per gallon. However, if the diesel is purchased to fill construction equipment such as front loaders and road graders used exclusively off highways, a contractor can claim a tax credit on the highway use tax portion of the amount paid.

Contractors may claim a refund on the taxes paid for any such diesel purchases in the past three years. The refund is claimed in California by filing Form CDTFA-770-DU, Diesel Fuel Claim for Refund on Nontaxable Uses.

The tax credit is available for any off-highway-use vehicle filled with diesel from a public gas station. If the vehicle is filled with off-highway diesel delivered to a job site by a distributor, it does not qualify for a refund because no highway use taxes are paid to the distributor. Typically, off-highway diesel injects a red dye to distinguish it from on-highway diesel.

Rules Are Complex

The rules governing the highway use tax are complex, and owners of commercial diesel vehicles need to know when to pay the highway use tax and when not. If a car travels on highways is only one factor in whether the owner must pay the highway use tax on diesel fuel. Sometimes, an on-highway vehicle has equipment that draws on the diesel fuel but is considered separate from the car. In such a case, the portion of the diesel that powers the specialized equipment is exempt from the highway use tax.

For example, consider the story of a small distribution company that owned a refrigeration truck used to transport food products. Naturally, the truck traveled on highways, so the diesel used to fuel the car was subject to the federal highway use tax. However, the generator that powered the refrigeration unit on the truck drew fuel from the same diesel tank that the truck ran on. That portion of the diesel was not subject to the highway use tax, and when the company’s accountants calculated the percentage of the diesel used by the unit, they could claim a refund on that portion of the taxes paid.

The federal government imposes excise taxes on a variety of liquid fuels. Along with heavy-vehicle use and truck/trailer sales taxes, these excise taxes are collected by the IRS and placed in the federal Highway Trust Fund. The Highway Trust Fund contains three accounts:

• A highway account that funds road construction;
• A mass transit account that funds transit-related projects; and
• A leaking underground storage tank (LUST) account that, as the name suggests, funds the remediation of leakage issues involving underground storage tanks.

Once deposited into the Highway Trust Fund, the taxes are distributed to individual states based on a legislatively determined formula.

Common Nontaxable Uses of Diesel

As noted, fuel excise taxes are imposed on fuel used in the nation’s transportation systems and are governed predominantly by IRC Sec. 4041. If a fuel is used for another purpose, it may be considered a nontaxable use. Taxpayers who have paid excise taxes on fuels used for nontaxable purposes may claim credits or refunds for any excise taxes paid.

The following uses of fuels are considered nontaxable for excise tax purposes:

• Fuels used for off-highway business uses (e.g., fuel used to power a generator for a business)
• Fuels used on a farm for farming purposes (e.g., to power farming equipment)
• Exported fuels
• Fuels used for intercity, school, and local buses
• Fuels used by a qualified blood collector organization
• Fuels used in an aircraft or vehicle owned by an aircraft museum
• Fuels exclusively for use by a nonprofit educational organization
• Fuels exclusively for use by a state, a political subdivision of a state or the District of Columbia

Taxpayers should report nontaxable uses of fuel on Schedule C of Form 720.

We’re here to help

If you have questions about claiming a refund of highway use taxes paid on fuel for your construction or other off-highway vehicles, we can help. Contact your JLK Rosenberger team member, or click here to contact us. We look forward to speaking with you soon.