Truck Topics

Understanding Fuel Taxes

It's been said that the only guarantees in life are death and taxes. The first one will affect all of us eventually, but those of us in the trucking industry are well aware of the way the second one affects our businesses every day.

If you were to ask your neighbor what he pays in fuel taxes, chances are he wouldn't be able to give you an answer. Of course, he can rattle off his property tax amount, or the percentage he pays in sales tax, but the odds are that he hasn't a clue what his state and federal fuel taxes amount to when he fills the tank in his car.

Professional drivers, or more likely, owner operators, are aware of the taxes charged when they stick that nozzle into the fuel tanks. As the numbers turn on the pump, the cents turn into dollars and the total can be staggering. And to think that you have to pay extra for that IFTA sticker on the side of your truck!

How can you save dollars by watching where and when you buy fuel so that you can take advantage of the best diesel prices? It's not as complicated as it sounds if you understand how fuel taxes are paid.

Some IFTA Background

In 1983, the International Fuel Tax Agreement (IFTA) was adopted in Arizona, Iowa and Washington in an effort to simplify the collection of fuel tax revenues. As more states became members of this agreement, the ease in filing quarterly reports offered relief for carriers.

Instead of completing a complicated tax return in every state (including those with no miles for the quarter), one IFTA report with each state was filed with the carrier's home jurisdiction.

IFTA allowed both debits and credits on one return, and the base state distributed the taxes to its other members for all trucks which qualified. As long as you ran in two or more jurisdictions, you could file your return and pay the taxes with one check. In addition, a fuel use tax bond requirement was eliminated for carriers who proved compliance.

Trucks meeting the requirements for IFTA were motor vehicles which had two axles and a gross weight exceeding 26,000 pounds, or those with three axles, regardless of weight, or any combination when the weight of the combination exceeded 26,000 pounds. (Recreational vehicles were not included in this agreement.)

The reporting requirements for IFTA compliance include the carrier's name, the unit number or vehicle identification, fleet number, and for each trip the starting and ending dates, origin and destination and route of travel sa well as the beginning and ending odometer readings. Drivers were also required to record the miles driven for each trip and when fuel was purchased, the number of gallons and name of the supplier was to be noted.

Although the paperwork seemed to be excessive for the driver, the time and effort saved in filing the reports each quarter were substantial.

The Way It Works

So, now you are still wondering if there is a way to save money when you pay the taxes at the end of the quarter. Should you buy fuel at the cheapest truck stops or in the cheapest states? Some drivers try to buy enough fuel to cover what they burn in each state, hoping to come out "even" at the end of the quarter.

Remember, these are called "taxes" and you will almost always owe the government when the return is due. First, remember one very important rule of thumb when buying diesel fuel...... you do NOT pay taxes on the fuel you purchase.

Wait a minute, what about the taxes added to the cost of the diesel flowing into your tank? Remember, you do NOT pay taxes on the fuel you purchase......until it is burned.

So, the rule to remember is that the taxes you pay are based on your fuel consumption. This means that you only pay the tax on the gallons you burn on the highway, regardless of where it was bought.

For example, if you were on the Illinois state line and put 200 gallons of Illinois fuel into your tanks and then drove through Indiana, you would have to pay Indiana taxes on the fuel you used in their state and later you would get a refund on the taxes you paid at the pump in Illinois.

Okay, it sounds complicated, but it's not. You only pay taxes on the fuel you BURN in each state. So, with that in mind you can begin watching the prices on the billboards and choose your stops accordingly.

You don't have a lot of control over the number of gallons you burn on a trip, unless you make an effort to avoid certain states for whatever reason. The key is remembering that the tax at the end of the quarter will be paid on your gallons burned, based on your miles per gallon overall.

Since each state has its own rate of fuel taxes, you should observe the amount of tax on each gallon and purchase the fuel according the the actual cost of the diesel. This means that you should be aware of the amount each state charges for diesel tax (don't even calculate the federal tax, as you have no control over this one) and buy at the lowest cost after you have subtracted the taxes.

Here's an example: Remember that fuel taxes can change monthly, so don't use this article for reference. Check the pumps or find a website that lists the current state tax rates for your comparison.

If you pumped 200 gallons of fuel into your tanks in Illinois, you would be paying 29.4 cents per gallons, or $58.80 in state taxes. Now, if you burned all of that fuel in Missouri, you would owe them $34 (17 cents per gallon) and you would get a refund from Illinois of $58.80. So far, you are ahead, right?

If the fuel in Illinois was $1.50 per gallon, you would have paid only $1.206 for the actual fuel (remember, take the pump price per gallon and subtract the state tax for your raw fuel cost; $1.50 - .294 tax = $1.206 raw cost.) Depending on what your pump price was in Missouri, you might have come out ahead, or you might not.

If the pump price in Missouri was $1.38 or more you were better off buying fuel in Illinois, since your raw price per gallon would be $1.20 (or $1.38 less 17 cents tax.) In simple terms, just compare the price per gallon after you deduct the state fuel tax.

To complicate things a little more, some states want drivers to buy fuel at the pump and then they collect even more when the return is filed. This is to appease the truck stop owners who want your business. A good example is in Indiana, which charges only 16 cents at the pump, but adds an eleven cent surcharge at the end of the quarter.

Make sure you look at the raw price after deducting the tax charged at the pump to out smart the Hoosiers and states using fuel surcharges instead of adding them at the point of purchase.

Now that you've tried to understand all the calculations above, just remember three things; (1) fuel taxes are based on the fuel you BURN in each state, not the fuel you purchase, (2) compare raw fuel prices after deducting the state fuel tax, including the surcharge, and (3) death and taxes are guaranteed, so all you can do is avoid both of them whenever possible.

Ellen Voie has written extensively about trucking and family issues. Her articles have appeared in print and internet magazines, such as PNV.com, Land Line, Driving Force, Overdrive, Transport Topics, The Big Road, layover.com, Expediters Online.com and rpm.

Ms. Voie currently serves as the National Director of Trucker Buddy International.