Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users SAFETEA-LU. Section PTO Report

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1 Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users SAFETEA-LU Section PTO Report Project ID PHL0019 July 2007

2 Table of Contents SB/SE Research Executive Summary... i Introduction... 1 The Research Problem and Its Importance... 1 Project Background and Objectives... 3 Methodology... 4 Research Approach... 4 Limitations... 5 Findings... 5 SAFETEA-LU SECTION (a) (1) (A) PTO Fuel Usage... 5 SAFETEA-LU SECTION (a) (1) (B) PTO Exemption... 6 SAFETEA-LU SECTION (a) (1) (B) (i) Exemption for Mobile Machinery... 7 SAFETEA-LU SECTION (a) (1) (B) (ii) Exemption for Single Motor Vehicles... 8 SAFETEA-LU SECTION (a) (2) (A) Fuel Use for Dual Motor Vehicles... 9 SAFETEA-LU SECTION (a) (2) (B) Tax Issues for Dual Motor Vehicles... 9 Summary Signature Page/Approvals Appendix Appendix A SAFETEA Public Law Appendix B Research Report Definitions Appendix C Federal Register Notice/Public Comments Appendix D PTO Exemption Rate Methodology - Process Steps Appendix E Single Unit vehicle PTO Fuel Use Appendix F Tractor Trailer vehicle PTO Fuel Use Appendix G PTO Implementation Options Appendix H PTO Funding Options Appendix I Information to be submitted by Ultimate Vendors Tables Table 1 PTO Fuel Consumption... 6 Table 2 Tax Paid on PTO Fuel... 6 Table 3 Proposed Implementation Options for a PTO Excise Tax Credit... 8 Table 4 Proposed Funding Options for a PTO Excise Tax Credit... 9 Table 5 Dual Motor Vehicle Fuel Consumption... 9

3 SB/SE Research Executive Summary Power-Take-Off (PTO) Exemption Options May Tax IRS Compliance Resources Background For a number of years, industries and their affiliate trade organizations have been advocating excise tax relief for registered highway vehicles that operate auxiliary equipment via power-take-off" (PTO). Federal excise tax laws and regulations have prohibited taxpayers from taking a credit or claiming a refund for any fuel used in the propulsion motor of a registered highway vehicle even though that motor also operates special equipment by PTO 1 or power transfer. Taxpayers have expressed concerns over this rule as well as the current definition of Mobile Machinery as defined in Internal Revenue Code Section (IRC) section 4053(8). In 2005, Congress enacted the Safe, Accountable, Flexible, Efficient, Transportation Equity Act - A Legacy For Users (SAFETEA-LU). Section of the SAFETEA-LU Act requires the Secretary of the Treasury to conduct a study on the use by trucks of highway motor fuel that is not used for the purpose of propulsion of the vehicle. The Secretary tasked the Internal Revenue Service (IRS) with completing this study. 2 The sections of the SAFETEA-LU Act, their Research Objectives and Findings appear in the table below. This is the third and final report required by the SAFETEA-LU Act. Section 11144(a)(3) of the Act is covered in a separate IRS Research Report. The scope of this report addresses all PTO activity, which includes taxed fuel consumed for the use of loading and unloading equipment, towing winches, and certain other equipment. This includes vehicles using PTO for carrying equipment related to the transportation function of the vehicle. Section 11144(a)(1)/(2) Objectives Findings (a)(1)(a): For vehicles carrying equipment that is unrelated to the transportation function of the vehicle, by type of vehicle, what is the annual average amount of taxpaid fuel consumed per vehicle used by the propulsion engine to provide power to the equipment attached to the highway vehicle? PTO Fuel Usage - Estimate the amount of taxed fuel consumed due to PTO usage by vehicle type. Our research indicates that there are approximately 2 million single unit and tractor trailer PTO vehicles. The 2 million PTO vehicles consume approximately 6 billion gallons of fuel per year. The portion of the fuel that is consumed by the propulsion engine to power PTO equipment is approximately 18.7% or 1.1 billion gallons. The tax paid on the 1.1 billion gallons is $274.9 million. This includes vehicles using PTO for carrying equipment related to the transportation function of the vehicle. (a)(1)(b): Is it technically and administratively feasible to exempt such nonpropulsive use of highway fuels from the highway motor fuels excise taxes? Tax Issues for PTO Exemption - Determine if it is technically and administratively feasible to exempt PTO related fuel. The law currently allows a credit or refund for the offhighway business use of taxed fuel in the following situations: Fuel used in non-highway vehicles, including mobile machinery where the vehicle travels less than 7,500 miles per year on the highway. Fuel used in a separate motor used to power special equipment that is on registered vehicles. An exemption for PTO use would reduce the amount of excise tax collected for the Highway Trust Fund. An exemption would also be administratively burdensome, placing at risk the current IRS system for maintaining, measuring, and ensuring Excise tax compliance. Technical issues are covered in the next two sections: 1 A mechanical device used to transmit engine power to auxiliary equipment. Power take-offs can be mounted on either a main or auxiliary transmission. Front-mounted and flywheel-mounted power take-offs are also used in various applications. - National Truck Equipment Association This is the third of three studies conducted under SAFETEA-LU Public Law i

4 Table Continued (a)(1)(b)(i): Assuming the answer to Subsection (a) (1) (B) is yes, what options can we propose for implementing the exemption for mobile machinery (as defined in IRC 4053(8)) whose non-propulsive fuel use exceeds 50%? (a)(1)(b)(ii): Assuming the answer to Subsection (a) (1) (B) is yes, what options can we propose for implementing the exemption for any highway vehicle, which consumes fuel for both transportation and nontransportation-related equipment, using a single motor? (a)(2)(a): Where a separate motor runs nontransportation equipment, what is the annual average amount of fuel exempted from tax in the use of such equipment? (a)(2)(b): Where a separate motor runs nontransportation equipment, what are the issues relating to administration and compliance of the present-law exemption provided for such fuel use? Exemption Options for Mobile Machinery (MM) - Determine exemption options for mobile machinery as defined by IRC 4053(8) where PTO fuel usage exceeds 50%. Exemption Options for Single Motor Vehicle - Determine options for exempting PTO fuel usage in single motor vehicles. Dual Motor Vehicle Fuel Usage - Estimate untaxed fuel consumed by PTO usage for dual motor vehicles. Tax Issues for Dual Motor Vehicle - Determine the issue(s) relating to administration and compliance of the present-law exemption provided for fuel used by a separate motor to operate a PTO. The following three tests must be met in order for the particular highway vehicle to qualify as MM: a. The special equipment or machinery at issue must be permanently mounted on the chassis. b. The vehicle s chassis must be designed to serve only as a mobile carriage for the jobsite equipment. c. The chassis must not be capable of transporting any load other than the jobsite equipment without substantial structural modification. A credit or refund is allowed for fuel used in mobile machinery that traveled less than 7,500 miles on public highways during the owner's taxable year. See IRC Therefore, the only option for implementing the exemption for MM operators who currently do not meet the requirements of IRC 6421 but whose non-propulsive fuel use exceeds 50% would be to change the use-based test of IRC 6421(e)(2)(C)(ii)(II). The research report presents five potential options for allowing an excise tax fuel credit for single motor vehicles with PTO fuel trade or business usage. The options are: 1. Ultimate vendor claims 2. PTO operator claim for fixed (dollar) credit amount for PTO vehicles 3. PTO operator claim for percentage of gallons purchased 4. PTO operator claim for actual gallons used in PTO 5. PTO operator claim for gallons based on meter reading It is estimated that the average amount of fuel exempted from excise tax due to the use of a separate motor to power auxiliary equipment is 571,216,618 gallons per year. The excise tax credits and/or refunds associated with this fuel are approximately $139 million. A refund is allowed for any taxed fuel that is not used in the propulsion system of a diesel-powered highway vehicle. In situations where a separate motor runs nontransportation equipment, the issue is how to determine how much fuel the separate motor consumes when the fuel is drawn from the same tank that supplies the vehicle s engine. Summary/Conclusions PTO activity consumes over 1.1 billion gallons of fuel each year. The excise tax associated with this fuel is approximately $275 million. The options outlined in this report for the allowance of a credit for PTO fuel usage would present IRS with a number of challenges. Within each of the suggested options is the potential for excise and/or income tax abuse. As such, a primary concern for IRS is whether resources will be available to ensure and maintain compliance with any potential tax law change. 3 The 7,500 mile use-based test was enacted with the American Jobs Creation Act of ii

5 Introduction The Research Problem and Its Importance Current law and regulations prohibit taxpayers from taking a credit or claiming a refund for fuel used in the propulsion motor of a registered highway vehicle even though that motor also operates special equipment by power-take-off (PTO) 1 or power transfer. 2 For a number of years, various industries (e.g., concrete pumpers, concrete/ready-mix, tank truck and waste management) and their affiliated trade organizations have sought federal excise tax relief from what they perceive to be inequitable tax administration of the off-highway business use provisions, particularly as it relates to registered vehicles using fuel to operate special equipment by a PTO. Their general positions on the application of the excise tax law can be summarized by this public comment received from one company within the industry: [T]he current approach to fuel used for operation of the PTO is unfair and inconsistent with congressional intent and sound policy. First, it is at odds with the congressional purpose of applying the fuel tax to operations of the vehicle that cause wear and tear on the highways. In furtherance of that purpose, Congress exempted off-road vehicles from tax. An exemption for fuel used for the PTO would similarly further that purpose, since the fuel is not used to propel the vehicle and cause wear on the roads. Second, the approach rewards taxpayers for using two, separate motors on a vehicle, rather than a single motor to propel the vehicle and operate the PTO equipment. Fuel used in a second motor is exempt, and fuel used for the PTO should also be exempt. The PTO is more fuel efficient, and results in lower emissions of air pollutants than the separate motor. 3 Another issue for these groups is the current definition of mobile machinery as a non-highway vehicle. Before the JOBS Act, Treasury regulation section (a)-1(d)(2)(ii) excluded mobile machinery from the sales tax on trucks and allowed a credit or refund for the fuel used in such vehicles. The JOBS Act codified the regulation in section 4053(8) of the Code. But for fuel tax purposes, the JOBS Act added an additional requirement: the vehicle had to be used less than 7,500 miles on the public highways during a year (section 6421(e)(2)(C)). The imposed travel restriction/limitation has caused some in the industries mentioned above and others to feel burdened by the Act. For example, the American Concrete Pumping Association (ACPA) states: Generally, the JOBS bill provision was effective in its apparent objective of delineating those vehicles that use a significant portion of their fuel on the job site from those that use most of their fuel on the public highways. However, concrete pumps were the lone, notable exception. Most concrete pumps travel more than 7,500 per year, so the JOBS bill provision effectively ended their federal fuel tax exemption. However, concrete pumps consume more than half of 1 A mechanical device used to transmit engine power to auxiliary equipment. Power take-offs can be mounted on either a main or auxiliary transmission. Front-mounted and flywheel-mounted power take-offs are also used in various applications.- National Truck Equipment Association Treasury Regulations, 26 CFR and 26 CFR (d). 3 Comments and recommendations on exemptions from tax for fuel used for non-transportation purposes, Waste Management - Government Affairs- Robert Eisenbud, Vice President, Federal Public Affairs. 1

6 their fuel in off-highway job site operations. Thus, in a clear departure from the "user pays" concept of highway tax design, concrete pump owners must now pay taxes on 100 percent of their fuel consumption, even though less than half is consumed on the public highways. 4 Treasury regulations define a highway vehicle as any self-propelled vehicle designed to carry a load over public highways, whether or not it is also designed to perform other functions. Generally, the following kinds of vehicles are not considered highway vehicles for purposes of the credit or refund of fuel taxes: Specially designed mobile machinery for non-transportation functions. A self-propelled vehicle is not a highway vehicle if all of the following apply: The chassis has permanently mounted to it machinery or equipment used to perform certain operations (construction, manufacturing, drilling, mining, timbering, processing, farming, or similar operations) if the operation of the machinery or equipment is unrelated to transportation on or off the public highways. The chassis has been specially designed to serve only as a mobile carriage and mount (and power source, if applicable) for the machinery or equipment, whether or not the machinery or equipment is in operation. The chassis could not, because of its special design and without substantial structural modification, be used as part of a vehicle designed to carry any other load. For the fuel tax credit, the vehicle must meet the design-based test described above, and also have traveled less than 7,500 miles on public highways during the owner's taxable year. 5 Vehicles specially designed for off-highway transportation. A self--propelled vehicle is not treated as a highway vehicle if the vehicle is (i) specially designed for the primary function of transporting a particular type of load other than over the public highway, and (ii) because of this special design, the vehicle's capability to transport a load over a public highway is substantially limited or impaired. The key factors in this determination are one the vehicle's size, whether the vehicle is subject to licensing, safety, or other requirements, and whether the vehicle can transport a load at a sustained speed of at least 25 miles per hour. It does not matter that the vehicle can carry heavier loads off highway than it is allowed to carry over the highway. 6 Non-transportation trailers and semi-trailers. A trailer or semi-trailer is not treated as a highway vehicle if it is specially designed to function only as an enclosed stationary shelter for carrying on a nontransportation function at an off-highway site. For example, a trailer that is capable only of functioning as an office for an off-highway construction operation is not a highway vehicle. 7 The terms, Off-highway business use, Public highway, and Registered are defined in Appendix B. See Appendix C for Federal Register Notice and additional public comments. 4 American Concrete Pumping Association (ACPA), study of highway fuels used by trucks for non-transportation purposes (Section of Public Law ), Public comment document - Christi Collins Executive Director, American Concrete Pumping Association. 5 The 7,500 mile use-based test was enacted with the American Jobs Creation Act of IRC 7701(a)(48)(A). 7 IRC 7701(a)(48)(B). 2

7 In seeking federal excise tax relief, the industry affiliates emphasize that at least 29 state taxing agencies have offered some form of fuel tax relief by allowing a credit and/or refund for tax paid on diesel fuel, which is used by equipment powered by the propulsion of engine of the vehicle. Advocates of excise tax relief for PTO fuel usage generally acknowledge that there may be a potential burden placed on the Highway Trust Fund (HTF) by reducing available revenue. For this reason, some industries are open to a General Business Tax Credit for PTO fuel usage. Project Background and Objectives Enacted on August 10, 2005, the Safe, Accountable, Flexible, Efficient Transportation Equity Act A Legacy for Users (SAFETEA LU) (Public Law ) 8 requires the Secretary of the Treasury to report to the Committees on Finance and Environment and Public Works of the Senate and the Committees on Ways and Means and Transportation and Infrastructure of the House of Representatives the results relating to the provisions of Section of the Act. Section (a) of SAFETEA-LU requires the Secretary of the Treasury to conduct a study regarding the use by trucks of highway motor fuel that is not used for the propulsion of the vehicle. As part of such study, the Secretary of the Treasury shall determine: Sec (a) (1) (A): For vehicles carrying equipment that is unrelated to the transportation function of the vehicle by type of vehicle, what is the annual average amount of tax-paid fuel consumed per vehicle used by the propulsion engine to provide power to the equipment attached to the highway vehicle? Sec (a) (1) (B): Is it technically and administratively feasible to exempt such nonpropulsive use of highway fuels from the highway motor fuels excise taxes? Sec (a) (1) (B) (i): Assuming the answer to Subsection (a) (1) (B) is yes, what options can be proposed for implementing the exemption for mobile machinery (as defined in IRC 4053) (8) whose non-propulsive fuel use exceeds 50%? Sec (a) (1) (B) (ii): Assuming the answer to Subsection (a) (1) (B) is yes, what options can be proposed for implementing the exemption for any highway vehicle that consumes fuel for both transportation and non-transportation-related equipment using a single motor? Sec (a) (2) (A): Where a separate motor runs non-transportation equipment, what is the annual average amount of fuel exempted from tax in the use of such equipment? Sec (a) (2) (B): Where a separate motor runs non-transportation equipment, what are the issues relating to administration and compliance of the present-law exemption provided for such fuel use? The Secretary tasked the IRS with responsibility for the study. The IRS Small Business/Self Employed (SB/SE) Research Office completed the study, whose objectives were to determine the six items listed above that are components of Section This report outlines the research methodology and reports on the specific requirements contained in the components of Section The scope of this report addresses all PTO activity, which includes taxed fuel consumed for the use of loading and unloading equipment, towing winches, and certain other equipment. This includes vehicles using PTO for carrying equipment related to the transportation function of the vehicle. 8 See Appendix A for Legislative Language of Section 11144(a). 3

8 Methodology Research Approach SB/SE Research used multiple approaches to obtain information for this report. SB/SE Research: Conducted a literature search to identify related surveys, studies, and reports. In accordance with Title XI, Section of the Safe, Accountable, Flexible, Efficient Transportation Equity Act: a Legacy for Users (SAFETEA-LU), invited the general public and other federal and state agencies to comment on and have their comments considered in the studies mandated by this section. Held meetings and conversations with members of the Department of Transportation (USDOT), the Department of Energy (DOE), and the U.S. Environmental Protection Agency (EPA) to communicate specifics of the SAFETEA-LU and to obtain information for the report. Held meetings with IRS subject-matter experts on IRS excise tax issues and obtained concerns related to the options proposed to allow an exemption for PTO fuel use. Held meetings with The National Ready Mixed Concrete Association (NRMCA). Observed PTO testing performed by NRMCA. Held meetings with The American Concrete Pumping Association (ACPA). Reviewed PTO testing data provided ACPA. Held conversations with representatives from The National Tank Truck Carriers, Inc. (NTTC). Reviewed PTO testing data provided by NTTC. Held meetings with members of Waste Management Inc. Federal Public Affairs Office. Reviewed PTO study provided by Waste Management. Held meetings with the State of California resources Board Enforcement Division. Generated data tables based on the U.S. Department of Commerce s Vehicle Inventory and Use Survey (VIUS) conducted by Bureau of the Census. Developed a range of cost estimates based on selected industry data. Reviewed websites of the EPA, DOE, and USDOT. Used state websites were to determine applicable PTO allowances. Held conversations with National Energy Control Services, Inc (NECS). Held conversations with a representative from Wolf Tree Inc. Held conversations with representatives from the Association of Equipment Manufacturers (AEM). In addition, to estimate the total PTO fuel usage on an annual basis, both State and Census data were used. The 2002 VIUS survey estimates mileage by PTO vehicle type, while the State information contains PTO allowances (flat percentage rates) by vehicle type. Since PTO allowances are not uniform at the State level, weighted averages were used to represent total PTO fuel usage by vehicle type. The calculation for the PTO usage by vehicle type is as follows: The total estimated fuel by 4

9 vehicle type (based on the 2002 VIUS survey) multiplied by the weighted PTO average by vehicle type (as determined by the State PTO allowances). The source for each of the State s PTO allowance by vehicle type is each State s website. See Appendix D for calculations of weighted average. Limitations There are four limitations associated with this research report: 1. The primary data source for estimates on PTO fuel usage by vehicle type is based on 2002 data. The 2002 VIUS Survey was the only government document found that provided a comprehensive listing of registered vehicles and their related PTO fuel usage. The 2002 VIUS survey is widely used as a reference in numerous government reports and studies. This report is published every five years. The next survey (if funded) would be available in The types of vehicles listed in this report may not be all inclusive. Vehicles represented in this report are those primarily listed in the 2002 VIUS survey document. However, in order to be as comprehensive as possible, the report also includes identified PTO vehicles from those States that allow a PTO fuel credit. 3. There is an uncertainty as to the different types of vehicles and the correct number of vehicles that have dual motors, one of which is used for PTO off-highway activities. As such, data for fuel consumed by dual motor vehicles was limited to a single vehicle type. 4. The PTO fuel usage is only representative of those States that provide an allowance for PTO off-highway fuel usage. Findings SAFETEA-LU SECTION (a) (1) (A) PTO Fuel Usage Q1: For vehicles carrying equipment that is unrelated to the transportation function of the vehicle, by type of vehicle, what is the annual average amount of tax-paid fuel consumed per vehicle used by the propulsion engine to provide power to the equipment attached to the highway vehicle? The 2002 US Census VIUS survey and PTO State data were used to develop findings for this SAFETEA-LU question. Based on these two data sources, it is estimated that the total PTO vehicle population is approximately 2 million vehicles, with 75% classified as Single Unit Trucks and the other 25% classified as Tractor Trailers. Combined, these vehicles will consume an estimated 6 billion gallons of taxed fuel per year. Approximately 19% or 1.1 billion gallons of this fuel is related to PTO off-highway business use. The estimated excise tax related to off-highway PTO fuel usage is $275 million. The scope of this report addresses all PTO activity, which includes taxed fuel consumed for the use of loading and unloading equipment, towing winches, and certain other equipment. This includes vehicles using PTO for carrying equipment related to the transportation function of the vehicle. Table 1 below presents the findings for PTO fuel usage associated with the broad categories of Single Unit Trucks and Tractor Trailers. As shown below, Table 2 represents the estimated amount of excise tax collected on fuel used by PTOs for each of the above categories. 5

10 See Appendix E through F for a breakdown of the individual types of vehicles listed within each of the two broad categories, their related fuel usage, and the assigned weighted PTO allowance. Table 1 PTO Fuel Consumption PTO Vehicles PTO Vehicles Non-Propulsion Exemption Rate Annual Fuel Consumed by PTO Trucks Gal/Year (State Data Based) (Gallons) Single-Unit Trucks 1,673,695 3,297,961, % 670,618,747 Tractor Trailers 336,114 2,740,425, % 455,973,013 Total 2,009,809 6,038,386, % 1,126,591,760 Data Source: 2002 U.S Census VIUS Report & State Taxing Authority PTO Data 9 We estimate that there are approximately 2 million PTO vehicles. These vehicles consume 6 billion gallons of fuel of which 1.1 billion gallons of fuel is consumed by the PTO activity. Table 2 Tax Paid on PTO Fuel PTO Vehicles Annual Fuel Consumed by PTO PTO Vehicles Trucks Gal/Year Gallons Cost (@$0.244/Gal) Single-Unit Trucks 1,673,695 3,297,961, ,618,747 $ 163,630,974 Tractor Trailers 336,114 2,740,425, ,973,013 $ 111,257,415 Total 2,009,809 6,038,386,122 1,126,591,760 $ 274,888,389 Data Source: 2002 U.S Census VIUS Report SAFETEA-LU SECTION (a) (1) (B) PTO Exemption Q2: Is it technically and administratively feasible to exempt such non-propulsive use of highway fuels from the highway motor fuels excise taxes? The law currently allows a credit and/or refund for the off-highway business use of taxed fuel in the following situations: Fuel used in non-highway vehicles, including mobile machinery where the vehicle travels less than 7,500 miles per year on the highway. Fuel used in a separate motor to power special equipment that is on a registered highway vehicle. To allow an exemption for other than these two situations, new or amended excise tax laws would be required along with public notification for tax law interpretation and filing procedures/requirements. A credit for fuel used in PTO would reduce the amount of excise tax collected for the HTF and place at risk the current IRS system for maintaining, measuring, and ensuring excise-tax compliance. In addition, there would be administrative burdens on both the IRS and ultimate vendors involved with selling the fuel to PTO operators at a tax-excluded price if an ultimate-vendor rule were adopted. The primary burden would be the registration and record-keeping requirements associated with Form Percentages have been rounded. 6

11 (Application of Registration for Certain Excise Tax Activities). See Appendix I for ultimate vendor claim information. Given the level of retail fuel service stations, ten thousand or more Ultimate Vendors might need to be registered. If the Ultimate Purchasers (PTO Operators) Implementation Options were selected, the administrative burden on the IRS would be even greater. See Appendix G for the Implementation Options Matrix. Existing IRS forms could be used to process claims related to several of the potential PTO exemption options presented in this report (see SAFETEA-LU Section (a) (1) (B) (ii) below). What remains uncertain is the potential increase in the volume of annual claims due to any change in the tax law. The overall cost associated with processing excise tax claims would increase. Another issue would be the funding burden placed on the HTF for any allowable PTO claim. As previously indicated, with an annual estimate of 1.1 billion gallons of fuel used by PTOs, the reduction of HTF revenue is likely to exceed $275 million each year. See Appendix G and H for a complete listing of IRS concerns related to the technical and administrative issues of exempting non-propulsive (PTO) use of highway fuels from the highway motor fuel excise taxes. SAFETEA-LU SECTION (a) (1) (B) (i) Exemption for Mobile Machinery Q3: Assuming the answer to Subsection (a) (1) (B) is yes, what options can be proposed for implementing the exemption for mobile machinery (as defined in IRC 4053(8)) whose nonpropulsive fuel use exceeds 50%? For tax years beginning after October 22, 2004, mobile machinery operators may claim an excise-tax (fuel) credit for taxed undyed diesel fuel used in mobile machinery (MM) vehicle if the operators meet the design--based and use--based tests. A taxpayer will satisfy the MM design-based test if: The chassis has permanently mounted to it machinery or equipment used to perform certain operations (construction, manufacturing, drilling, mining, timbering, processing, farming, or similar operations) if the operation of the machinery or equipment is unrelated to transportation on or off the public highways; The chassis has been specially designed to serve only as a mobile carriage and mount (and power source, if allocable) for the machinery or equipment, whether or not the machinery or equipment is in operation; and The chassis could not, because of its special design, and without substantial structural modification, be used as part of a vehicle designed to carry any other load. A taxpayer meets the use-based test if the taxpayer uses the vehicle on public highways for less than 7,500 miles during the taxpayer s taxable year. A taxpayer may claim a credit for taxed diesel fuel only on its income tax return, using Form 4136, Credit for Federal Tax Paid on Fuels. For tax years beginning after October 22, 2004, mobile machinery operators cannot use dyed diesel fuel in their mobile machinery vehicles IRC 4082(b). 7

12 Fuel used in mobile machinery that traveled less than 7,500 miles on public highways during the owner's taxable year is entitled to a credit for excise tax paid under IRC Therefore, the only option for implementing the exemption for MM operators who currently do not meet the requirements of IRC 6421, but whose non-propulsive fuel use exceeds 50%, would be to change the use-based test of IRC 6421(e)(2)(C)(ii)(II). IRS concerns related to allowing an exemption for MM are similar to those appearing in Appendix G PTO Implementation Options (1a) and (1b). SAFETEA-LU SECTION (a) (1) (B) (ii) Exemption for Single Motor Vehicles Q4: Assuming the answer to Subsection (a) (1) (B) is yes, what options can be proposed for implementing the exemption for any highway vehicle that consumes fuel for both transportation and non-transportation-related equipment using a single motor? The research report presents five potential options for allowing an excise tax fuel credit for single motor vehicles with PTO fuel usage. The options range from allowing PTO operators to purchase fuel at a tax-excluded price at the point of sale to allowing a fixed credit amount based on the type of vehicle. Tables 3 and 4 below outline the proposed options and the potential funding sources. See Appendix G and H for related IRS concerns. Table 3 Proposed Implementation Options for a PTO Excise Tax Credit Implementation Option Process Description 1. Ultimate vendor claims 2. PTO operator claim for fixed (dollar) credit amount for PTO vehicles 3. PTO operator claim for percentage of gallons purchased 4. PTO operator claim for actual gallons used in PTO 5. PTO operator claim for gallons based on meter reading PTO operators purchase at a tax-excluded price based on either a fixed tax-free percentage or a percentage based on vehicle type. Example: Dump Truck purchases 15 established PTO rate. Fixed credit amount for all PTO vehicles or fixed credit amount based on vehicle type. Example: $150 per PTO vehicle or $200 per Dump Truck, $250 per Cement Mixer, etc. Based on gallons purchased multiplied by a fixed tax-free percentage or a tax-free percentage based on vehicle type. Example: 100 gallons purchased at a fixed PTO rate of 15% would result in 15 gallons tax-free. Based on substantiated PTO gallons. Example: actual PTO gallons $ Based on actual gallons per meter reading. Example: meter reading $ Note: If Taxpayer files IRS Form 2290 (Heavy Highway Vehicle Use Tax Return), credit could be used to offset tax. 8

13 Table 4 Proposed Funding Options for a PTO Excise Tax Credit Funding Option Process Description 1. Income Tax Return General Business Tax (GBT) Credit 2. Excise Tax Return Highway Trust Fund (HTF) Refund 3. Taxpayer Option GBT Credit vs. HTF Refund SAFETEA-LU SECTION (a) (2) (A) Fuel Use for Dual Motor Vehicles Q5: Where a separate motor runs non-transportation equipment, what is the annual average amount of fuel exempted from tax in the use of such equipment? Conversations with representatives from the Association of Equipment Manufacturers (AEM) and the IRS excise-tax program have indicated that vehicles with a separate motor and a single fuel tank are not as common as they once were. Concrete mixers, trash trucks and refrigeration vehicles used to be the primary users. However, due to advancements in single motor equipment and the need for less maintenance and less weight, dual motor vehicles are primarily limited to refrigeration type trucks. For these reasons, and because SB/SE Research found limited data sources with which to develop estimates of fuel usage for dual motor vehicles, findings for the above SAFETEA-LU question are limited to refrigeration type vehicles. It is estimated that the average amount of fuel exempted from excise tax due to the use of a separate motor to power auxiliary equipment is 571 million gallons per year. The excise tax credit and/or refund associated with this fuel is approximately $139 million ($0.244 * 571,216,618). See Table 5 for more detailed fuel and cost information. Table 5 Vehicles Dual Motor Vehicle Fuel Consumption PTO Vehicles Non-Propulsion Exemption Rate State Data (Weighted Average) Non-Propulsive Fuel (Gallons/Year) Trucks Gal/Year Tractor Trailers 1,632,737 16,103,448,215 Van, Insulated Refrigerated 122,135 1,933,636, % Dual Motor ~58, ,601, % 571,216,618 Data Source: 2002 U.S Census VIUS Report SAFETEA-LU SECTION (a) (2) (B) Tax Issues for Dual Motor Vehicles Q6: Where a separate motor runs non-transportation equipment, what are the issues relating to administration and compliance of the present-law exemption provided for such fuel use? IRS SB/SE Specialty Programs/Excise Tax operations responded to this question as follows: In situations where a separate motor runs non-transportation equipment, the issue is to determine the actual fuel that the separate motor consumes. 9

14 If that motor has a separate fuel supply tank, the determination is relatively straightforward: it is the fuel that this motor consumes out of that tank. However, since the tank is separate, dyed non-taxed fuel may have been used. Therefore, taxpayers must demonstrate that excise tax was actually imposed on the fuel in the separate supply tank. If the motor draws fuel from the same supply tank, the issue is whether the taxpayer made a reasonable determination of the quantity of taxable liquid fuel used in the separate motor. One must establish the consumption rate of that equipment, which is usually on a per hour basis, and then determine the number of hours the equipment was operated. In the case of refrigeration, most units operate whenever the truck or trailer is in operation, as the cargo must be maintained within a constant temperature range. IRS must then determine whether the method the taxpayer used was reasonable. 11 Many of the refrigeration units that do not have separate fuel supply tanks now have a gauge that will provide the number of gallons that the refrigeration units consumed. If there are no meters, then taxpayers may use specified hourly usage estimates provided by the manufacturer of the separate motors. Such usage is allowable under IRC section 6427(l) and Treasury Regulation section IRS has not seen any large significant tax issues in the calculations. Summary Under current law, all fuel that is used in the propulsion engine of a registered highway vehicle is subject to tax, and a credit or refund is not allowed, even if that engine also provides power for a PTO. By contrast, a credit or refund is allowed for fuel used in a separate motor on the vehicle, even if that motor draws fuel from the same tank that supplies the propulsion engine of the vehicle. An estimated 1.1 billion gallons of taxed diesel fuel per year is used for PTO use. Exempting this fuel from taxation at a minimum would have the potential to decrease the Highway Trust Fund or the general Treasury by $275 million per year. While there are several options to exempt PTO fuel usage, each presents IRS with a unique set of challenges. Some primary concerns are: The additional IRS resources needed to ensure compliance. The potential need for IRS SB/SE to register over 10,000 ultimate vendors. The validation and determination of equitable PTO allowance rates by type of PTO vehicles. 11 Treasury Regulation, 26 CFR (d). 10

15 Signature Page/Approvals Chief, SB/SE Research Philadelphia Date Keith V. Taylor Director, SB/SE Research Date 11

16 Appendices 12

17 Appendix A SAFETEA Public Law Public Law th Congress An Act To authorize funds for Federal-aid highways, highway safety programs, and transit programs, and for other purposes. <<NOTE: Aug. 10, [H.R. 3]>> Be it enacted by the Senate and House of Representatives of the United States of America in Congress <<NOTE: Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users. Inter- governmental relations. 23 USC 101 note.>> assembled, SEC TREASURY STUDY OF HIGHWAY FUELS USED BY TRUCKS FOR NON- TRANSPORTATION PURPOSES. (a) Study.--The Secretary of the Treasury shall conduct a study regarding the use of highway motor fuel by trucks that is not used for the propulsion of the vehicle. As part of such study-- (1) in the case of vehicles carrying equipment that is unrelated to the transportation function of the vehicle-- (A) the Secretary of the Treasury, in consultation with the Secretary of Transportation, and with public notice and comment, shall determine the average annual amount of tax-paid fuel consumed per vehicle, by type of vehicle, used by the propulsion engine to provide the power to operate the equipment attached to the highway vehicle, and (B) the Secretary of the Treasury shall review the technical and administrative feasibility of exempting such nonpropulsive use of highway fuels from the highway motor fuels excise taxes, and, if such exemptions are technically and administratively feasible, shall propose options for implementing such exemptions for-- (i) mobile machinery (as defined in section 4053(8) of the Internal Revenue Code of 1986) whose nonpropulsive fuel use exceeds 50 percent, and (ii) any highway vehicle which consumes fuel for both transportation and non-transportationrelated equipment, using a single motor, (2) in the case where non-transportation equipment is run by a separate motor-- (A) the Secretary of the Treasury shall determine the annual average amount of fuel exempted from tax in the use of such equipment by equipment type, and 13

18 (B) the Secretary of the Treasury shall review issues of administration and compliance related to the present-law exemption provided for such fuel use, and (3) the Secretary of the Treasury shall-- (A) estimate the amount of taxable fuel consumed by trucks and the emissions of various pollutants due to the long-term idling of diesel engines, and (B) determine the cost of reducing such long-term idling through the use of plug-ins at truck stops, auxiliary power units, or other technologies. 14

19 Appendix B Research Report Definitions Data Source-IRS Off-highway business use Any use of fuel in a trade or business or in an income-producing activity. No use of a boat is consider as an off-highway business use. Highway Vehicle A highway vehicle is any self-propelled vehicle designed to carry a load over public highways, whether or not also designed to perform other functions. Examples of vehicles designed to carry a load over public highways are passenger automobiles, motorcycles, buses, and highway-type trucks and truck tractors. A vehicle is a highway vehicle, even though the vehicle's design allows it to perform a highway transportation function for only one of the following: o A particular type of load, such as passengers, furnishings, and personal effects (as in a house, office, or utility trailer). o o A special kind of cargo, goods, supplies, or materials. Some off-highway task unrelated to highway transportation. Public highway A public highway includes any road in the United States that is not a private roadway. This includes federal, state, county, and city roads and streets. Registered A vehicle is considered registered when it is registered or required to be registered for highway use under the law of any state, the District of Columbia, or any foreign country in which it is operated or situated. Any highway vehicle operated under a dealer's tag, license, or permit is considered registered. A highway vehicle is not considered registered solely because a special permit allows the vehicle to be operated at particular times and under specified conditions. Dual use of propulsion motor Off-highway business use does not include any fuel used in the propulsion motor of a registered highway vehicle, even though that motor also operates special equipment by means of a power take-off or power transfer. It does not matter if the special equipment is mounted on the vehicle. 15

20 Appendix C Federal Register Notice/Public Comments Federal Register: December 9, 2005 (Volume 70, Number 236) From the Federal Register Online via GPO Access [wais.access.gpo.gov] DEPARTMENT OF THE TREASURY Internal Revenue Service AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Notice and request for comments SUMMARY: The Department of the Treasury--IRS, in accordance with Title XI. Section of the Safe, Accountable, Flexible, Efficient Transportation Equity Act: a Legacy for Users (SAFETEA-LU) invites the general public and other Federal and state agencies to take this opportunity to comment on and have their comments considered in the studies mandated by this section. DATES: Written comments should be received on or before February 7, 2006 to be assured of consideration. ADDRESSES: Direct all written correspondence to Thomas P. Colaiezzi, Chief, SB/SE Research-PHL, Internal Revenue Service, 600 Arch Street, Room 7204, Philadelphia, PA FOR FURTHER INFORMATION CONTACT: Requests for additional information or copies of the SAFETEA-LU sections should be directed to the address listed in the ADDRESSES section in this document or via to Thomas.P.Colaiezzi@irs.gov. SUPPLEMENTARY INFORMATION: Abstract: Title XI, section of SAFETEA-LU, enacted on August 10, 2005, directs the Secretary of the Treasury (Secretary) to study the use by trucks of highway motor fuel that is not used in the propulsion of the vehicle. This will include vehicles carrying equipment that is unrelated to the transportation function of the vehicle and also where non-transportation equipment is run by a separate motor. The Secretary is also proposing options for implementing exemptions from tax for fuel used in non-transportation uses, but only if the Secretary determines such exemptions are administratively feasible. In addition, the Secretary is estimating the amount of fuel consumed and pollutants emitted by trucks due to longterm idling of diesel engines, and reporting on the cost of reducing long-term idling through various technologies. Affected Public: Businesses that use, produce, or distribute diesel fuel or other products referenced in this section. Also affected are state agencies that impose taxes on diesel fuels. Thomas P. Colaiezzi, Chief, Small Business/Self Employed Research. 16

21 Government Affairs 701 Pennsylvania Avenue, NW Suite 590 Washington, DC December 4, 2006 Comments and recommendations on exemptions from tax for fuel used for nontransportation purposes Waste Management (WM) appreciates the opportunity to submit this summary of comments already submitted for consideration by the Internal Revenue Service in the course of its study pursuant to Section of SAFETEA-LU relating to Power Takeoff (PTO) fuel use by sanitation trucks. For purposes of these comments, the term sanitation truck means a vehicle designed to engage in the daily collection of refuse or recyclables from homes or businesses and equipped with a mechanism by which the vehicle s propulsion engine provides the power to operate a load compactor. Industry data indicate that a typical sanitation truck uses 6,578 gallons of fuel per year, bearing a yearly federal fuel excise tax of about $1,498. Data also indicate that approximately 30 percent of the fuel is used to operate the PTO equipment. Thus, the actual amount of tax paid on fuel used for non-propulsion, off highway business use to power the PTO is about $ $450 per truck each year. These data are derived from a study by the National Solid Wastes Management Association in 1984, showing that operation of the PTO consumed 37 percent of total fuel usage, and a 1997 WM study showing that 26 percent of the truck s fuel was used to run the PTO compactor. At least 29 states provide an allowance for nontaxable PTO fuel use by sanitation trucks. The allowances range from an amount determined by metering the actual fuel usage to specified amounts of from 20 to 41 percent, with an average of about 30 percent. WM believes that the current approach to fuel used for operation of the PTO is unfair and inconsistent with congressional intent and sound policy. First, it is at odds with the congressional purpose of applying the fuel tax to operations of the vehicle that cause wear and tear on the highways. In furtherance of that purpose, Congress exempted off-road vehicles from tax. An exemption for fuel used for the PTO would similarly further that purpose, since the fuel is not used to propel the vehicle and cause wear on the roads. Second, the approach rewards taxpayers for using two, separate motors on a vehicle, rather than a single motor to propel the vehicle and operate the PTO equipment. Fuel used in a second motor is exempt, and fuel used for the PTO should also be exempt. The PTO is more fuel efficient, and results in lower emissions of air pollutants than the separate motor. 17

22 For the reasons set forth above, WM recommends that the IRS: (1) Recommend to Congress enactment of legislation based upon the text of S 932 and HR 1513 as introduced in the 108th Congress. That legislation would provide a $250 per year income tax credit for each sanitation truck if the owner has records showing that the vehicle was licensed and insured for operation. The $250 credit is a very conservative approximation of the amount of tax paid each year that should not have been imposed, and we would welcome a credit closer to the $450 actually paid in taxes for PTO fuel. This approach has the benefit of being easy to administer and implement; or (2) If IRS determines that it would be administratively workable, adopt without need of legislation, regulations allowing the owner of a sanitation truck to claim a refund on Form 8849 or otherwise, for the amount of excise tax paid on 30 percent of the fuel purchased for the vehicle; or (3) Similar to (2), adopt regulations allowing the owner of a sanitation truck to claim a refund for the amount of excise tax that is shown to have been paid on fuel used to operate the PTO. WM believes that computerized metering equipment will soon be available to make this option feasible and verifiable. Robert Eisenbud Vice President, Federal Public Affairs 18

23 Statement by Christi Collins Executive Director, American Concrete Pumping Association for the study of highway fuels used by trucks for non transportation purposes (Section of Public Law ) On behalf of the 600 members of the American Concrete Pumping Association (ACPA) and the 10,000 people employed by the concrete pumping industry, I write to provide information and comment for the US Department of Treasury off road fuel use study mandated in Section of SAFETEA LU. The ACPA believes that, of all the mobile equipment used in the construction industry today, concrete pumps have the strongest case for an excise tax exemption for off road fuel use. The ACPA has been actively involved in this issue since the Internal Revenue Service proposed the complete elimination of the mobile machinery exemption in 2002, and sincerely hopes this study provides a constructive path forward to addressing it in legislation. Section of SAFETEA LU directs the US Treasury Secretary to accomplish two main objectives for the study as it relates to mobile machinery for which a majority of fuel use is ʺnon propulsiveʺ (offroad). First, the Secretary must determine an average off road fuel consumption percentage for various categories of mobile machinery, including concrete pumps. Second, the Secretary must propose administratively feasible options for exempting fuel used by those categories. Background The concrete pump industry has evolved over the past 30 years as an efficient and money saving technique for placing concrete in residential and commercial construction projects. It has largely replaced the bucket and crane system, whereby ready mix trucks poured concrete into large buckets, which were then hoisted by a crane up into an area to be poured, and either discharged directly or manually into the appropriate form. As a building material, concrete has many cost and structural advantages, and the development of an efficient system for pumping the concrete to multi floor levels has stimulated engineers to specify concrete for an increasing number of construction applications. Concrete pumps have traditionally been exempted from federal fuel excise taxes because they meet the three part mobile machinery design test defined in section 4053(8) of the Internal Revenue Code of Pumps are uniquely designed as mobile machinery; in that they are not capable of transporting the load over the public highways, nor can they be economically reconverted to do so. This three part, design based ʺMobile Machinery Exemptionʺ has been in existence for nearly 30 years. During the 1990s, the Mobile Machinery Exemption was effectively exploited by the owners of other types of vehicles such as bucket trucks and digger derricks. While these vehicles technically met the design criteria set forth in the mobile machinery exemption, in most cases the vast majority of their fuel was consumed traveling on the public highways. It is generally understood that this expansion of usage prompted IRS to propose eliminating it in