Converting to Proper Units of Measurement When Used as Motor Fuel

Additionally, if the fuel is being used to power motor vehicles, distributors must convert the amount of fuel sold to the unit of measurement (UOM) applicable in each state where they are doing business. There is no uniform measurement unit for LNG across states, so propane distributors must calculate either the DGE (diesel gallon equivalent) or GGE (gasoline gallon equivalent) according to each state’s requirements. Knowing which UOM is applicable and converting your inventory when crossing state lines is tedious, but important for compliance.

Exemption Documents

Yet another variable is exemptions – some transactions are considered exempt from tax collection due to the status of the person or business buying the fuel. For example, government clients, charities, churches, and bus operators are usually not required to pay excise taxes on their fuel purchases. It’s the distributor’s responsibility to ask these entities to fill out valid documentation for each tax-exempt transaction, which many states view as proof that the correct amount of tax was collected or exempted. Otherwise, when the fuel distributor files monthly excise tax returns, the discrepancy between what should have been filed according to the number of transactions and what was collected and filed could raise a red flag to auditors.

Filing Excise Tax Returns

All these tax calculations and exemptions must be processed within the distributor’s ERP system so those figures can be translated into the proper excise returns, which then need to be filed with the states in which fuel transactions took place. A single transaction can end up on multiple returns as well, depending on the type of fuel, the number of states it traveled through, and how it was used at the destination.

As if this wasn’t already complex enough, each state has different forms, and each form has different tax figures to populate. Knowing which numbers belong in what fields can get confusing when the form you’re dealing with uses archaic, unclear language. And if your company operates across many states, the list of forms and transaction data increases exponentially. Then there’s the fact that the federal government sometimes has its own set of return requirements. Now consider the fact that these returns must be filed monthly and it’s enough to make any tax accountant cringe.

Example Scenario

Let’s say you are a fuel distributor based in New Jersey who is selling propane (LNG) to two different end users: one in Pennsylvania and one in New York. Your buyer in Pennsylvania will use the fuel to power his fleet of recycling trucks and your customer in New York is a hospital that will use the propane to heat its facility.

Right off the bat, you know you will have to file returns in the three states that your pressurized container truck travels through. Because your PA buyer will be using the LNG as an on-road motor fuel, you will also have to calculate and file state and federal excise taxes in addition to any applicable local taxes. Luckily, as of 2015, Pennsylvania calculates their LNG amounts based on DGE, which is aligned with the federal calculation unit of measure, and because New Jersey does not charge excise taxes on LNG, this transaction is about as straightforward as you are going to get.

The transaction occurring in NY is different. Because the fuel is being sold to a for-profit hospital (considered as commercial use), it will have both sales tax and excise tax requirements. The excise tax requirement is in the form of a PERC fee. If the customer in New York used the propane to heat his or her own home versus a commercial facility, no state excise or sales tax would be due (but local sales tax could be). Because sales tax is due to New York on the commercial transaction, an additional return will also need to be filed.

Summary

When the tax auditor comes knocking, they are going to check whether the figures listed on your multiple tax returns match those in your calculation engine. Mistakes can be made when translating this data manually, whether through a spreadsheet or other methods. What’s an excise tax manager to do? Savvy ones set up systems that enable automated returns through integrations with their excise tax calculation engines. Because excise returns are filed monthly, automated systems also allow for a more efficient, and more accurate, business process, thus lowering the total cost of ownership.

Did You Know?

Avalara’s suite of cloud-based excise tax compliance automation software enables businesses in the fuel industry to gain efficiency and accuracy in excise and sales tax calculation, excise return filings and exemption and license management. Avalara has a certified connector with Cargas Energy that allows Cargas customers’ fuel transaction data to populate Avalara’s Returns Excise platform. This integration results in fast and accurate monthly excise tax returns filing. To learn more about how your business can benefit from Returns Excise, contact your sales representative.