Dyed Diesel Waivers: State and Federal Tax Relief

In recent weeks, several states and the federal government have taken executive action to allow certain industries to use dyed diesel on public highways without incurring penalties. These measures are intended to provide relief from high diesel costs, but their provisions and implementation requirements vary. Taxpayers and the revenue agencies must determine how the executive orders apply, what documentation is required and whether the measures provide actual tax savings.

Dyed Diesel Tax Rules and Highway Use

Dyed diesel is standard ultra-low sulfur diesel (ULSD) that contains red dye. Dyed diesel is designated for off highway use only and is generally exempt from fuel excise taxes. Some jurisdictions, such as Arkansas, tax dyed diesel at a lower rate. The red dye identifies the fuel as exempt.

Dyed diesel is generally approved for off-road use in agricultural machinery, construction equipment, stationary generators and forestry and mining operations. Its use in vehicles licensed for public highway use is generally prohibited, and penalties can be significant. Inspectors test for the presence of red dye to determine whether dyed diesel is being used in violation of applicable requirements.

The red dye can stain fuel systems and is difficult to remove completely. Taxpayers eligible for the penalty relief should consider potential equipment replacement costs if their fuel systems are not designed for dyed diesel. Even tiny trace amounts of red dye can trigger a positive reading for dyed diesel after the fuel tank has been converted back to clear diesel use. If equipment replacement costs and the risks of future penalties outweigh the potential benefits of a short-term relief program, taxpayers may decide not to participate. Any potential fuel cost savings should be weighed against these costs and risks.

How Federal and State Dyed Diesel Relief Programs Differ

Dyed diesel relief programs vary by jurisdiction in their scope, duration and implementation guidance. These differences affect how taxpayers determine their tax obligations, document eligible fuel use and apply the available relief.

The federal relief program established under Executive Order 14435, Emergency Tax Relief on Diesel Fuel (the Order), allows dyed diesel to be used on public highways without penalty or interest from October 5, 2026, through December 31, 2026. However, the Order does not exempt dyed diesel used on public highways during this period from the federal excise tax. Instead, it defers payment of the tax and directs the Secretary of the Treasury to issue implementing guidance outlining the relief and applicable conditions.

As of this time, the IRS has not published guidance or issued an announcement specifically addressing implementation of the relief directed under the Order. Absent guidance, taxpayers should plan to accrue the federal excise tax on sales of dyed diesel and anticipate collecting and remitting the tax after December 31, 2026. Taxpayers selling dyed diesel should also consider collecting customer statements documenting the intended use of the fuel to support the tax treatment applied to each sale.

State programs also vary. Some states have issued implementing guidance. Others have provided limited clarification on tax obligations, documentation requirements and eligibility. The following examples illustrate selected state actions and their implications for taxpayers. They are not a comprehensive list of state dyed diesel waivers.

• Nebraska’s executive order waives penalties for using dyed diesel on public highways. Nebraska’s Department of Revenue clarified the order in its FAQs on September 24 Executive Orders. The Department of Revenue clarifies that the diesel excise tax remains in effect, but eligible taxpayers may apply for a refund. This approach allows tax to be collected on diesel sales in accordance with Nebraska law, with eligible taxpayers seeking refunds through the state’s established process. The refund process may create additional administrative work for both the department and eligible taxpayers.
• Illinois’ executive order waives penalties for using dyed diesel on public highways for farming and agricultural purposes. It directs the Illinois Department of Revenue to issue guidance on how the penalty relief will be implemented, including the documentation users of dyed diesel should maintain to show eligibility for the waiver. The guidance provides a sample list of documents that may demonstrate the fuel was used for farming and agricultural purposes.

Other states have issued executive orders with limited guidance on tax treatment and documentation requirements. In these jurisdictions, taxpayers may need to determine whether fuel taxes remain due and what records to retain.

• Louisiana’s executive order waives penalties for using dyed diesel on public highways but does not address the applicable fuel taxes. Taxpayers should therefore assess their tax obligations under existing state law.
• Alabama’s executive order is similar to Louisiana’s approach. It halts enforcement, and therefore, penalties, for use of dyed diesel on the highways while not exempting dyed diesel from applicable state fuel tax on diesel.
• Arkansas’ executive order waives penalties and the excise tax on dyed diesel used by agricultural and forestry operations.
• Missouri’s executive order allows all motorists to use dyed diesel on public highways without penalties. While the action does not specifically waive taxes, the state’s press release refers to tax-free dyed diesel, suggesting that there will continue to be no tax on dyed diesel when used on public highways during the period the executive order is active. Potential participants should also consider the possible effects of dyed diesel on fuel systems and the difficulty of removing residual dye.
• Iowa’s executive order waives penalties and taxes for vehicles using dyed diesel to transport a specific list of agricultural commodities on public highways.
• Indiana’s executive order allows farmers and timber harvesters to use dyed diesel on public highways without penalty.

Texas dyed diesel waiver: Sales and tax requirements

Although Texas has not issued formal implementation guidance, the Comptroller has provided informal direction on the requirements for selling dyed diesel for highway use. The Texas executive order waives penalties for using dyed diesel on public highways but does not waive the applicable fuel taxes. Under the Comptroller’s informal guidance, dyed diesel may be sold for highway use during the relief period if the following criteria are met:

• The dyed diesel is dispensed through a distributor-owned pump that is not accessible to the public.
• The pump is activated only after the purchaser’s applicable license or end-user statement has been verified.
• The $0.20-per-gallon diesel fuel tax is collected at the point of sale.
• Retailers do not take ownership of dyed diesel inventory for sale.
• A distributor may maintain a secured dyed diesel pump at a retail location, as defined by Texas Tax Code Section 162.001(20), provided access is restricted and purchaser eligibility is verified. The distributor remains responsible for reporting and remitting the tax to the Texas Comptroller.

States with different effective dates for penalty and tax relief

Some states have suspended the fuel taxes in addition to waiving penalties, but differences in the effective dates of these measures may complicate tax reporting.

• North Carolina’s executive order suspends penalties for the agricultural use of dyed diesel on public highways. Initially, the underlying diesel tax was still to be collected and the Department of Revenue issued guidance on how to report the tax. Shortly after, the state fuel tax was suspended. However, the suspension of the fuel tax takes effect 10 days after the executive order suspending the penalties. As a result, the fuel tax remains due on dyed diesel during the first 10 days of October, subject to the applicable requirements.
• Georgia has suspended state fuel taxes and waived penalties for using dyed diesel on public highways. However, like North Carolina, the timing of the actions does not align. The fuel tax suspension took effect a few days before the end of September rather than at the beginning of the month. Taxpayers may therefore need to account for different tax treatment within the same reporting period.

Relief programs also vary in duration, with some schedule to expire as early as November. In addition, a penalty waiver does not necessarily eliminate the fuel tax. Taxpayers should evaluate whether a program provides actual tax savings or primarily reduces the risk of penalties.

In the absence of clear guidance from a jurisdiction, taxpayers should continue to follow their existing fuel tax compliance procedures. This may include accruing taxes on their books, maintaining records of customers purchasing fuel tax-free during a waiver period and collecting documentation necessary to support exemptions or other relief.

Key Takeaways

While the executive orders issued by each state share a common goal, the specific provisions vary from state to state. Some states provide relief to farmers, transporters or only properly registered vehicles by waiving penalties. Other states offer refunds or a combination of both forms of relief.

Businesses and individuals must meet the eligibility requirements of the applicable waiver to qualify for relief. Unless an executive order expressly waives or suspends the applicable tax or penalty, existing state requirements generally remain in effect. Taxpayers should confirm their eligibility, determine whether fuel taxes remain due and retain documentation supporting the treatment applied.

Weaver Can Help with Compliance

Taxpayers should carefully review the specific provisions of each applicable executive order to understand eligibility requirements, tax obligations and documentation needs. Weaver’s motor fuels and excise tax team can help businesses assess how dyed diesel waivers affect their tax reporting and compliance responsibilities. Contact us today.

©2026

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