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VideoMotor Fuels Tax Minute Episode 126: Dyed Diesel Waivers and Tax Compliance Risks
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Leanne Sobel and Kelly Grace discuss the recent federal and state dyed diesel waivers and the questions they are generating across the fuel industry. They explain when businesses may be permitted to use dyed diesel on the highway and where uncertainty remains around tax obligations and compliance. The conversation also covers documentation, audit preparedness and differences between federal and state requirements. Businesses considering the use of dyed diesel can gain practical insight into balancing potential short-term fuel savings with longer-term compliance risks.
Key Takeaways
- Dyed diesel waivers may offer short-term fuel savings, but businesses should consider the long-term compliance risks before using dyed diesel on the highway.
- Federal dyed diesel relief does not override state requirements, so businesses should understand the rules that apply in each state where the fuel is used.
- Strong documentation is essential for supporting dyed diesel use during the waiver period and preparing for future audits.
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Detailed Description of Weaver’s Motor Fuels Tax Minute, Episode 126
00:00:00
Kelly: Welcome to this week’s Motor Fuels Tax Minute, where we are talking all things motor fuels. As we’ve been discussing, it’s been an exciting few weeks, and the excitement just keeps coming, but this time with dyed diesel.
We even got an executive order out, which who would have thought of that? I can’t remember the last time, other than the Superfund tax, where federal really made big changes to fuel.
00:00:20
Kelly: Leanne, what is your take on all this? I know we’re getting a lot of questions.
00:00:25
Leanne: Yeah. The dyed diesel waivers are really a response to rising diesel prices and trying to alleviate some of that primarily for our agriculture industry. If you look at the waivers, they’ve come out mostly from Southern and Western states where a lot of our agriculture is based, and they’re generally limited to agriculture and agriculture-adjacent industries. There’s really not many out there that are saying anybody who wants to use dyed diesel on the highway, “Go ahead and use it.”
00:01:00
Leanne: And what it’s doing is it’s saying, in these limited instances, you can use dyed diesel on the highway to get your products, your agriculture products, etc., and agriculture-adjacent products from A to B, and you can put dyed diesel in your fuel tank.
00:01:16
Leanne: Dyed diesel is generally tax-deferred, although there’s a question mark about that. And a lot of the states where the waiver came out either didn’t say anything about the tax, and there’s some states that said, “Well, you have to pay the tax if you use it on the highways.” But they’re allowing it to be used on the highways without penalty or interest. And the idea behind it is to reduce the price, the sort of supply and demand economics.
00:01:40
Leanne: But there’s a couple of interesting issues with it, and the big one is what the dye does to your fuel tank. That red dye dyes everything. It’s literally called indelible red dye, and you cannot get it out. Once these waivers are over and fuel inspectors are back on the road, there’s no way to ever completely clear your tank, and trace amounts of dye could flag in an inspection.
00:02:07
Leanne: And then you could be hit with penalties and interest if you’re not able to show that the very first time you ever put dyed diesel in there was during this waiver and that you’re not currently putting dyed diesel in there. The short-term benefits may outweigh the long-term risks of having this dyed fuel tank because it’s expensive to then eliminate that piece of equipment and get a new piece of equipment. I wonder how many people are really going to take advantage of it with that part in mind.
00:02:38
Kelly: And do you see any conflict? I know, originally, when the states were coming out, they were like, “Well, just because it’s okay in the state doesn’t mean the federal government or the Environmental Protection Agency is going to be okay with it.” Do you think maybe the opposite can be true now that we have this executive order out, that maybe the IRS is saying it’s fine, but maybe you’re in a state that’s saying it’s not fine?
00:03:00
Leanne: Right. Yes. It is absolutely possible. We do have a federal executive order that says there are no penalties for using dyed diesel on the highway.
00:03:10
Leanne: Interestingly, the limited IRS guidance we’ve had so far on that says that suppliers and distributors are not required to investigate what somebody buying dyed diesel was using it for during this waiver period. They’re not required to pay tax on it right now. And the IRS said they’re looking at ways where they may just eliminate the obligation to pay the tax altogether.
00:03:33
Leanne: What does that mean from a federal perspective, setting aside the state? Do we accrue taxes because they may not be able to find a way to eliminate that obligation? If we’re not required to find out what the dyed diesel was being used for, what assumptions should we be making? There’s not enough guidance out there.
00:03:53
Leanne: And what I would say is just gather documentation. Document, document, document, because even if they do come out with a way to eliminate the obligation, we don’t know in two and a half years on an audit, if a brand-new auditor even remembers this or even has paperwork in their file to tell them this period of time, there was no tax.
00:04:17
Leanne: But back to your original question, the states, yeah, we’ve got a lot of states that have not issued waivers. Now we’ve got a federal waiver for dyed diesel on the highway. But in a state, California, for example, or one of our Northeastern states, there’s no waivers. You couldn’t use it on the highway anyway because the federal doesn’t cover you in the states. It is a bit limited when you think about it.
00:04:45
Kelly: It is wild. I don’t know if everyone’s thinking of all these consequences all at once because I see some traders getting really excited and the tax department trying to pump the brakes because they know there’s going to be consequences to this.
00:04:55
Leanne: Right. There is potential to sell more dyed diesel to the extent people want it, but there are definitely risks. You’ve got the federal waiver that covers the whole country, but state waivers cover individual states. And if your state hasn’t waived it, that federal waiver isn’t going to help you.
00:05:12
Kelly: No. No. Like I said before, it’ll be nice when all this is cleared up. We’ll be hitting January. It’ll be a fresh start, and hopefully, past all this craziness.
00:05:21
Leanne: Well, that’s it too. It’s all for different lines of time. Let’s look at January 1. Certainly, the federal waiver goes out at the end of the year. I don’t think there’s many of any state ones going beyond the end of the year.
00:05:35
Kelly: We shall see what comes. Well, thank you so much, Leanne. I know this has been a hot topic for everyone. We’ve been asked to give a response, so here’s just a little more information. If you can avoid it, don’t do it.
00:05:48
Kelly: Well, that was this week’s Motor Fuels Tax Minute. Thank you so much for joining us.
