Publication 510 (1-2016) EXCISE TAXES (INCLUDING FUEL TAX CREDITS AND REFUNDS)

What's New

Section references are to the Internal Revenue Code unless otherwise noted.

What's New

One-time claims for calendar year 2015. The section 6426 credits for biodiesel mixtures, renewable diesel mixtures, and alternative fuels, which expired at the end of 2014, were retroactively reinstated for calendar year 2015. You can make a one-time claim for credits for sales or uses of these fuels in calendar year 2015. For information on how to make a one-time claim, see Notice 2016-05, available at http://www.irs.gov/irb/2016-06_IRB/ar08.html, and Schedule 3 (Form 8849).

Alternative fuel mixture credits for 2015. The credit for alternative fuel mixtures also expired at the end of 2014, and is reinstated for calendar year 2015. If you want to make a claim for the alternative fuel mixture credit for 2015 you must file Form 720X, Amended Quarterly Federal Excise Tax Return. For information on how to make a claim, see Notice 2016-05.

Suspension of section 4191 medical device tax. The medical device tax no longer applies to sales for two years beginning January 1, 2016, through December 31, 2017. For information on the tax for sales before January 1, 2016, see T.D. 9604 and Notice 2012-77.

Alternative liquid fuel and compressed natural gas (CNG) gasoline gallon equivalent (GGE) and diesel gallon equivalent (DGE). For sales or uses of fuel after December 31, 2015, for taxation under section 4041:

10,000 gallons of LNG ÷ 1.71 = 5,848 DGE × $0.243 = $1,421.06 tax.

See Alternative fuel (IRS Nos. 112, 118, and 120-124), and Line 6. Nontaxable Use of Alternative Fuel, in the Instructions for Form 720.

Biodiesel, renewable diesel mixture, alternative fuel, and alternative fuel mixture credits. The section 6426 credits and section 6427 payments for biodiesel, renewable diesel mixtures, alternative fuel, and alternative fuel mixtures are extended retroactively to January 1, 2015, and through 2016. See Schedule C. Claims, in the Instructions for Form 720.

Alternative liquid fuel GGE and DGE claim rates. For sales or uses of fuel after December 31, 2015, LPG has a claim rate (or GGE) of 5.75 pounds or 1.353 gallons of LPG; LNG has a claim rate (or DGE) of 6.06 pounds or 1.71 gallons of LNG.

Use of international air travel facilities for 2016. For calendar year 2016, the tax on the amount paid for international flights is $17.80 per person for flights that begin or end in the United States. The tax continues to be $8.90 per person for domestic segments that begin or end in Alaska or Hawaii (applies only to departures). See Air Transportation Taxes, in the Instructions for Form 720.

Section 4371(3) tax on foreign reinsurance premiums no longer applies. The 1% tax no longer applies to premiums paid on a policy of reinsurance issued by one foreign reinsurer to another foreign insurer or reinsurer, under the situations described in Rev. Rul. 2008-15. See Foreign Insurance Taxes, in the Instructions for Form 720.

Arrow shafts. For calendar year 2016, the tax on arrow shafts continues to be $.49 per arrow shaft.

Future Developments

The IRS has created a page on IRS.gov that includes information about Publication 510 at http://www.irs.gov/pub510. Information about any future developments will be posted on that page.

Reminders

Publication 510 updates. Publication 510 isn't updated annually. Instead, it will be updated only when there are major changes in the tax law.

Reducing your excise tax liability. For federal income tax purposes, reduce your section 4081 excise tax liability by the amount of excise tax credit allowable under section 6426(c) and your section 4041 excise tax liability by the amount of your excise tax credit allowable under section 6426(d), in determining your deduction for those excise taxes or your cost of goods sold deduction attributable to those excise taxes.

Aviation fuels for use in foreign trade. Aviation gasoline and kerosene for use in aviation are exempt from the leaking underground storage tank (LUST) tax.

Disregarded entities and qualified subchapter S subsidiaries. Qualified subchapter S subsidiaries (QSubs) and eligible single-owner disregarded entities are treated as separate entities for excise tax and reporting purposes. QSubs and eligible single-owner disregarded entities must pay and report excise taxes (other than IRS Nos. 31, 51, and 117), register for most excise tax activities, and claim any refunds, credits, and payments under the entity's employer identification number (EIN). These actions can't take place under the owner's taxpayer identification number (TIN). Some QSubs and disregarded entities may already have an EIN. However, if you are unsure, please call the IRS Business and Specialty Tax line at 1-800-829-4933.

Generally, QSubs and eligible single-owner disregarded entities will continue to be treated as disregarded entities for other federal tax purposes (other than employment taxes).

For more information on these regulations, see Treasury Decision (T.D.) 9356, T.D. 9462, and T.D. 9596. You can find T.D. 9356 on page 675 of Internal Revenue Bulletin (I.R.B.) 2007-39 at http://www.irs.gov/pub/irs-irbs/irb07-39.pdf; T.D. 9462 on page 504 of I.R.B. 2009-42 at http://www.irs.gov/pub/irs-irbs/irb09-42.pdf; and T.D. 9596 on page 84 of I.R.B. 2012-30 at http://www.irs.gov/pub/irs-irbs/irb12-30.pdf.

Registration for certain activities. You are required to be registered for certain excise tax activities, such as blending of gasoline, diesel fuel, or kerosene outside the bulk transfer/terminal system. See the instructions for Form 637 for the list of activities for which you must register. Also see Registration Requirements under Fuel Taxes in chapter 1 for information on registration for activities related to fuel. Each business unit that has, or is required to have, a separate employer identification number must be registered.

To apply for registration, complete Form 637 and provide the information requested in its instructions. If your application is approved, you will receive a Letter of Registration showing the activities for which you are registered, the effective date of the registration, and your registration number. A copy of Form 637 isn't a Letter of Registration.

Photographs of missing children. The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.

Introduction

This publication covers the excise taxes for which you may be liable and which are reported on Form 720 and other forms. It also covers fuel tax credits and refunds. For information on fuel credits against income tax (the section 40 credits for the production of cellulosic biofuel and second generation biofuel, and the section 40A credit for biodiesel and renewable diesel used as fuel) see the instructions for Form 6478 and Form 8864, Biodiesel and Renewable Diesel Fuels Credit.

Comments and suggestions. We welcome your comments about this publication and your suggestions for future editions.

You can send us comments from http://www.irs.gov/formspubs. Click on "More Information," then on "Give Us Feedback."

Or you can write to:

Internal Revenue Service Tax Forms and Publications 1111 Constitution Ave. NW, IR-6526 Washington, DC 20224

We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence.

Although we can't respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products.

Useful Items

You may want to see:

Publication

See

in chapter 17 for information about ordering forms and publications.

Guidance

In addition to the taxes discussed in this publication, you may have to report certain other excise taxes.

For tax forms relating to alcohol, firearms, and tobacco, visit the Alcohol and Tobacco Tax and Trade Bureau website at http://www.ttb.gov.

Heavy highway vehicle use tax. You report the federal excise tax on the use of certain trucks, truck tractors, and buses used on public highways on Form 2290, Heavy Highway Vehicle Use Tax Return. The tax applies to highway motor vehicles with a taxable gross weight of 55,000 pounds or more. Vans, pickup trucks, panel trucks, and similar trucks generally are not subject to this tax.

Note. A Spanish version (Formulario 2290(SP)) is also available. See How To Get Tax Help in chapter 17.

Registration of vehicles. Generally, you must prove that you paid your heavy highway vehicle use tax to register your taxable vehicle with your state motor vehicle department or to enter the United States in a Canadian or Mexican registered taxable vehicle. Generally, a copy of Schedule 1 (Form 2290) is stamped by the IRS and returned to you as proof of payment.

TIP: If you have questions on Form 2290, see its separate instructions, or you can call the Form 2290 call site at 1-866-699-4096 (toll free) from the United States, and 1-859-669-5733 (not toll free) from Canada and Mexico. The hours of service are 8:00 a.m. to 6:00 p.m. Eastern time.

Wagering tax and occupational tax. The information on wagering tax can be found in the instructions for Form 730, Tax on Wagering, and Form 11-C, Occupational Tax and Registration Return for Wagering.

Part One. Fuel Taxes and Fuel Tax Credits and Refunds

Chapter 1 defines the types of fuel, taxable events, and exemptions or exceptions to the fuel taxes. Chapter 2 provides information on, and definitions of, the nontaxable uses and explains how to make a claim.

1. Fuel Taxes

Definitions

Excise taxes are imposed on all the following fuels.

The following terms are used throughout the discussion of fuel taxes. Other terms are defined in the discussion of the specific fuels to which they pertain.

Agri-biodiesel. Agri-biodiesel means biodiesel derived solely from virgin oils, including esters derived from virgin vegetable oils from corn, soybeans, sunflower seeds, cottonseeds, canola, crambe, rapeseeds, safflowers, flaxseeds, rice bran, mustard seeds, and camelina, and from animal fats.

Approved terminal or refinery. This is a terminal operated by a registrant that is a terminal operator or a refinery operated by a registrant that is a refiner.

Biodiesel. Biodiesel means the monoalkyl esters of long chain fatty acids derived from plant or animal matter that meet the registration requirements for fuels and fuel additives established by the Environmental Protection Agency (EPA) under section 211 of the Clean Air Act, and the requirements of the American Society of Testing Materials (ASTM) D6751.

Blended taxable fuel. This means any taxable fuel produced outside the bulk transfer/terminal system by mixing taxable fuel on which excise tax has been imposed and any other liquid on which excise tax has not been imposed. This doesn't include a mixture removed or sold during the calendar quarter if all such mixtures removed or sold by the blender contain less than 400 gallons of a liquid on which the tax has not been imposed.

Blender. This is the person that produces blended taxable fuel.

Bulk transfer. This is the transfer of taxable fuel by pipeline or vessel.

Bulk transfer/terminal system. This is the taxable fuel distribution system consisting of refineries, pipelines, vessels, and terminals. Fuel in the supply tank of any engine, or in any tank car, railcar, trailer, truck, or other equipment suitable for ground transportation isn't in the bulk transfer/terminal system.

Cellulosic biofuel. Cellulosic biofuel means any liquid fuel produced from any lignocellulosic or hemicellulosic matter that is available on a renewable or recurring basis that meets the registration requirements for fuels and fuel additives established by the EPA under section 211 of the Clean Air Act. Cellulosic biofuel doesn't include any alcohol with a proof of less than 150 (without regard to denaturants). For fuels sold or used after December 31, 2009, cellulosic biofuel doesn't include fuel of which more than 4% (determined by weight) is any combination of water and sediment, fuel of which the ash content is more than 1%, or fuel that has an acid number greater than 25. Also see Second generation biofuel below.

Diesel-water fuel emulsion. A diesel-water fuel emulsion means an emulsion at least 14% of which is water. The emulsion additive used to produce the fuel must be registered by a United States manufacturer with the EPA under section 211 of the Clean Air Act as in effect on March 31, 2003.

Dry lease aircraft exchange. See later, under Surtax on any liquid used in a fractional ownership program aircraft as fuel.

Enterer. This is the importer of record (under customs law) for the taxable fuel. However, if the importer of record is acting as an agent, such as a customs broker, the person for whom the agent is acting is the enterer. If there is no importer of record, the owner at the time of entry into the United States is the enterer.

Entry. Taxable fuel is entered into the United States when it is brought into the United States and applicable customs law requires that it be entered for consumption, use, or warehousing. This doesn't apply to fuel brought into Puerto Rico (which is part of the U.S. customs territory), but does apply to fuel brought into the United States from Puerto Rico.

Fractional ownership aircraft program and fractional program aircraft. See later, under Surtax on any liquid used in a fractional ownership program aircraft as fuel.

Measurement of taxable fuel. Volumes of taxable fuel can be measured on the basis of actual volumetric gallons or gallons adjusted to 60 degrees Fahrenheit.

Other fuels. See Other Fuels (Including Alternative Fuels), later, and Alternative Fuel Credit and Alternative Fuel Mixture Credit in chapter 2.

Pipeline operator. This is the person that operates a pipeline within the bulk transfer/terminal system.

Position holder. This is the person that holds the inventory position in the taxable fuel in the terminal, as reflected in the records of the terminal operator. You hold the inventory position when you have a contractual agreement with the terminal operator for the use of the storage facilities and terminaling services for the taxable fuel. A terminal operator that owns taxable fuel in its terminal is a position holder.

Rack. This is a mechanism capable of delivering fuel into a means of transport other than a pipeline or vessel.

Refiner. This is any person that owns, operates, or otherwise controls a refinery.

Refinery. This is a facility used to produce taxable fuel and from which taxable fuel may be removed by pipeline, by vessel, or at a rack. However, this term doesn't include a facility where only blended fuel, and no other type of fuel, is produced. For this purpose, blended fuel is any mixture that would be blended taxable fuel if produced outside the bulk transfer/terminal system.

Registrant. This is a taxable fuel registrant (see Registration Requirements, later).

Removal. This is any physical transfer of taxable fuel. It also means any use of taxable fuel other than as a material in the production of taxable fuel or Other Fuels. However, taxable fuel isn't removed when it evaporates or is otherwise lost or destroyed.

Renewable diesel. See Renewable Diesel Credits in chapter 2.

Sale. For taxable fuel not in a terminal, this is the transfer of title to, or substantial incidents of ownership in, taxable fuel to the buyer for money, services, or other property. For taxable fuel in a terminal, this is the transfer of the inventory position if the transferee becomes the position holder for that taxable fuel.

Second generation biofuel. This is any liquid fuel derived by, or from, qualified feedstocks, and meets the registration requirements for fuels and fuel additives established by the EPA under section 211 of the Clean Air Act (42 U.S.C. 7545). It also includes certain liquid fuel which is derived by, or from, any cultivated algae, cyanobacteria, or lemna. It isn't alcohol of less than 150 proof (disregard any added denaturants). See Form 6478 for more information.

State. This includes any state, any of its political subdivisions, the District of Columbia, and the American Red Cross. An Indian tribal government is treated as a state only if transactions involve the exercise of an essential tribal government function.

Taxable fuel. This means gasoline, diesel fuel, and kerosene.

Terminal. This is a storage and distribution facility supplied by pipeline or vessel, and from which taxable fuel may be removed at a rack. It doesn't include a facility at which gasoline blendstocks are used in the manufacture of products other than finished gasoline if no gasoline is removed from the facility. A terminal doesn't include any facility where finished gasoline, diesel fuel, or kerosene is stored if the facility is operated by a registrant and all such taxable fuel stored at the facility has been previously taxed upon removal from a refinery or terminal.

Terminal operator. This is any person that owns, operates, or otherwise controls a terminal.

Throughputter. This is any person that is a position holder or that owns taxable fuel within the bulk transfer/terminal system (other than in a terminal).

Vessel operator. This is the person that operates a vessel within the bulk transfer/terminal system. However, vessel doesn't include a deep-draft ocean-going vessel.

Information Returns

Form 720-TO and Form 720-CS are information returns used to report monthly receipts and disbursements of liquid products. A liquid product is any liquid transported into storage at a terminal or delivered out of a terminal. For a list of products, see the product code table in the Instructions for Forms 720-TO and 720-CS.

The returns are due the last day of the month following the month in which the transaction occurs. Generally, these returns can be filed on paper or electronically. For information on filing electronically, see Publication 3536, Motor Fuel Excise Tax EDI Guide. Publication 3536 is only available on the IRS website.

Form 720-TO. This information return is used by terminal operators to report receipts and disbursements of all liquid products to and from all approved terminals. Each terminal operator must file a separate form for each approved terminal.

Form 720-CS. This information return must be filed by bulk transport carriers (barges, vessels, and pipelines) who receive liquid product from an approved terminal or deliver liquid product to an approved terminal.

Registration Requirements

The following discussion applies to excise tax registration requirements for activities relating to fuels only. See Form 637 for other persons who must register and for more information about registration.

Persons that are required to be registered. You are required to be registered if you are a:

You may, but are not required to, register if you are a:

Ultimate vendors, credit card issuers, and alternative fuel claimants do not need to be registered to buy or sell fuel. However, they must be registered to file claims for certain sales and uses of fuel. See Form 637 for more information.

Taxable fuel registrant. This is an enterer, an industrial user, a refiner, a terminal operator, or a throughputter who received a Letter of Registration under the excise tax registration provisions and whose registration has not been revoked or suspended. The term registrant as used in the discussions of these fuels means a taxable fuel registrant.

Additional information. See the Form 637 instructions for the information you must submit when you apply for registration.

Failure to register. The penalty for failure to register if you must register, unless due to reasonable cause, is $10,000 for the initial failure, and then $1,000 each day thereafter you fail to register.

Gasoline and Aviation Gasoline

Gasoline. Gasoline means all products commonly or commercially known or sold as gasoline with an octane rating of 75 or more that are suitable for use as a motor fuel. Gasoline includes any gasoline blend other than:

Gasoline also includes gasoline blendstocks, discussed later.

Aviation gasoline. This means all special grades of gasoline suitable for use in aviation reciprocating engines and covered by ASTM specification D910 or military specification MIL-G-5572.

Taxable Events

The tax on gasoline is $.184 per gallon. The tax on aviation gasoline is $.194 per gallon. When used in a fractional ownership program aircraft, gasoline also is subject to a surtax of $.141 per gallon. See Surtax on any liquid used in a fractional ownership program aircraft as fuel, later.

Tax is imposed on the removal, entry, or sale of gasoline. Each of these events is discussed later. Also, see the special rules that apply to gasoline blendstocks, later.

If the tax is paid on the gasoline in more than one event, a refund may be allowed for the "second" tax paid. See Refunds of Second Tax in chapter 2.

Removal from terminal. All removals of gasoline at a terminal rack are taxable. The position holder for that gasoline is liable for the tax.

Two-party exchanges. In a two-party exchange, the receiving person, not the delivering person, is liable for the tax imposed on the removal of taxable fuel from the terminal at the terminal rack. A two-party exchange means a transaction (other than a sale) where the delivering person and receiving person are both taxable fuel registrants and all of the following apply.

The terminal operator is jointly and severally liable for the tax if the position holder is a person other than the terminal operator and isn't a registrant.

However, a terminal operator meeting all the following conditions at the time of the removal will not be liable for the tax.

The removal of gasoline from a refinery is taxable if the removal meets either of the following conditions.

The refiner is liable for the tax.

Exception. The tax doesn't apply to a removal of gasoline at the refinery rack if all the following requirements are met.

The entry of gasoline into the United States is taxable if the entry meets either of the following conditions.

The enterer is liable for the tax.

Importer of record's liability. The importer of record is jointly and severally liable for the tax with the enterer if the importer of record isn't the enterer of the taxable fuel and the enterer isn't a taxable fuel registrant.

However, an importer of record meeting both of the following conditions at the time of the entry will not be liable for the tax.

The customs bond will not be charged for the tax imposed on the entry of the gasoline if at the time of entry the surety has an unexpired notification certificate from the enterer and has no reason to believe any information in the certificate is false.

Removal from a terminal by unregistered position holder or unregistered pipeline or vessel operator. The removal by bulk transfer of gasoline from a terminal is taxable if the position holder for the gasoline or the operator of the pipeline or vessel isn't a registrant. The position holder is liable for the tax. The terminal operator is jointly and severally liable for the tax if the position holder is a person other than the terminal operator. However, see Terminal operator's liability under Removal from terminal, earlier, for an exception.

Bulk transfers not received at approved terminal or refinery. The removal by bulk transfer of gasoline from a terminal or refinery, or the entry of gasoline by bulk transfer into the United States, is taxable if the following conditions apply.

The owner of the gasoline when it is removed from the pipeline or vessel is liable for the tax. However, an owner meeting all the following conditions at the time of the removal will not be liable for the tax.

The operator of the facility where the gasoline is received is liable for the tax if the owner meets these conditions. The operator is jointly and severally liable if the owner doesn't meet these conditions.

Sales to unregistered person. The sale of gasoline located within the bulk transfer/terminal system to a person that isn't a registrant is taxable if tax wasn't previously imposed under any of the events discussed earlier.

The seller is liable for the tax. However, a seller meeting all the following conditions at the time of the sale will not be liable for the tax.

The buyer of the gasoline is liable for the tax if the seller meets these conditions. The buyer is jointly and severally liable if the seller doesn't meet these conditions.

Exception. The tax doesn't apply to a sale if all of the following apply.

The removal or sale of blended gasoline by the blender is taxable. See

under

earlier.

The blender is liable for the tax. The tax is figured on the number of gallons not previously subject to the tax on gasoline.

Persons who blend alcohol with gasoline to produce an alcohol fuel mixture outside the bulk transfer/terminal system must pay the gasoline tax on the volume of alcohol in the mixture. See Form 720 to report this tax. You also must be registered with the IRS as a blender. See Form 637.

However, if an untaxed liquid is sold as taxed taxable fuel and that untaxed liquid is used to produce blended taxable fuel, the person that sold the untaxed liquid is jointly and severally liable for the tax imposed on the blender's sale or removal of the blended taxable fuel.

Notification certificate. The notification certificate is used to notify a person of the registration status of the registrant. A copy of the registrant's letter of registration can't be used as a notification certificate. A model notification certificate is shown in the Appendix as Model Certificate C. A notification certificate must contain all information necessary to complete the model.

The certificate may be included as part of any business records normally used for a sale. A certificate expires on the earlier of the date the registrant provides a new certificate, or the date the recipient of the certificate is notified that the registrant's registration has been revoked or suspended. The registrant must provide a new certificate if any information on a certificate has changed.

Additional persons liable. When the person liable for the tax willfully fails to pay the tax, joint and several liability for the tax is imposed on:

CAUTION: Gasoline blendstocks may be subject to $.001 per gallon LUST tax as discussed below.

Gasoline includes gasoline blendstocks. The previous discussions apply to these blendstocks. However, if certain conditions are met, the removal, entry, or sale of gasoline blendstocks are taxed at $.001 per gallon or are not subject to the excise tax.

Blendstocks. Gasoline blendstocks are:

However, gasoline blendstocks don't include any product that can't be used without further processing in the production of finished gasoline.

Not used to produce finished gasoline. Gasoline blendstocks not used to produce finished gasoline are not taxable (other than LUST) if the following conditions are met.

Removals and entries not connected to sale. Nonbulk removals and entries are not taxable if the person otherwise liable for the tax (position holder, refiner, or enterer) is a registrant.

Removals and entries connected to sale. Nonbulk removals and entries are not taxable if the person otherwise liable for the tax (position holder, refiner, or enterer) is a registrant, and at the time of the sale, meets the following requirements.

The sale of a gasoline blendstock that wasn't subject to tax on its nonbulk removal or entry, as discussed earlier, is taxable. The seller is liable for the tax. However, the sale isn't taxable if, at the time of the sale, the seller meets the following requirements.

The certificate from the buyer certifies the gasoline blendstocks will not be used to produce finished gasoline. The certificate may be included as part of any business records normally used for a sale. A model certificate is shown in the

as

The certificate must contain all information necessary to complete the model.

A certificate expires on the earliest of the following dates.

The buyer must provide a new certificate if any information on a certificate has changed.

The IRS may withdraw the buyer's right to provide a certificate if that buyer uses the gasoline blendstocks in the production of finished gasoline or resells the blendstocks without getting a certificate from its buyer.

Received at approved terminal or refinery. The nonbulk removal or entry of gasoline blendstocks received at an approved terminal or refinery isn't taxable if the person otherwise liable for the tax (position holder, refiner, or enterer) meets all the following requirements.

The removal of gasoline blendstocks from a pipeline or vessel isn't taxable (other than LUST) if the blendstocks are received by a registrant that is an industrial user. An industrial user is any person that receives gasoline blendstocks by bulk transfer for its own use in the manufacture of any product other than finished gasoline.

Credits or refunds. A credit or refund of the gasoline tax may be allowable if gasoline is used for a nontaxable purpose or exempt use. For more information, see chapter 2.

Diesel Fuel and Kerosene

Generally, diesel fuel and kerosene are taxed in the same manner as gasoline (discussed earlier). However, special rules (discussed later) apply to dyed diesel fuel and dyed kerosene, and to undyed diesel fuel and undyed kerosene sold or used in Alaska for certain nontaxable uses and undyed kerosene used for a feedstock purpose.

Diesel fuel means:

A liquid is suitable for this use if the liquid has practical and commercial fitness for use in the propulsion engine of a diesel-powered highway vehicle or diesel-powered train. A liquid may possess this practical and commercial fitness even though the specified use isn't the predominant use of the liquid. However, a liquid doesn't possess this practical and commercial fitness solely by reason of its possible or rare use as a fuel in the propulsion engine of a diesel-powered highway vehicle or diesel-powered train. Diesel fuel doesn't include gasoline, kerosene, excluded liquid, No. 5 and No. 6 fuel oils covered by ASTM specification D396, or F-76 (Fuel Naval Distillate) covered by military specification MIL-F-16884.

An excluded liquid is either of the following.

means a by-product of refined products created by the mixing of different specification products during pipeline transportation.

Kerosene. This means any of the following liquids.

However, kerosene doesn't include excluded liquid, discussed earlier.

Kerosene also includes any liquid that would be described above but for the presence of a dye of the type used to dye kerosene for a nontaxable use.

Diesel-powered highway vehicle. This is any self-propelled vehicle designed to carry a load over public highways (whether or not also designed to perform other functions) and propelled by a diesel-powered engine. Specially designed mobile machinery for nontransportation functions and vehicles specially designed for off-highway transportation are generally not considered diesel-powered highway vehicles. For more information about these vehicles and for information about vehicles not considered highway vehicles, see Off-Highway Business Use (No. 2) in chapter 2.

Diesel-powered train. This is any diesel-powered equipment or machinery that rides on rails. The term includes a locomotive, work train, switching engine, and track maintenance machine.

Taxable Events

The tax on diesel fuel and kerosene is $.244 per gallon. It is imposed on the removal, entry, or sale of diesel fuel and kerosene. Each of these events is discussed later. Only the $.001 LUST tax applies to dyed diesel fuel and dyed kerosene, discussed later.

If the tax is paid on the diesel fuel or kerosene in more than one event, a refund may be allowed for the "second" tax paid. See Refunds of Second Tax in chapter 2.

Use in certain intercity and local buses. Dyed diesel fuel and dyed kerosene can't be used in certain intercity and local buses. A claim for $.17 per gallon may be made by the registered ultimate vendor (under certain conditions) or the ultimate purchaser for undyed diesel fuel or undyed kerosene sold for use in certain intercity or local buses. An intercity or local bus is a bus engaged in furnishing (for compensation) passenger land transportation available to the general public. The bus must be engaged in one of the following activities.

A bus is available to the general public if the bus is available for hire to more than a limited number of persons, groups, or organizations.

Removal from terminal. All removals of diesel fuel and kerosene at a terminal rack are taxable. The position holder for that fuel is liable for the tax.

Two-party exchanges. In a two-party exchange, the receiving person, not the delivering person, is liable for the tax imposed on the removal of taxable fuel from the terminal at the terminal rack. A two-party exchange means a transaction (other than a sale) where the delivering person and receiving person are both taxable fuel registrants and all of the following apply.

The terminal operator is jointly and severally liable for the tax if the terminal operator provides any person with any bill of lading, shipping paper, or similar document indicating that diesel fuel or kerosene is dyed (discussed later).

The terminal operator is jointly and severally liable for the tax if the position holder is a person other than the terminal operator and isn't a registrant. However, a terminal operator will not be liable for the tax in this situation if, at the time of the removal, the following conditions are met.

The removal of diesel fuel or kerosene from a refinery is taxable if the removal meets either of the following conditions.

The refiner is liable for the tax.

Exception. The tax doesn't apply to a removal of diesel fuel or kerosene at the refinery rack if all the following conditions are met.

The entry of diesel fuel or kerosene into the United States is taxable if the entry meets either of the following conditions.

The enterer is liable for the tax.

Importer of record's liability. The importer of record is jointly and severally liable for the tax with the enterer if the importer of record isn't the enterer of the taxable fuel and the enterer isn't a taxable fuel registrant.

However, an importer of record meeting both of the following conditions at the time of the entry will not be liable for the tax.

The customs bond will not be charged for the tax imposed on the entry of the diesel fuel or kerosene if at the time of entry the surety has an unexpired notification certificate from the enterer and has no reason to believe any information in the certificate is false.

Removal from a terminal by unregistered position holder or unregistered pipeline or vessel operator. The removal by bulk transfer of diesel fuel or kerosene from a terminal is taxable if the position holder for that fuel or the operator of the pipeline or vessel isn't a registrant. The position holder is liable for the tax. The terminal operator is jointly and severally liable for the tax if the position holder is a person other than the terminal operator. However, see Terminal operator's liability under Removal from terminal, earlier, for an exception.

Bulk transfers not received at approved terminal or refinery. The removal by bulk transfer of diesel fuel or kerosene from a terminal or refinery or the entry of diesel fuel or kerosene by bulk transfer into the United States is taxable if the following conditions apply.

The owner of the diesel fuel or kerosene when it is removed from the pipeline or vessel is liable for the tax. However, an owner meeting all the following conditions at the time of the removal will not be liable for the tax.

The operator of the facility where the diesel fuel or kerosene is received is liable for the tax if the owner meets these conditions. The operator is jointly and severally liable if the owner doesn't meet these conditions.

Sales to unregistered person. The sale of diesel fuel or kerosene located within the bulk transfer/terminal system to a person that isn't a registrant is taxable if tax wasn't previously imposed under any of the events discussed earlier.

The seller is liable for the tax. However, a seller meeting all the following conditions at the time of the sale will not be liable for the tax.

The buyer of the diesel fuel or kerosene is liable for the tax if the seller meets these conditions. The buyer is jointly and severally liable if the seller doesn't meet these conditions.

Exception. The tax doesn't apply to a sale if all of the following apply.

The removal or sale of blended diesel fuel or blended kerosene by the blender is taxable. Blended taxable fuel produced using biodiesel is subject to the tax. See

under

earlier.

The blender is liable for the tax. The tax is figured on the number of gallons not previously subject to the tax.

Persons who blend biodiesel with undyed diesel fuel to produce and sell or use a biodiesel mixture outside the bulk transfer/terminal system must pay the diesel fuel tax on the volume of biodiesel in the mixture. Generally, the biodiesel mixture must be diesel fuel (defined earlier). See Form 720 to report this tax. You also must be registered by the IRS as a blender. See Form 637 for more information.

However, if an untaxed liquid is sold as taxable fuel and that untaxed liquid is used to produce blended taxable fuel, the person that sold the untaxed liquid is jointly and severally liable for the tax imposed on the blender's sale or removal of the blended taxable fuel.

Additional persons liable. When the person liable for the tax willfully fails to pay the tax, joint and several liability for the tax applies to:

A credit or refund is allowable for the tax on undyed diesel fuel or undyed kerosene used for a nontaxable use. For more information, see chapter 2.

Dyed Diesel Fuel and Dyed Kerosene

CAUTION: Dyed diesel fuel and dyed kerosene are subject to $.001 per gallon LUST tax as discussed below, unless the fuel is for export.

The excise tax isn't imposed on the removal, entry, or sale of diesel fuel or kerosene (other than the LUST tax) if all the following tests are met.

Diesel fuel or kerosene satisfies the dyeing requirements only if it satisfies the following requirements.

A legible and conspicuous notice stating either:

or

must be:

The notice under item (1) must be provided by the time of the removal and must appear on all shipping papers, bills of lading, and similar documents accompanying the removal of the fuel.

Any seller that fails to post the required notice under item (2) is presumed to know that the fuel will be used for a taxable use (a use other than a nontaxable use listed later). That seller is subject to the penalty described next.

Penalty. A penalty is imposed on a person if any of the following situations apply.

The penalty is the greater of $1,000 or $10 per gallon of the dyed diesel fuel or dyed kerosene involved. After the first violation, the $1,000 portion of the penalty increases depending on the number of violations.

This penalty is in addition to any tax imposed on the fuel.

If the penalty is imposed, each officer, employee, or agent of a business entity who willfully participated in any act giving rise to the penalty is jointly and severally liable with that entity for the penalty.

There is no administrative appeal or review allowed for the third and subsequent penalty imposed by section 6715 on any person except for:

If you are liable for the penalty, you may also be liable for the back-up tax, discussed later. However, the penalty applies only to dyed diesel fuel and dyed kerosene, while the back-up tax may apply to other fuels. The penalty may apply if the fuel is held for sale or use for a taxable use while the back-up tax doesn't apply unless the fuel is delivered into a fuel supply tank.

Exception to penalty. The penalty under item (3) will not apply in any of the following situations.

Tax of $.001 per gallon is imposed on:

No tax is imposed on the removal, entry, or sale of diesel fuel or kerosene in Alaska for ultimate sale or use in certain areas of Alaska for certain nontaxable uses. The removal or entry of any diesel fuel or kerosene isn't taxed if all the following requirements are satisfied.

If all three of the requirements above are not met, then tax is imposed at $.244 per gallon.

A qualified dealer is any person that holds a qualified dealer license from the state of Alaska or has been registered by the IRS as a qualified retailer. Satisfactory evidence may include copies of qualified dealer licenses or exemption certificates obtained for state tax purposes.

Later sales. The excise tax applies to diesel fuel or kerosene sold by a qualified dealer after the removal or entry. The tax is imposed at the time of the sale and the qualified dealer is liable for the tax. However, the sale isn't taxable (other than the LUST tax at $.001 per gallon) if all the following requirements are met.

The $.001 per gallon LUST tax is imposed on the removal or entry of undyed kerosene if all the following conditions are met.

If all of the requirements above are not met, then tax is imposed at $.244 per gallon.

Kerosene is used for a feedstock purpose when it is used for nonfuel purposes in the manufacture or production of any substance other than gasoline, diesel fuel, or Other Fuels. For example, kerosene is used for a feedstock purpose when it is used as an ingredient in the production of paint, but isn't used for a feedstock purpose when it is used to power machinery at a factory where paint is produced. A feedstock user is a person that uses kerosene for a feedstock purpose. A registered feedstock user is a person that has been registered by the IRS as a feedstock user. See Registration Requirements, earlier.

Later sales. The excise tax ($.244 per gallon) applies to kerosene sold for use by the buyer for a feedstock purpose (item (3)(b) above) if the buyer in that sale later sells the kerosene. The tax is imposed at the time of the later sale and that seller is liable for the tax.

Certificate. The certificate from the buyer certifies the buyer is a registered feedstock user and the kerosene will be used by the buyer for a feedstock purpose. The certificate may be included as part of any business records normally used for a sale. A model certificate is shown in the Appendix as Model Certificate G. Your certificate must contain all information necessary to complete the model.

A certificate expires on the earliest of the following dates.

The buyer must provide a new certificate if any information on a certificate has changed.

Back-up Tax

Tax is imposed on the delivery of any of the following into the fuel supply tank of a diesel-powered highway vehicle.

Generally, this back-up tax is imposed at a rate of $.244 per gallon.

Liability for tax. Generally, the operator of the vehicle into which the fuel is delivered is liable for the tax. In addition, the seller of the diesel fuel or kerosene is jointly and severally liable for the tax if the seller knows or has reason to know that the fuel will be used for other than a nontaxable use.

Exemptions from the back-up tax. The back-up tax doesn't apply to a delivery of diesel fuel or kerosene for uses 1, 2, 6, 7, 12, 13, 14, and 15 listed under Definitions of Nontaxable Uses in chapter 2.

In addition, since the back-up tax is imposed only on the delivery into the fuel supply tank of a diesel-powered vehicle or train, the tax doesn't apply to diesel fuel or kerosene used as heating oil or in stationary engines.

Diesel-Water Fuel Emulsion

Diesel-water fuel emulsion means diesel fuel at least 14% of which is water and for which the emulsion additive is registered by a United States manufacturer with the EPA under section 211 of the Clean Air Act as in effect on March 31, 2003.

A reduced tax rate of $.198 per gallon is imposed on a diesel-water fuel emulsion. To be eligible for the reduced rate, the person who sells, removes, or uses the diesel-water fuel emulsion must be registered by the IRS. If the diesel-water fuel emulsion doesn't meet the requirements above, or if the person who sells, removes, or uses the fuel isn't registered, the diesel-water fuel emulsion is taxed at $.244 per gallon.

Credits or refunds. The allowance for a credit or refund on a diesel-water fuel emulsion is discussed in chapter 2.

Kerosene for Use in Aviation

Taxable Events

Generally, kerosene is taxed at $.244 per gallon unless a reduced rate applies (see Diesel Fuel and Kerosene, earlier).

For kerosene removed directly from a terminal into the fuel tank of an aircraft for use in noncommercial aviation, the tax rate is $.219. The rate of $.219 also applies if kerosene is removed into any aircraft from a qualified refueler truck, tanker, or tank wagon that is loaded with the kerosene from a terminal that is located within an airport. The airport terminal doesn't need to be a secured airport terminal for this rate to apply. However, the refueler truck, tanker, or tank wagon must meet the requirements discussed under Certain refueler trucks, tankers, and tank wagons, treated as terminals, later.

For kerosene removed directly into the fuel tank of an aircraft for use in commercial aviation, the rate of tax is $.044 per gallon. For kerosene removed into an aircraft from a qualified refueler truck, tanker, or tank wagon, the $.044 rate applies only if the truck, tanker, or tank wagon is loaded at a terminal that is located in a secured area of the airport. See Terminal located within a secured area of an airport, later. In addition, the operator must provide the position holder with a certificate similar to Model Certificate K in the Appendix.

For kerosene removed directly into the fuel tank of an aircraft for a use exempt from tax under section 4041(c) (such as use in an aircraft for the exclusive use of a state or local government), the rate of tax is $.001. There is no tax on kerosene removed directly into the fuel tank of an aircraft for use in foreign trade. The kerosene must be removed from a qualifying refueler truck, tanker, or tank wagon loaded at a terminal located within a secured area of an airport. See Terminal located within a secured area of an airport, later. In addition, the operator must provide the position holder with a certificate similar to Model Certificate K in the Appendix. The position holder is liable for the $.001 per gallon tax.

For kerosene removed directly from a terminal into the fuel tank of a fractional ownership program aircraft after March 31, 2012, a surtax of $.141 per gallon applies.

Certain refueler trucks, tankers, and tank wagons treated as terminals. For purposes of the tax imposed on kerosene for use in aviation removed directly into the fuel tank of an aircraft for use in commercial aviation, certain refueler trucks, tankers, and tank wagons are treated as part of a terminal if the following conditions are met.

See

and

for the list of terminals located within a secured area of an airport. This list refers to fueling operations at airport terminals as it applies to the federal excise tax on kerosene for use in aviation, and has nothing to do with the general security of airports either included or not included in the list.

Liability For Tax

If the kerosene is removed directly into the fuel tank of an aircraft for use in commercial aviation, the operator of the aircraft in commercial aviation is liable for the tax on the removal at the rate of $.044 per gallon. However, the position holder is liable for the LUST tax for kerosene for use in aviation removed directly into the fuel tank of an aircraft for use exempt from tax under section 4041(c) (except foreign trade). For example, for kerosene removed directly into the aircraft for use in military aircraft, the position holder is liable for the tax.

For the aircraft operator to be liable for the tax $.044 rate, the position holder must meet the following requirements:

Commercial aviation is any use of an aircraft in the business of transporting persons or property by air for pay. However, commercial aviation doesn't include any of the following uses.

Surtax on Any Liquid Used in a Fractional Ownership Program Aircraft as Fuel

Fuel used in a fractional ownership program aircraft (as defined below) after March 31, 2012, is subject to a surtax of $.141 per gallon. The fractional ownership program manager is liable for the tax. The surtax applies in addition to any other taxes imposed on the removal, entry, use, or sale of the fuel. If the surtax is imposed, the following air transportation taxes don't apply.

These taxes are described under

later.

A fractional ownership program aircraft flight is considered noncommercial aviation; for the rules for kerosene used in noncommercial aviation, see Kerosene for Use in Aviation above.

A fractional ownership program is one under which:

Any aircraft that, in any fractional ownership aircraft program, is listed as a fractional program aircraft in the management specifications issued to the manager of such program by the Federal Aviation Administration under subpart K of part 91, title 14, Code of Federal Regulations, and is registered in the United States.

Fractional program aircraft are not considered used for transportation of a qualified fractional owner, or on account of such qualified fractional owner when they are used for flight demonstration, maintenance or crew training. In such situations, the flight isn't commercial aviation. Instead, the tax on the fuel used in the flight is imposed at the non-commercial aviation rate.

Fractional owner. Any person owning any interest (including the entire interest) in a fractional program aircraft.

Dry lease aircraft exchange. An agreement, documented by the written program agreements, under which the fractional program aircraft are available, on an as-needed basis without crew, to each fractional owner.

Special rule relating to deadhead service. A fractional program aircraft will not be considered to be used on account of a qualified fractional owner when it is used in deadhead service and a person other than a qualified fractional owner is separately charged for such service.

More information. See section 4043 for more information on the surtax.

Certificate for Commercial Aviation and Exempt Uses

A certificate is required from the aircraft operator:

The certificate may be included as part of any business records normally used for a sale. See

in the

A certificate expires on the earliest of the following dates.

The buyer must provide a new certificate if any information on a certificate has changed.

The IRS may withdraw the buyer's right to provide a certificate if the buyer uses the kerosene for use in aviation to which a certificate relates other than as stated in the certificate.

Exempt use. The rate on kerosene for use in aviation is $.001 (LUST tax) if it is removed from any refinery or terminal directly into the fuel tank of an aircraft for an exempt use. An exempt use includes kerosene for the exclusive use of a state or local government. There is no tax on kerosene removed directly into the fuel tank of an aircraft for use in foreign trade.

Flash title transaction. A position holder isn't liable for tax if, among other conditions, it obtains a certificate (described above) from the operator of the aircraft into which the kerosene is delivered. In a "flash title transaction" the position holder sells the kerosene to a wholesale distributor (reseller) that in turn sells the kerosene to the aircraft operator as the kerosene is being removed from a terminal into the fuel tank of an aircraft. In this case, the position holder will be treated as having a certificate from the operator of the aircraft if:

This is a statement that is signed under penalties of perjury by a person with authority to bind the reseller; is provided at the bottom or on the back of the certificate (or in an attached document); and contains:

A claim may be made by the ultimate purchaser (the operator) for taxed kerosene for use in aviation used in commercial aviation (other than foreign trade) and noncommercial aviation (other than nonexempt, noncommercial aviation and exclusive use by a state, political subdivision of a state, or the District of Columbia). A claim may be made by a registered ultimate vendor for certain sales. For more information, see chapter 2.

Other Fuels (Including Alternative Fuels)

Other Fuels means any liquid except gas oil, fuel oil, or any product taxable under section 4081. Other Fuels include alternative fuels. Alternative fuels are:

Liquefied petroleum gas includes propane, butane, pentane, or mixtures of those products.

Qualified methanol and ethanol fuels. Qualified ethanol and methanol means any liquid at least 85% of which consists of alcohol produced from coal, including peat. The tax rates are listed in the Instructions for Form 720.

Partially exempt methanol and ethanol fuels. A reduced tax rate applies to these fuels. Partially exempt ethanol and methanol means any liquid at least 85% of which consists of alcohol produced from natural gas. The tax rates are listed in the Instructions for Form 720.

Motor vehicles. Motor vehicles include all types of vehicles, whether or not registered (or required to be registered) for highway use, that have both the following characteristics.

Motor vehicles do

include any vehicle that moves exclusively on rails, or any of the following items: farm tractors, trench diggers, power shovels, bulldozers, road graders, road rollers, and similar equipment that doesn't carry or tow a load.

Taxable Events

Tax is imposed on the delivery of Other Fuels into the fuel supply tank of the propulsion engine of a motor vehicle or motorboat. However, there is no tax on the delivery if tax was imposed under the bulk sales rule, discussed next, or the delivery is for a nontaxable use. If the delivery is in connection with a sale, the seller is liable for the tax. If it isn't in connection with a sale, the operator of the vehicle or boat is liable for the tax.

Bulk sales. Tax is imposed on the sale of Other Fuels that isn't in connection with delivery into the fuel supply tank of the propulsion engine of a motor vehicle or motorboat if the buyer furnishes a written statement to the seller stating the entire quantity of the fuel covered by the sale is for other than a nontaxable use listed in chapter 2. The seller is liable for this tax.

Tax rate. See Form 720 and the Instructions for Form 720 for the tax rates.

Nontaxable uses. The nontaxable uses of Other Fuels (including alternative fuels) are discussed in chapter 2.

Compressed Natural Gas (CNG)

Taxable Events

Tax is imposed on the delivery of compressed natural gas (CNG) into the fuel supply tank of the propulsion engine of a motor vehicle or motorboat. The tax is based on the gasoline gallon equivalent of CNG. See Form 720 for the tax rate.

However, there is no tax on the delivery if tax was imposed under the bulk sales rule discussed next, or the delivery is for a nontaxable use, listed in chapter 2. If the delivery is in connection with a sale, the seller is liable for the tax. If it isn't in connection with a sale, the operator of the boat or vehicle is liable for the tax.

If CNG is delivered into the fuel supply tank by the seller in connection with the sale of CNG for a nontaxable use, the seller is liable for the tax unless, at the time of the sale, the seller has an exemption certificate from the buyer. The seller must have no reason to believe any information in the certificate is false.

Certificate. The certificate from the buyer certifies the CNG will be used in a nontaxable use. The certificate may be included as part of any business records normally used for a sale. A model certificate is shown in the Appendix as Model Certificate J.

A certificate expires on the earliest of the following dates.

Tax is imposed on the sale of CNG that isn't in connection with delivery into the fuel supply tank of the propulsion engine of a motor vehicle or motorboat if the buyer furnishes a written statement to the seller that the entire quantity of the CNG covered by the sale is for use as a fuel in a motor vehicle or motorboat and the seller has given the buyer a written acknowledgment of receipt of the statement. The seller of the CNG is liable for the tax.

Motor vehicle. For this purpose, motor vehicle has the same meaning as given under Other Fuels (Including Alternative Fuels), earlier.

Nontaxable uses. The nontaxable uses of CNG are discussed under Other Fuels (Including Alternative Fuels) in chapter 2.

Fuels Used on Inland Waterways

CAUTION: The tax on inland waterways fuel use applies at the rate listed on Form 720. This is in addition to all other taxes imposed on the sale or use of the fuel.

Tax applies to liquid fuel used in the propulsion system of commercial transportation vessels while traveling on certain inland and intracoastal waterways. The tax generally applies to all types of vessels, including ships, barges, and tugboats. The LUST tax must be paid on any liquid fuel used on inland waterways that isn't subject to LUST tax under section 4041(d) or 4081. For example, Bunker C residual fuel oil is subject to the LUST tax.

Inland and intracoastal waterways. Inland and intracoastal waterways on which fuel consumption is subject to tax are specified in section 48.4042-1(g) for a list of these waterways.

Commercial waterway transportation. Commercial waterway transportation is the use of a vessel on inland or intracoastal waterways for either of the following purposes.

The operation of all vessels meeting either of these requirements is commercial waterway transportation regardless of whether the vessel is actually transporting property on a particular voyage. However, see

, later. The tax is imposed on fuel consumed in vessels while engaged in any of the following activities.

Liquid fuel includes diesel fuel, Bunker C residual fuel oil, Other Fuels, and gasoline. The tax is imposed on liquid fuel actually consumed by a vessel's propulsion engine and not on the unconsumed fuel in a vessel's tank.

Dual use of liquid fuels. The tax applies to all taxable liquid used as a fuel in the propulsion of the vessel, regardless of whether the engine (or other propulsion system) is used for another purpose. The tax applies to all liquid fuel consumed by the propulsion engine even if it operates special equipment by means of a power take-off or power transfer. For example, the fuel used in the engine both to operate an alternator, generator, or pumps and to propel the vessel is taxable.

The tax doesn't apply to fuel consumed in engines not used to propel the vessel.

If you draw liquid fuel from the same tank to operate both a propulsion engine and a nonpropulsion engine, determine the fuel used in the nonpropulsion engine and exclude that fuel from the tax. IRS will accept a reasonable estimate of the fuel based on your operating experience, but you must keep records to support your allocation.

Voyages crossing boundaries of the specified waterways. The tax applies to fuel consumed by a vessel crossing the boundaries of the specified waterways only to the extent of fuel consumed for propulsion while on those waterways. Generally, the operator may figure the fuel so used during a particular voyage by multiplying total fuel consumed in the propulsion engine by a fraction. The numerator of the fraction is the time spent operating on the specified waterways and the denominator is the total time spent on the voyage. This calculation can't be used where it is found to be unreasonable.

Taxable event. Tax is imposed on liquid fuel used in the propulsion system of a vessel. See Form 720 for the tax rate.

The person who operates (or whose employees operate) the vessel in which the fuel is consumed is liable for the tax. If a vessel owner (or lessee) contracts with an independent contractor to operate the vessel, the independent contractor is the person liable for tax, regardless of who purchases the fuel. The tax is paid with Form 720. No tax deposits are required.

Exemptions. Certain types of commercial waterway transportation are excluded from the tax.

Fishing vessels. Fuel isn't taxable when used by a fishing vessel while traveling to a fishing site, while engaged in fishing, or while returning from the fishing site with its catch. A vessel isn't transporting property in the business of the owner, lessee, or operator by merely transporting fish or other aquatic animal life caught on the voyage.

However, the tax does apply to fuel used by a commercial vessel along the specified waterways while traveling to pick up aquatic animal life caught by another vessel and while transporting the catch of that other vessel.

Deep-draft ocean-going vessels. Fuel isn't taxable when used by a vessel designed primarily for use on the high seas if it has a draft of more than 12 feet on the voyage. For each voyage, figure the draft when the vessel has its greatest load of cargo and fuel. A voyage is a round trip. If a vessel has a draft of more than 12 feet on at least one way of the voyage, the vessel satisfies the 12-foot draft requirement for the entire voyage.

Passenger vessels. Fuel isn't taxable when used by vessels primarily for the transportation of persons. The tax doesn't apply to fuel used in commercial passenger vessels while being operated as passenger vessels, even if such vessels also transport property. Nor does it apply to ferryboats carrying passengers and their cars.

Ocean-going barges. Fuel isn't taxable when used in tugs to move LASH and SEABED ocean-going barges released by their ocean-going carriers solely to pick up or deliver international cargoes.

However, it is taxable when any of the following conditions apply.

No tax is imposed on the fuel used in a vessel operated by a state or local government in transporting property on official business. The ultimate use of the cargo must be for a function ordinarily carried out by governmental units. An Indian tribal government is treated as a state only if the fuel is used in the exercise of an essential tribal government function.

RECORDS: All operators of vessels used in commercial waterway transportation who acquire liquid fuel must keep adequate records of all fuel used for taxable purposes. Operators who are seeking an exclusion from the tax must keep records that will support any exclusion claimed.

Your records should include all of the following information.

If you claim an exemption from the tax, include in your records the following additional information as it pertains to you.

Cellulosic or Second Generation Biofuel Not Used as Fuel

If you claimed the section 40 cellulosic or second generation biofuel producer credit, you are liable for an excise tax on each gallon of cellulosic or second generation biofuel if you don't use the fuel for the purposes described under Qualified Cellulosic Biofuel Production or Qualified Second Generation Biofuel Production next.

Qualified cellulosic biofuel production. This is cellulosic biofuel which during the tax year:

Qualified cellulosic biofuel production doesn't include purchasing alcohol and increasing the proof of the alcohol through additional distillation. Nor does it include cellulosic biofuel that isn't both produced in the United States or a U.S. possession and used as a fuel in the United States or a U.S. possession.

A qualified cellulosic biofuel mixture combines cellulosic biofuel with gasoline or a special fuel. The producer of the mixture either:

This is second generation biofuel which during the tax year:

Qualified second generation biofuel production doesn't include purchasing alcohol and increasing the proof of the alcohol through additional distillation. Nor does it include second generation biofuel that isn't both produced in the United States or a U.S. possession and used as a fuel in the United States or a U.S. possession. A qualified second generation biofuel mixture combines second generation biofuel with gasoline or a special fuel. The producer of the mixture either:

Report the tax on Form 720. The rate of tax depends on the applicable rate used to figure the credit. No deposits are required.

Biodiesel Sold as But Not Used as Fuel

If the credit was claimed (either as an excise tax credit or income tax credit) or a refund was claimed, you are liable for an excise tax if you used the mixture or biodiesel other than as a fuel, separated the biodiesel from a mixture, or mixed the biodiesel.

Report the tax on Form 720. The rate of tax depends on the applicable rate used to figure the credit. No deposits are required.

2. Fuel Tax Credits and Refunds

Federal excise taxes are imposed on certain fuels as discussed in chapter 1. This chapter lists the nontaxable uses of each fuel and defines the nontaxable uses. Information on the refund of second tax is included. This chapter also explains credits and refunds for the biodiesel or renewable diesel mixture credits, and the alternative fuel mixture and alternative fuel credits.

Information on how to make a claim for credit or refund is included in this chapter and in the instructions for:

The claim rates for exported taxable fuel are listed on Schedule C (Form 720), Schedule 1 (Form 8849), and Form 4136. Taxpayers making a claim for exported taxable fuel must include with their records proof of exportation. Proof of exportation includes:

Gasoline and Aviation Gasoline

Ultimate purchasers. The following are the uses of gasoline (defined earlier) for which a credit or refund may be allowable to an ultimate purchaser.

The following are the uses of aviation gasoline for which a credit or refund may be allowable to an ultimate purchaser.

Except for sales to nonprofit educational organizations and states and local governments, a credit or refund is allowable to the person that paid the tax to the government if the gasoline was sold to the ultimate purchaser (including an exporter) by either that person or by a retailer and the fuel was exported; used or sold for use as a supply for vessels or aircraft, including military aircraft, commercial fishing, and foreign trade; sold to a qualified blood collector organization; or used or sold for use in the production of Other Fuels. See

, later.

Sales by registered ultimate vendors. This is an ultimate vendor that sells gasoline or aviation gasoline to any of the following and that is purchased without the use of a credit card.

The registered ultimate vendor may make the claim if the ultimate purchaser did not use a credit card and waives its right to the credit or refund by providing the registered ultimate vendor with a certificate. A sample certificate is included as

in the

. The registered ultimate vendor must have the certificate at the time the credit or refund is claimed.

The ultimate vendor must be registered by the IRS. See Registration Requirements, earlier.

Credit card purchases. If gasoline and aviation gasoline are purchased with a credit card issued to a state or local government for its exclusive use (including essential government use by an Indian tribal government), or a nonprofit educational organization for its exclusive use, the person who extended credit to the ultimate purchaser (the credit card issuer) is treated as the person that paid the tax and makes the claim if the credit card issuer:

If the requirements above are not met by the credit card issuer, the credit card issuer must collect the tax from the ultimate purchaser and only the ultimate purchaser may make the claim.

How to make the claim. If the claim is made by the credit card issuer, see Schedule C (Form 720) or Schedule 8 (Form 8849).

Undyed Diesel Fuel and Undyed Kerosene (Other Than Kerosene Used in Aviation)

For conditions to an allowance of a credit or refund on exported dyed diesel fuel and dyed kerosene, see Exported taxable fuel, earlier.

Ultimate purchasers. The following are nontaxable uses of diesel fuel and kerosene (defined earlier) for which a credit or refund may be allowable to an ultimate purchaser.

The following are the sales for which a credit or refund may be allowable to the registered ultimate vendor only.

This is a person that sells undyed diesel fuel or undyed kerosene to a state or local government for its exclusive use (including essential government use by an Indian tribal government). The diesel fuel or kerosene must be purchased by the state without the use of a credit card, issued to the state by the credit card issuer, in order for the ultimate vendor to make the claim. The ultimate vendor must be registered by the IRS. See

, earlier.

Registered ultimate vendor (blocked pump). This is an ultimate vendor that sells undyed kerosene from a blocked pump.

A credit or refund may be allowable to a registered ultimate vendor (blocked pump) if the vendor sold to a buyer undyed kerosene from a blocked pump for use other than as a fuel in a diesel-powered highway vehicle and the vendor had no reason to believe the kerosene would not be used in that manner.

Blocked pump. A blocked pump is a fuel pump that meets all the following requirements.

This is an ultimate vendor that sells undyed diesel fuel or undyed kerosene to the ultimate purchaser for use in certain intercity and local buses.

The registered ultimate vendor may make the claim if the ultimate purchaser waives its right to the credit or refund by providing the registered ultimate vendor with a waiver. A sample waiver is included as Model Waiver N in the Appendix. The registered ultimate vendor must have the waiver at the time the credit or payment is claimed.

Credit card purchases. If undyed diesel fuel or kerosene is purchased with a credit card issued to a state, the person who extended credit to the state (the credit card issuer) is treated as the person that paid the tax and makes the claim if the credit card issuer:

If the requirements above are not met by the credit card issuer, the credit card issuer must collect the tax from the ultimate purchaser and only the ultimate purchaser may make the claim.

Diesel-Water Fuel Emulsion

A claim for credit or refund may be made for the nontaxable use of a diesel-water fuel emulsion and for undyed diesel fuel used to produce a diesel-water fuel emulsion. The claim rate for nontaxable use of a diesel-water fuel emulsion taxed at $.198 per gallon is $.197 (if exported, the claim rate is $.198). The following are the nontaxable uses for a diesel-water fuel emulsion for which a credit or refund may be allowable to an ultimate purchaser.

The claim rate for undyed diesel fuel taxed at $.244 and used to produce a diesel-water fuel emulsion is $.046 per gallon of diesel fuel so used. The blender must be registered by the IRS in order to make the claim. The blender must attach a statement to the claim certifying that:

Kerosene for Use in Aviation

Ultimate purchasers. Ultimate purchasers of kerosene used in certain aviation uses may make a claim if the rate of tax on their use is less than the rate of tax that was charged on the kerosene.

The ultimate purchaser of the kerosene used in commercial aviation (other than foreign trade) and noncommercial aviation (other than nonexempt, noncommercial aviation and exclusive use by a state, political subdivision of a state, or the District of Columbia) is eligible to make a claim if the ultimate purchaser certifies that the right to make the claim has not been waived. Generally, the ultimate purchaser is the aircraft operator.

The following are the nontaxable uses of kerosene used in noncommercial aviation for which a credit or refund may be allowable to the ultimate purchaser.

If the fuel is used partly for use in commercial aviation and partly for use in nonexempt, noncommercial aviation, the operator may identify, either at the time of purchase or after the kerosene has been used, the amount that will be (or has been) used in commercial aviation. At the same time, the operator would either make the claim or waive the right to make the claim for credit or refund of the kerosene for use in commercial and nonexempt, noncommercial aviation.

If the operator doesn't identify the amount of kerosene that will be (or has been) used in commercial aviation, the operator may provide a certificate to the ultimate vendor similar to Model Certificate Q in the Appendix. For kerosene purchased with the certificate, used in commercial aviation, and taxed at $.244 per gallon, use of the certificate will be treated as a waiver of the right to claim a credit or refund for the $.025 per gallon part of the tax. The ultimate vendor may make this claim. The operator may make a claim for the $.175 tax per gallon of the kerosene, but can't waive the right to make the claim for the $.175 tax per gallon.

Sales by Registered Ultimate Vendors

Kerosene for use in commercial aviation or noncommercial aviation. The registered ultimate vendor of kerosene for use in commercial aviation (other than foreign trade) or noncommercial aviation (other than nonexempt, noncommercial aviation and exclusive use by a state, political subdivision of a state, or the District of Columbia) may make this claim if the ultimate purchaser waives its right to the credit or payment by providing the registered ultimate vendor with a waiver. A sample waiver is included as Model Waiver L in the Appendix. The registered ultimate vendor must have the waiver at the time the credit or payment is claimed.

Noncommercial aviation means any use of an aircraft not described as commercial aviation. For the definition of commercial aviation, see Commercial aviation on page 11.

Kerosene for use in nonexempt, noncommercial aviation. Only the registered ultimate vendor may claim a credit or payment for sales of kerosene for use in nonexempt, noncommercial aviation. The ultimate vendor must be registered by the IRS (activity letter UA) and have the required certificate from the ultimate purchaser. A sample certificate is included as Model Certificate Q in the Appendix. The registered ultimate vendor must have the certificate at the time the credit or payment is claimed.

Kerosene for use in aviation by a state or local government. Only the registered ultimate vendor may claim a credit or payment for sales of kerosene for use in aviation to a state or local government for its exclusive use (including essential government use by an Indian tribal government). The kerosene for use in aviation must be purchased by the state without the use of a credit card in order for the ultimate vendor to make the claim. The ultimate vendor must be registered by the IRS (activity letter UV) and have the required certificate from the ultimate purchaser. A sample certificate is included as Model Certificate P in the Appendix. The registered ultimate vendor must have the certificate at the time the credit or payment is claimed.

Credit card purchases. If taxed kerosene for use in aviation is purchased with a credit card issued to a state, the person who extended credit to the state (the credit card issuer) is treated as the person that paid the tax and makes the claim if the credit card issuer:

If the requirements above are not met by the credit card issuer, the credit card issuer must collect the tax from the ultimate purchaser and only the ultimate purchaser may make the claim.

Other Fuels (Including Alternative Fuels)

Credit or refund for nontaxable use of taxed Other Fuels may be allowable to an ultimate purchaser. While tax is generally imposed on delivery, Other Fuels are taxed prior to delivery in the case of certain bulk sales described in chapter 1. The following are the nontaxable uses of Other Fuels for which a credit or refund may be allowable to the ultimate purchaser.

See

later.

Refunds of Second Tax

CAUTION: The tax on dyed diesel fuel for inland waterways fuel use applies at the rate listed on Form 720. This is in addition to all other taxes imposed on the sale or use of the fuel. The section 4081(e) refund (discussed below) can't be claimed.

If the tax is paid and reported to the government on more than one taxable event for a taxable fuel under section 4081, the person paying the "second tax" may claim a refund (without interest) of that tax if certain conditions and reporting requirements are met. No credit against any tax is allowed for this tax. For information about taxable events, see the discussions under Gasoline, Diesel Fuel and Kerosene and Kerosene for Use in Aviation in chapter 1.

Conditions to allowance of refund. A claim for refund of the tax is allowed only if all the following conditions are met.

Generally, the person that paid the first tax must file a "First Taxpayer's Report" with its Form 720 for the quarter to which the report relates. A model first taxpayer's report is shown in the

as

The report must contain all information needed to complete the model.

By the due date for filing the Form 720, you must also send a separate copy of the report to the following address.

Department of the Treasury Internal Revenue Service Cincinnati, OH 45999-0555

Write "EXCISE - FIRST TAXPAYER'S REPORT" across the top of that copy.

Optional reporting. A first taxpayer's report isn't required for the tax imposed on:

However, if the person liable for the tax expects that another tax will be imposed on that fuel, that person should (but isn't required to) file a first taxpayer's report.

Providing information. The first taxpayer must give a copy of the report to the buyer of the fuel within the bulk transfer/terminal system or to the owner of the fuel immediately before the first tax was imposed, if the first taxpayer isn't the owner at that time. If an optional report is filed, a copy should (but isn't required to) be given to the buyer or owner.

A person that receives a copy of the first taxpayer's report and later sells the fuel within the bulk transfer/terminal system must give the copy and a "Statement of Subsequent Seller" to the buyer. If the later sale is outside the bulk transfer/terminal system and that person expects that another tax will be imposed, that person should (but isn't required to) give the copy and the statement to the buyer. A model statement of subsequent seller is shown in the Appendix as Model Certificate A. The statement must contain all information necessary to complete the model.

If the first taxpayer's report relates to fuel sold to more than one buyer, copies of that report must be made when the fuel is divided. Each buyer must be given a copy of the report.

Refund claim. You must have filed Form 720 and paid the second tax before you file for a refund of that tax. You must make your claim for refund on Form 8849. Complete Schedule 5 (Form 8849) and attach it to your Form 8849. Don't include this claim with a claim under another tax provision. You must not have included the second tax in the price of the fuel and must not have collected it from the purchaser. You must submit the following information with your claim.

Definitions of Nontaxable Uses

This section provides definitions of the terms used in Table 2-1 for nontaxable uses. If applicable, the type of use number from Table 2-1 is indicated in each heading.

Table 2-1. Type of Use Table

 ----------------------------------------------------------------------

No.                             Type of Use

 ----------------------------------------------------------------------

  1   On a farm for farming purposes

  2   Off-highway business use (for business use other than in a

      highway vehicle registered or required to be registered for

      highway use) (other than use in mobile machinery)

  3   Export

  4   In a boat engaged in commercial fishing

  5   In certain intercity and local buses

  6   In a qualified local bus

  7   In a bus transporting students and employees of schools (school

      buses)

  8   For diesel fuel and kerosene (other than kerosene used in

      aviation) used other than as a fuel in the propulsion engine of a

      train or diesel-powered highway vehicle (but not off-highway

      business use)

  9   In foreign trade

 10   Certain helicopter and fixed-wing aircraft uses

 11   Exclusive use by a qualified blood collector organization

 12   In a highway vehicle owned by the United States that isn't used

      on a highway

 13   Exclusive use by a nonprofit educational organization

 14   Exclusive use by a state, political subdivision of a state, or

      the District of Columbia

 15   In an aircraft or vehicle owned by an aircraft museum

 16   In military aircraft

 ----------------------------------------------------------------------

The first column of the table is the number you enter on Form 4136, Form 8849, or Schedule C (Form 720) for that type of use. For type of use 2, the mobile machinery parenthetical applies only to Form 8849 and Form 720.

On a farm for farming purposes (No. 1). On a farm for farming purposes means fuel used in carrying on a trade or business of farming, on a farm in the United States, and for farming purposes.

Farm. A farm includes livestock, dairy, fish, poultry, fruit, fur-bearing animals, and truck farms; orchards; plantations; ranches; nurseries; ranges; and feed yards for fattening cattle. It also includes structures such as greenhouses used primarily for the raising of agricultural or horticultural commodities. A fish farm is an area where fish are grown or raised--not merely caught or harvested.

Farming purposes. As an owner, tenant, or operator, you use fuel on a farm for farming purposes if you use it in any of the following ways.

If any other person, such as a neighbor or custom operator, performs a service for you on your farm for any of the purposes listed in (1) or (2), you are considered to be the ultimate purchaser that used the fuel on a farm for farming purposes. However, see

next.

If doubt exists whether the owner, the tenant, or the operator of the farm bought the fuel, determine who bore the cost of the fuel. For example, if the owner of a farm and the tenant equally share the cost of gasoline that is used on a farm for farming purposes, each can claim a credit for the tax on one-half of the fuel used.

Custom application of fertilizer and pesticide. Fuel used on a farm for farming purposes includes fuel used in the application of fertilizer, pesticides, or other substances, including aerial applications. Generally, the applicator is treated as having used the fuel on a farm for farming purposes. For aviation gasoline, the aerial applicator makes the claim as the ultimate purchaser. For kerosene used in aviation, the ultimate purchaser may make the claim or waive their right to make the claim to the registered ultimate vendor.

Fuel used between airfield and farm. Fuel used by an aerial applicator for the direct flight between the airfield and one or more farms is treated as a farming purpose.

Fuel not used for farming. Fuel isn't used on a farm for farming purposes if it is used in any of the following ways.

Off-highway business use means fuel used in a trade or business or in an income-producing activity other than as a fuel in a highway vehicle registered or required to be registered for use on public highways. The terms "highway vehicle," "public highway," and "registered" are defined below. Don't consider any use in a boat as an off-highway business use.

Off-highway business use includes fuels used in any of the following ways.

Generally, this use doesn't include nonbusiness use of fuel, such as use by minibikes, snowmobiles, power lawn mowers, chain saws, and other yard equipment.

Example. Caroline owns a landscaping business. She uses power lawn mowers and chain saws in her business. The gasoline used in the power lawn mowers and chain saws qualifies as fuel used in an off-highway business use. The gasoline used in her personal lawn mower at home doesn't qualify.

Highway vehicle. A highway vehicle is any self-propelled vehicle designed to carry a load over public highways, whether or not it is 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.

Generally, the following kinds of vehicles are not considered highway vehicles for purposes of the credit or refund of fuel taxes.

A public highway includes any road in the United States that isn't 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 isn't 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 doesn't 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 doesn't matter if the special equipment is mounted on the vehicle.

Example. The motor of a registered concrete-mixer truck operates both the engine and the mixing unit by means of a power take-off. The fuel used in the motor to run the mixer isn't off-highway business use.

Use in separate motor. Off-highway business use includes fuel used in a separate motor to operate special equipment, such as a refrigeration unit, pump, generator, or mixing unit. If you draw fuel from the same tank that supplies fuel to the propulsion motor, you must figure the quantity used in the separate motor operating the special equipment. You may make a reasonable estimate based on your operating experience and supported by your records.

You can use devices that measure the miles the vehicle has traveled (such as hubometers) to figure the gallons of fuel used to propel the vehicle. Add to this amount the fuel consumed while idling or warming up the motor before propelling the vehicle. The difference between your total fuel used and the fuel used to propel the vehicle is the fuel used in the separate motor.

Example. Hazel owns a refrigerated truck. It has a separate motor for the refrigeration unit. The same tank supplies both motors. Using the truck's hubometer, Hazel figures that 90% of the fuel was used to propel the truck. Therefore, 10% of the fuel is used in an off-highway business use.

Fuel lost or destroyed. You can't treat fuel lost or destroyed through spillage, fire, or other casualty as fuel used in an off-highway business use.

Export (No. 3). Export means fuel transported from the United States with the intention that the fuel remain in a foreign country or possession of the United States. Fuel isn't exported if it is in the fuel supply tank of a vehicle or aircraft.

In a boat engaged in commercial fishing (No. 4). In a boat engaged in commercial fishing means fuel used in taking, catching, processing, or transporting fish, shellfish, or other aquatic life for commercial purposes, such as selling or processing the catch, on a specific trip basis. They include boats used in both fresh and salt water fishing. They don't include boats used for both sport fishing and commercial fishing on the same trip.

In certain intercity and local buses (No. 5). In certain intercity and local buses means fuel used in a bus engaged in furnishing (for compensation) passenger land transportation available to the general public. The bus must be engaged in one of the following activities.

This means you offer service to more than a limited number of persons or organizations. If a bus operator normally provides charter operations through travel agencies but has buses available for chartering by the general public, this service is available to the general public. A bus doesn't qualify when its operator uses it to provide exclusive services to only one person, group, or organization. Also, intercity bus transportation doesn't include transporting students and employees of schools or intercity transportation in a qualified local bus.

In a qualified local bus (No. 6). In a qualified local bus means fuel used in a bus meeting all the following requirements.

This is the land transportation of passengers between points located within the same metropolitan area. It includes transportation along routes that cross state, city, or county boundaries if the routes remain within the metropolitan area.

Under contract. A bus is under contract with a state or local government only if the contract imposes a bona fide obligation on the bus operator to furnish the transportation.

More than a nominal subsidy. A subsidy is more than nominal if it is reasonably expected to exceed an amount equal to 3 cents multiplied by the number of gallons of fuel used in buses on subsidized routes. A company that operates its buses along subsidized and unsubsidized intracity routes may consider its buses qualified local buses only when the buses are used on the subsidized intracity routes.

In a school bus (No. 7). In a school bus means fuel used in a bus engaged in the transportation of students or employees of schools. A school is an educational organization with a regular faculty and curriculum and a regularly enrolled body of students who attend the place where the educational activities occur.

For diesel fuel and kerosene (other than kerosene used in aviation) used other than as a fuel (No. 8). Diesel fuel and kerosene (other than kerosene used in aviation) used other than as a fuel in the propulsion engine of a diesel-powered highway vehicle or diesel-powered train (not including off-highway business use) means undyed diesel fuel and undyed kerosene used:

In foreign trade means fuel used in civil aircraft employed in foreign trade or trade between the United States and any of its possessions. The term trade includes the transportation of persons or property for hire and the making of the necessary preparations for such transportation. In the case of aircraft registered in a foreign country, the country must allow reciprocal benefits for aircraft registered in the United States.

Certain helicopter and fixed-wing aircraft uses (No. 10). Includes:

Certain helicopter uses. Certain helicopter uses means fuel used by a helicopter for any of the following purposes.

During a use described in items (1) and (2), the helicopter must not take off from, or land at, a facility eligible for assistance under the Airport and Airway Development Act of 1970, or otherwise use services provided pursuant to section 44509 or 44913(b) or subchapter I of chapter 471 of title 49, United States Code. For item (1), treat each flight segment as a separate flight.

Fixed-wing aircraft uses. Fixed-wing aircraft uses means fuel used by a fixed-wing aircraft for any of the following purposes.

During a use described in item (1), the aircraft must not take off from, or land at, a facility eligible for assistance under the Airport and Airway Development Act of 1970, or otherwise use services provided pursuant to section 44509 or 44913(b) or subchapter I of chapter 471 of title 49, United States Code.

Exclusive use by a qualified blood collector organization (No. 11). Exclusive use by a qualified blood collector organization means fuel used by the qualified blood collector organization for its exclusive use in the collection, storage, or transportation of blood.

Qualified blood collector organization. A qualified blood collector organization is one that is:

In a highway vehicle owned by the United States that isn't used on a highway means fuel used in a vehicle that wasn't used on public highways during the period covered by the claim. This use applies whether or not the vehicle is registered or required to be registered for highway use.

Exclusive use by a nonprofit educational organization (No. 13). Exclusive use by a nonprofit educational organization means fuel used by an organization exempt from income tax under section 501(a) that meets both of the following requirements.

A nonprofit educational organization also includes a school operated by a church or other organization described in section

if the school meets the above requirements.

Exclusive use by a state, political subdivision of a state, or the District of Columbia (No. 14). Exclusive use by a state, political subdivision of a state, or the District of Columbia means fuel purchased by the state or local government for its exclusive use. A state or local government is any state, any political subdivision thereof, or the District of Columbia. An Indian tribal government is treated as a state only if the fuel is used in an activity that involves the exercise of an essential tribal government function. Gasoline, diesel fuel, and kerosene used by the American Red Cross is considered to be the use of these fuels by a state.

In an aircraft or vehicle owned by an aircraft museum (No. 15). In an aircraft or vehicle owned by an aircraft museum means fuel used in an aircraft or vehicle that is owned by an organization that meets all the following requirements.

The aircraft or vehicle (such as a ground servicing vehicle for aircraft) must be used exclusively for the purposes described in item (3).

In military aircraft (No. 16). In a military aircraft means fuel used in an aircraft owned by the United States or any foreign nation and constituting a part of its armed forces.

In commercial aviation (other than foreign trade). See Commercial aviation, earlier, for the definition.

Use in a train. Use in a train means fuel used in the propulsion engine of equipment or machinery that rides on rails. This includes use in a locomotive, work train, switching engine, and track maintenance machine.

Biodiesel or Renewable Diesel Mixture Credit, Alternative Fuel Credit, and Alternative Fuel Mixture Credit

The section 6426 credit for biodiesel and alternative fuel consists of the biodiesel or renewable diesel mixture credit, alternative fuel credit, and alternative fuel mixture credit.

Coordination with income tax credit. Only one credit may be claimed for any amount of biodiesel or renewable diesel. If any amount is claimed (or will be claimed) for any amount of biodiesel or renewable diesel on Form 720, Form 8849, or Form 4136, then a claim can't be made on Form 8864 for that amount of biodiesel or renewable diesel.

Biodiesel or renewable diesel mixture credit claimant. Claimant produced a biodiesel mixture by mixing biodiesel with diesel fuel. Claimant produced a renewable diesel mixture by mixing renewable diesel with liquid fuel (other than renewable diesel).

The person that produced and sold or used the mixture in their trade or business is the only person eligible to make this claim. The credit is based on the gallons of biodiesel or renewable diesel in the mixture.

CAUTION: Renewable diesel doesn't include any fuel derived from coprocessing biomass (as defined in section 6426 fuel credit. See Registration Requirements in chapter 1.

Credits for fuel provide incentive for United States production. The section 6426 fuel credit may not be claimed for alternative fuel that is produced outside the United States for use as a fuel outside the United States. The United States includes any possession of the United States.

No credit for fuels derived from paper or pulp production. Credit for alternative fuels and alternative fuel mixtures isn't available for any fuel derived from the production of paper or pulp.

Filing Claims

This section tells you how to make a claim for a credit or refund of excise taxes on fuels. This section also covers recordkeeping requirements and when to include the credit or refund in your income.

Generally, you will provide all the information needed to claim a credit or refund when you properly complete Form 8849, Form 4136, Schedule C (Form 720), Form 6478, or Form 8864. In some cases, you will have to attach additional information. You need to keep records that support your claim for a credit or refund.

RECORDS: Keep at your principal place of business all records needed to enable the IRS to verify that you are the person entitled to claim a credit or refund and the amount you claimed.

Ultimate purchaser. Ultimate purchasers may make claims for the nontaxable use of fuels on Form 4136, Schedule 1 (Form 8849), and Schedule C (Form 720) if reporting excise tax liability on that return. If you are an ultimate purchaser, you must keep the following records.

It is important that your records show separately the number of gallons used for each nontaxable use that qualifies as a claim. If the fuel is exported, you must have proof of exportation.

For more information about keeping records, see Publication 583, Starting a Business and Keeping Records, or chapter 1 of Publication 17, Your Federal Income Tax for Individuals.

Exceptions.

Registered ultimate vendors may make claims for certain sales of fuels on Form 4136, Schedule 2 (Form 8849), and Schedule C (Form 720) if reporting excise tax liability on that return. If you are a registered ultimate vendor, you must keep certain information pertaining to the sale of the fuel.

To make a claim, you must have sold the fuel at a tax-excluded price, repaid the tax to the buyer, or obtained the buyer's written consent to the allowance of the claim. You are required to have a valid certificate or waiver in your possession in order to make the claim.

In addition, you must have a registration number that has not been revoked or suspended. See Form 637.

State use. To make a claim as an ultimate vendor (state), you must have a UV registration number and the fuel can't be purchased with a credit card as explained below. If you sell undyed diesel fuel, undyed kerosene, or kerosene for use in aviation for use by a state or local government, you must keep the following information.

To make a claim as an ultimate vendor (nonprofit educational organization or state), you must have a UV registration number and the fuel can't be purchased with a credit card as explained later. If you sell gasoline or aviation gasoline to a nonprofit educational organization for its exclusive use or to a state or local government for its exclusive use, you must keep the following information.

To make a claim as an ultimate vendor (blocked pump), you must have a UP registration number. If you sell undyed kerosene (other than kerosene for use in aviation) from a pump that qualifies as a blocked pump because it is locked by you after each sale and is unlocked by you at the request of the buyer, you must keep the following information for each sale of more than 5 gallons.

To make a claim as an ultimate vendor of undyed diesel fuel or undyed kerosene used in certain intercity and local buses, you must have a UB registration number. You must keep the following information.

To make a claim as an ultimate vendor of kerosene for use in commercial aviation (other than foreign trade) or noncommercial aviation (other than nonexempt, noncommercial aviation and exclusive use by a state, political subdivision of a state, or the District of Columbia), you must have a UA registration number. See

earlier, for a list of nontaxable uses. You must keep the following information.

To make a claim as an ultimate vendor of kerosene for use in nonexempt, noncommercial aviation, you must have a UA registration number. You must keep the following information.

For sales of gasoline, aviation gasoline, diesel fuel, kerosene, or kerosene for use in aviation that are purchased by an exempt user with the use of a credit card, the registered credit card issuer is the only person who can make the claim. An exempt user for this purpose is:

If gasoline is purchased without the use of a credit card, then the registered ultimate vendor of the gasoline may make the claim for refund or credit. However, if the gasoline is purchased with a credit card issued to a state, but the credit card issuer isn't registered by the IRS or doesn't meet the conditions described, the credit card issuer must collect the tax and the state may make the claim.

If diesel fuel, kerosene, or kerosene for use in aviation is purchased without the use of a credit card, the registered ultimate vendor may make the claim for refund or credit. A state isn't allowed to make a claim for these fuels. However, if the diesel fuel or kerosene is purchased with a credit card issued to a state, but the credit card issuer isn't registered by the IRS or doesn't meet the conditions described, the credit card issuer must collect the tax and the state may make the claim.

The claim from the credit card issuer must contain the following information as it applies to the fuel covered in the claim.

To file a claim, you must have a taxpayer identification number. Your taxpayer identification number can be an:

If you normally file only a U.S. individual income tax return (such as Form 1040 or 1040NR), use your SSN or ITIN. You get an SSN by filing Form SS-5, Application for a Social Security Card, with the Social Security Administration. To get an ITIN, file Form W-7, Application for IRS Individual Taxpayer Identification Number, with the IRS.

If you operate a business, use your EIN. If you don't have an EIN, you may apply for one online. Go to the IRS website at irs.gov/businesses/small and click on the "Employer ID Numbers (EINs)" link. You may also apply for an EIN by faxing or mailing Form SS-4, Application for Employer Identification Number, to the IRS.

Claiming A Refund

Generally, you may claim a refund of excise taxes on Form 8849. Complete and attach to Form 8849 the appropriate Form 8849 schedules. The instructions for Form 8849 and the separate instructions for each schedule explain the requirements for making a claim for refund. If you file Form 720, you can use the Schedule C (Form 720) for your refund claims for the quarter. See the Instructions for Form 720. Don't claim a refund on Form 8849 for any amount for which you have filed or will file a claim on Schedule C (Form 720) or Form 4136.

Only one claim may be made for any particular amount of alternative fuel.

Claiming a Credit on Form 4136

A credit may be claimed for certain uses and sales of fuels on Form 4136 when you file your income tax return at the end of the year. If you meet certain requirements (discussed earlier), you may be able to make a claim during the year.

Credit only. You can claim the following taxes only as a credit on Form 4136.

Don't claim a credit for any amount for which you have filed a refund claim on Form 8849 or credit on Schedule C (Form 720).

When to file. You can claim a fuel tax credit on your income tax return for the year you used the fuel (or sold the fuel in the case of a registered ultimate vendor claim).

TIP: You may be able to make a fuel tax claim on an amended income tax return for the year you used the fuel. Generally, you must file an amended return by the later of 3 years from the date you filed your original return or within 2 years from the date you paid the income tax.

How to claim a credit. How you claim a credit depends on whether you are an individual, partnership, corporation, S corporation, or farmers' cooperative association.

Individuals. You claim the credit on the "Credits from" line of Form 1040. Also check box b on that line. If you would not otherwise have to file an income tax return, you must do so to get a fuel tax credit.

Partnerships. Partnerships (other than electing large partnerships) claim the credit by including a statement on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc., showing each partner's share of the number of gallons of each fuel sold or used for a nontaxable use, the type of use, and the applicable credit per gallon. Each partner claims the credit on his or her income tax return for the partner's share of the fuel used by the partnership.

Other entities. Corporations, S corporations, farmers' cooperative associations, and trusts must make the claim on the appropriate line of their applicable income tax return.

Federal, state, and local governments, and certain tax-exempt organizations (as discussed earlier under Claiming a Refund) must use Form 8849, not Form 4136, to make an annual claim.

Including the Credit or Refund in Income

CAUTION: In most situations, the amount claimed as a credit or refund will be less than the amount deducted as fuel tax expense because the LUST tax is generally not refunded.

Include any credit or refund of excise taxes on fuels in your gross income if you claimed the total cost of the fuel (including the excise taxes) as an expense deduction that reduced your income tax liability.

The year you include a credit or refund in gross income depends on whether you use the cash or an accrual method of accounting.

Cash method. If you use the cash method and file a claim for refund, include the refund amount in your gross income for the tax year in which you receive the refund. If you claim a credit on your income tax return, include the credit amount in gross income for the tax year in which you file Form 4136. If you file an amended return and claim a credit, include the credit amount in gross income for the tax year in which you receive the credit.

Example 1. Sharon Brown, a cash basis farmer, filed her 2015 Form 1040 on March 3, 2016. On her Schedule F (Form 1040), Sharon deducted the total cost of gasoline (including $110 of excise taxes) used on the farm. Then, on Form 4136, Sharon claimed $108 as a credit. Sharon reports the $108 as additional income on her 2016 Schedule F (Form 1040).

Example 2. March Corporation uses the calendar year as its tax year. For 2015, the following amounts of excise tax were included in the cost of gasoline the corporation used each quarter in a nontaxable use.

                       Fuel Tax     Fuel Tax

 Calendar Quarters     Expense         Claim

 Jan. 1 - March 31        $1,300       $1,293

 April 1 - June 30         1,100        1,094

 July 1 - Sept. 30           400          397

 Oct. 1 - Dec. 31            300          298

                         -------      -------

Total                    $3,100       $3,082

                         =======      =======

The corporation deducts the entire cost of the gasoline (including the $3,100 in excise taxes) it used during the year as a business expense on its corporation income tax return, thereby reducing its corporate income tax liability for that year.

Form 8849. March Corporation files quarterly refund claims for the first 2 quarters (ending March 31 and June 30). It can't file a quarterly refund claim for the third or fourth quarter because it did not meet the $750 minimum requirement.

Since March Corporation uses the cash method of accounting, the corporation includes $2,387 ($1,293 + $1,094) in its gross income for the tax year in which it receives the refunds (2015).

Form 4136. The corporation claims the remaining amounts ($397 + $298) as a credit on its 2015 income tax return by attaching Form 4136. It files its tax return in 2016. It includes this credit ($695) in its 2016 gross income.

Accrual method. If you use an accrual method, include the amount of credit or refund in gross income for the tax year in which you used the fuels (or sold the fuels if you are a registered ultimate vendor). It doesn't matter whether you filed for a quarterly refund or claimed the entire amount as a credit.

Example 3. Patty Green uses an accrual method. She files her 2015 return on April 15, 2016. On Schedule C (Form 1040) she deducts the total cost of gasoline (including $155 of excise taxes) used for an off-highway business use during 2015. On Form 4136, Patty claims $153 as a credit. She reports the $153 as additional income on her 2015 Schedule C (Form 1040).

Example 4. Use the same facts as in Example 2 above, except that March Corporation uses an accrual method of accounting. Since the nontaxable use occurred in 2015, the corporation reports the $3,082 of excise taxes as income on its 2015 income tax return. This consists of the $2,387 it claimed on Form 8849 and the $695 it claimed on Form 4136.

Example. Tyler S. Sands used undyed diesel fuel in vehicles used in his construction business. The vehicles were not registered (or required to be registered) for highway use. In the fourth quarter of his 2015 income tax year, which ends in December, he used 3,000 gallons of undyed diesel fuel. The excise tax on the 3,000 gallons of undyed diesel fuel he used was $732 (tax of $.244 per gallon).

Because the tax is less than $750, Tyler must claim a credit for the tax on his 2015 income tax return. He fills out Form 4136 and attaches it to his 2015 income tax return, which he files in 2016. He enters $729 (credit of $.243 per gallon) on the "Credits from" line of his Form 1040 and checks box b.

Tyler uses the cash method of accounting. On his 2015 Schedule C (Form 1040), he deducts the total cost of the fuel, including the tax. When Tyler files his 2016 Form 1040, he will include the $729 credit shown on his 2015 Form 4136 as additional income on his Schedule C (Form 1040) for 2016.

Example, continued. For the first 2 quarters of 2016, Tyler's records show the following.

                                  Claim      Claim

Quarter

Gallons Used

Tax Rate

Amount

 First              2,750         .243     $668.25

 Second             2,500         .243      607.50

Tyler could not file a claim for a refund for the first quarter because the amount of the claim was less than $750. He adds the first quarter amount ($668.25) to the second quarter amount ($607.50) and claims a refund of $1,275.75 by filing Form 8849 and Schedule 1 (Form 8849). The claim must be filed by September 30, 2016, which is the last day of the first quarter (July - Sept.) following the last quarter (April - June) included in the claim. He will have to include the $1,275.75 excise tax refund as additional income on his Schedule C (Form 1040) for 2016.

Part Two. Excise Taxes Other Than Fuel Taxes

3. Environmental Taxes

Environmental taxes are imposed on crude oil and petroleum products (oil spill liability), the sale or use of ozone-depleting chemicals (ODCs), and imported products containing or manufactured with ODCs. In addition, a floor stocks tax is imposed on ODCs held on January 1 by any person (other than the manufacturer or importer of the ODCs) for sale or for use in further manufacture.

Figure the environmental tax on Form 6627. Enter the tax on the appropriate lines of Form 720 and attach Form 6627 to Form 720.

For environmental tax purposes, United States includes the 50 states, the District of Columbia, the Commonwealth of Puerto Rico, any possession of the United States, the Commonwealth of the Northern Mariana Islands, the Trust Territory of the Pacific Islands, the continental shelf areas (applying the principles of section

• Metered-dose inhalers.

• Recycled ODCs.