Treasury Says No to Reinstating Blocked Pump Guidance

In place of the guidance, Treasury says, IRS agents received instructions to apply the definition of "blocked pump" in a reasonable manner. Moreover, it says, "we will make every effort, in developing the final regulations, to address your concerns in a manner consistent with our statutory authority."

[1] Thank you for your letter to Secretary Rubin concerning the temporary regulations relating to the tax on kerosene. You expressed concern that the definition of "blocked pump" contained in those regulations was adversely affecting kerosene consumers and suggested that an alternative definition contained in internal guidance issued by the Internal Revenue Service to its agents be used instead. To ensure that your views were properly considered, Secretary Rubin referred your letter to this office which is responsible for issues of tax policy.

[2] The tax treatment of kerosene was changed by the Taxpayer Relief Act of 1997. Under the new rules, which took effect on July 1, 1998, kerosene is taxed at a rate of 24.4 cents per gallon when it is removed from a fuel storage terminal unless it is dyed to indicate that it may be used only for nontaxable purposes. These rules are generally the same as the rules that have applied to diesel fuel since 1993.

[3] The purpose of the dyeing requirement is to prevent the diversion of untaxed fuel to taxable highway uses. This was a serious problem with respect to diesel fuel before the 1993 change and had become a growing problem with respect to kerosene since 1993. Diversion occurs because highway vehicles can use a kerosene/diesel mixture as a substitute for pure diesel fuel. In fact, kerosene is routinely mixed with diesel fuel in cold climates to prevent coagulation in fuel lines. Mixtures of 30 percent kerosene and 70 percent diesel fuel are common for this purpose. Under the law in effect before July 1, 1998, tax should have been imposed on kerosene mixed with taxed diesel fuel, but the tax was easy to avoid because there was no visible evidence of kerosene in the mixture.

[4] The new rules, by allowing dyed fuel to be removed from a fuel storage terminal without payment of tax, continue to permit tax- free purchases of fuel for nontaxable purposes such as home heating. Dyed kerosene, however, may not be safe for use in unvented space heaters. The statute addressed this problem by providing a special rule applicable only to kerosene. This special rule permits kerosene vendors such as convenience stores to sell undyed kerosene at a price that does not include the tax and then apply for a refund of the tax that was imposed at the terminal. This rule applies, however, only if the kerosene is sold from a pump that is not suitable for use in fueling a highway vehicle.

[5] Temporary and proposed regulations issued in July 1998 describe these pumps as blocked pumps and prescribe various requirements that a blocked pump must satisfy. The principal requirement is that the pump be at a fixed location and be incapable, because of its distance from a road surface or the length of its delivery hose, of dispensing fuel directly into the fuel tank of a highway vehicle. This requirement implements the statutory rule that the pump be unsuitable for use in fueling a highway vehicle.

[6] Because of concerns that this rule might be administered in an unreasonable manner, internal IRS enforcement guidance issued in December 1998 instructed agents to apply an alternative test under which a pump would be deemed to be a blocked pump if certain, primarily procedural, safeguards were in place. This guidance was withdrawn, however, after review by legal counsel in both the Internal Revenue Service and Treasury. They concluded that the alternative test would permit fuel pumps that are suitable for use in fueling highway vehicles, and that may in fact have been used for that purpose, to qualify as blocked pumps. IRS agents were instructed, however, in the memorandum withdrawing the alternative test, that the definition in the temporary and proposed regulations should be applied in a reasonable manner.

[7] I can assure you that we will make every effort, in developing final regulations, to address your concerns in a manner consistent with our statutory authority. We very much appreciate your interest in this issue and look forward to working with you in our continuing efforts to improve the administration of the motor fuel excise taxes. Thank you again for writing.

Sincerely,

[The same identical letter was sent to Honorable McCollum]