Waste Management Addresses Impact of Rules on Highway Trust Fund

We would like to thank the officials of the Department of Treasury and the Internal Revenue Service for meeting with us on May 11, 2016, to discuss our concerns regarding Treasury Regulation § 48.4041-7 (the "Treasury Regulation").

At the meeting, we discussed possible amendments to the Treasury Regulation in order to better address situations where a single motor of a diesel-powered highway vehicle is used not only to propel that vehicle but also to operate special, non-propulsion equipment by means of a power take-off ("PTO") or other power transfer. We requested that this issue be listed in the 2016-2017 Priority Guidance Plan. During the meeting, it was suggested that we prepare a follow-up submission, addressing the potential impact (if any) on the Highway Trust Fund (established under section 9503 of the Internal Revenue Code¹) of an expansion of the "off-highway business use" exemption from excise tax liability as interpreted by the Treasury Regulation.²

Federal excise taxes generally are imposed under section 4081 upon the removal of diesel fuel -- and certain other "taxable fuels" -- from a refinery or terminal (with exemptions from tax for certain "bulk transfers" by pipeline or water-borne vessel) or, alternatively, under section 4041, which is often described as imposing a "backup retail tax," upon sale or use of diesel fuel in a motor vehicle in the event that no excise tax previously was imposed on such fuel under section 4081.³ To the extent, however, the diesel fuel ultimately is used for "off-highway business use" (or certain other "nontaxable uses") section 34(a)(3) and section 6427(l) provide alternative mechanisms for the purchaser of the fuel to claim a tax credit or refund payment in the amount of the excise taxes previously imposed on such fuel (even though the excise tax initially was imposed on another party).⁴ As explained in more detail below, changes to the Internal Revenue Code enacted in 2010 make clear that allowing purchasers of diesel fuel to claim a tax credit or refund payment on account of their "off-highway business use" of fuel -- regardless of whether a highway vehicle's non-propulsive functions are powered by a separate motor or a PTO apparatus -- will have no adverse impact on the Highway Trust Fund. This is because such credits and refunds are paid out of the so-called "General Fund" administered by the U.S. Treasury Department, without offsetting transfers of funds from the Highway Trust Fund to the General Fund.

By way of background, the Highway Trust Fund was established as part of the Highway Revenue Act of 1956.⁵ As Congress deliberated on this legislation, both the House of Representatives and the Senate agreed that the revenue generated from gasoline and diesel fuel excise taxes would be deposited into the Highway Trust Fund and gasoline refunds paid from the Highway Trust Fund.⁶ When the Highway Revenue Act of 1956 was enacted, only gasoline was subject to a refund for the off-highway use of fuel. Instead of providing a refund for diesel fuel, an exemption was for the retail sales of gasoline at a reduced rate based on the use of diesel fuel in an unregistered highway vehicle or when used off-highway.⁷

As originally enacted, section 209(f) of the Highway Revenue Act of 1956 provided that "Expenditures from [the Highway] Trust Fund" included expenditures for: (1) Federal-Aid Highway Program; (2) Repayment of Advances from General Fund; (3) Transfers from Trust Fund for Gasoline used on Farms and for Certain Other Purposes; and (4) Floor Stocks Refunds.⁸ The expenditures relating to gasoline used "for certain other purposes" included periodic transfers from the Highway Trust Fund into the General Fund of amounts equivalent to refund payments allowed under section 6421 of the Internal Revenue Code to purchasers of gasoline used for certain nonhighway purposes or by local transit systems.⁹

Over the next 27 years, as Congress repeatedly extended the fuel excise tax and Highway Trust Fund provisions, section 209(f) of the Highway Revenue Act of 1956 remained essentially unchanged, aside from extensions of the scheduled expiration dates.¹⁰ Then, in 1983, Congress repealed section 209 of the Highway Revenue Act of 1956 and, instead, codified the Highway Trust Fund provisions in section 9503 of the Internal Revenue Code.¹¹ As originally enacted into the Internal Revenue Code in January of 1983, section 9503(c) contained a list of "Expenditures from Highway Trust Fund" including (among other expenditures):

For nearly three decades after the enactment of section 9503(c)(2), the language in the Internal Revenue Code remained unchanged, aside from slight revisions to the wording (mostly related to certain alternative fuel credits) and extensions of the scheduled expiration dates. However, in 2010, the Hiring Incentives to Restore Employment Act ("HIRE Act") removed prior-law section 9503(c)(2) from the Internal Revenue Code.¹⁶ During the Senate discussions of this legislation, Senator Reid proposed an amendment that would allow additional revenue to be available in the Highway Trust Fund for appropriation by Congress for specified transportation purposes. This was accomplished by repealing the section 9503(c)(2) provisions otherwise authorizing periodic transfers from the Highway Trust Fund to the General Fund (in the nature of reimbursements) to reflect the tax credits and refund payments allowed to certain purchasers of transportation fuels. In essence, the repeal of prior-law section 9503(c)(2) shifted the ultimate economic impact of the fuel tax credits and refund provisions from the Highway Trust Fund to the General Fund.¹⁷ This approach was supported by various associations and unions, including the American Association of State Highway and Transportation Officials, which recognized the need for additional funding for the Highway Trust Fund.¹⁸ The amendment striking "old" section 9503(c)(2) was agreed upon by the Senate, and subsequently passed by the House of Representatives.¹⁹ Accordingly, the HIRE Act removed the "old-law" provisions specifying that expenditures from the Highway Trust Fund included periodic transfers to the General Fund of amounts equivalent to (a) refund payments made under section 6427 (and certain other fuel-tax refund provisions) to purchasers of fuel ultimately used for nontaxable purposes and (b) refundable income tax credits allowed under section 34 in lieu of the claimant seeking a refund payment under section 6427.²⁰

Therefore, if the existing regulations interpreting the "off-highway business use" exemption are updated consistent with technological advances and sound environmental policy so that a separate motor is not required for the operation of special, non-propulsion equipment attached to a diesel-powered highway vehicle, this will allow taxpayers to claim either a refund payment under section 6427(l) or a refundable income tax credit under section 34(a)(3), without impacting the balance of funds in the Highway Trust Fund that are available for appropriation by Congress for transportation programs.

We appreciate your consideration of these issues. Please feel free to reach out to me if you have any additional questions.

² If amendments ultimately are made to Treas. Reg. § 48.4041-7, then conforming changes also may need to be made to Treas. Reg. § 48.6427-1(d), which cross-references the "dual use of fuel" rule in the Treasury Regulation, and to Treas. Reg. § 48.6427-8(b)(vii)(C), which governs certain refund payments made when diesel fuel is used "other than as a fuel in a propulsion engine of a diesel-powered highway vehicle."

³See section 4082 (allowing exemption from tax imposed by section 4081 for dyed diesel fuel removed from a refinery or terminal if the fuel is destined for a "nontaxable use").

⁴See also sections 6427(k), 6427(i)(2) and 34(b), which coordinate the tax credit and refund payment provisions. The term "off-highway business use" is defined statutorily in section 6421(e)(2) as meaning use of the fuel in a trade or business, or in an income-producing activity described in section 212, "otherwise than as fuel in a highway vehicle." See also section 4041(b)(1) and section 6427(l)(2), which directly or indirectly incorporate the "off-highway business use" exemption from excise tax liability. Since 1960, Treasury regulations have provided that the "off-highway business use" exemption from excise taxes applies to fuel used in a highway vehicle that has a "propulsion" motor and a separate motor to operate special (non-propulsion) equipment used in the taxpayer's trade or business, even if the fuel used in both motors is drawn from the same vehicle fuel tank. See T.D. 6433, 1960-1 C.B. 426; T.D. 8066, 1986-1 C.B. 306; Treas. Reg. § 48.4041-7 (governing "dual use" of diesel fuel); Treas. Reg. § 48.6421-7(d) (governing "dual use" of gasoline); Treas. Reg. § 48.6427-1(d) (providing that "dual use" principles are equally applicable in determining whether refund payment is allowed under section 6427(a) for excise taxes previously imposed under section 4041 on diesel fuel or special motor fuel).

⁵See section 209(a) of the Federal-Aid Highway and Highway Revenue Act of 1956, Pub. L. 84-627 (1956).

⁶See Federal-Aid Highway and Highway Revenue Act of 1956: Hearing on H.R. 9075 Before the H. Comm. On Ways and Means, 84th Cong. (1956).

⁷See Federal-Aid Highway and Highway Revenue Act of 1956, sec. 202(a)("In the case of a liquid taxable under this subsection sold for use or used as a fuel in a diesel-powered highway vehicle (A) which (at the time of such sale or use) is not registered, and is not required to be registered, for highway use under the laws of any State or foreign country, or (B) which, in the case of a diesel-powered highway vehicle owned by the United States, is not used on the highway, the tax imposed by paragraph (1) or by paragraph (2) shall be 2 cents a gallon in lieu of 3 cents a gallon. If a liquid on which tax was imposed by paragraph (1) at the rate of 2 cents a gallon by reason of the preceding sentence is used as a fuel in a diesel-powered highway vehicle (A) which (at the time of such use) is registered, or is required to be registered, for highway use under the laws of any State or foreign country, or (B) which, in the case of a diesel-powered highway vehicle owned by the United States, is used on the highway, a tax of 1 cent a gallon shall be imposed under paragraph (2)").

⁸See section 209(f) of the Federal-Aid Highway and Highway Revenue Act of 1956

⁹Id at section 209(0(3).

¹⁰See Federal-Aid Highway Act of 1961, Pub. L. 87-61 (1961); Federal-Aid Highway Act of 1970, Pub. L. 91-605 (1970); Federal-Aid Highway Act of 1976, Pub. L. 94-280 (1976); Surface Trans. Assistance Act of 1978, Pub. L. 95-599(1978).

¹¹See Surface Transportation Assistance Act of 1982, Pub. L. 97-424 (enacted on January 6, 1983). Current-law section 9503(b) of the Internal Revenue Code provides for appropriation to the Highway Trust Fund of amounts equivalent to the taxes received by the Treasury Department before October 1, 2022 under section 4041, section 4081, and certain other Internal Revenue Code sections authorizing the imposition of excise taxes (e.g., taxes imposed on heavy trucks or on tires).

¹²See 1983-1 C.B. at 415. Section 39 of the Internal Revenue Code was subsequently re-numbered as section 34, subsection (a)(3) of which currently provides (as noted above) that taxpayers are allowed to elect a refundable income tax credit in lieu of submitting a claim for a refund payment for excise taxes otherwise allowed under section 6427. See also section 6401(b)(1).

¹³ Omnibus Budget Act of 1987, Pub. L. 100-203 (1987).

¹⁴See Omnibus Budget Act of 1987, Pub. L. 100-203 Sec. 202(a)(1987).

¹⁵See Federal-Aid Highway and Highway Revenue Act of 1956: Hearing on H.R. 9075 Before the H. Comm. On Ways and Means, 84th Cong. (1956); See also Omnibus Budget Act of 1987: House Report No. 100-495, Conference Report to Accompany H.R. 3545, 100th Cong. (1987).

¹⁶ Hiring Incentives to Restore Employment Act ("HIRE Act"), Pub. L. 111-147 (2010).

¹⁷ S. Doc. No. 156-21, S559 (2010).

¹⁸ S. Doc. No. 156-22, S604-S607 (2010).

¹⁹See section 444(a) of the HIRE Act, Pub. L. 111-147 (2010). The HIRE Act also re-numbered "old" section 9503(c)(3) of the Internal Revenue Code -- governing certain "floor stocks refunds" -- as "new" section 9503(c)(2). See generally Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in the 111^th Congress (JCS-2-11), March 2011, at pp. 155-157.

²⁰ As summarized by the Joint Committee on Taxation in its publication entitled "Long-Term Financing of the Highway Trust Fund" JCX 92-15 (dated June 15, 2015) at p. 4 footnote 14: "The requirement that transfers be made from the Highway Trust Fund to the General Fund to cover amounts paid by the General Fund for nontaxable use refund claims was repealed by section 444(a) of Pub. L. No. 111-147 (the Hire Incentives to Restore Employment Act, discussed infra)."