SERVICE CLARIFIES GASOLINE EXCISE TAX ISSUES.

Notice 89-38

The purpose of this notice is to modify certain provisions of Notice 88-132, 1988-52 I.R.B. 22, including the definition of wholesale distributor. Notice 88-182 provides interim rules for the administration of the federal excise taxes on diesel and aviation fuel as amended by the Technical and Miscellaneous Revenue Act of 1988, P.L. 100-647.

I Requirements for Making Tax-Free and Tax-Reduced Sales

Section IV(A) of Notice 88-132 requires producers and importers to obtain and retain certain information in order to make tax-free or tax-reduced sales. Paragraph (3) of this section requires the producer or importer's record of sale to contain "a written statement clearly indicating that the entire quantity of the fuel purchased is purchased for the nontaxable use specified in the buyer's certification".

This provision does not permit producers to make a sale of fuel to a particular buyer for both taxable and nontaxable uses. Therefore, section IV(A)(3) is modified to read as follows:

"(3) The producer or importer's record of sale contains a written statement clearly stating the quantity of fuel that the buyer has bought for the nontaxable or tax-reduced use specified in the buyer's certification . . ."

II Definition of Wholesale Distributor

Section V(C) of Notice 88-132 defines the term "wholesale distributor" for purposes of the definition of the term "producer." This definition of wholesale distributor may exclude many distributors who sell substantial quantities of diesel fuel to farmers, fishermen, and other off-road users who are eligible to buy fuel tax free from producers. Therefore, section V(C) is modified to read as follows:

"C. Wholesale Distributor

"(1) Definition. For purposes of the definition of the term "producer," the regulations will provide that the term "wholesale distributor" includes any person who --

"(a) Holds itself out to the public as being engaged in the trade or business of selling taxable fuel to producers of taxable fuel (including wholesale distributors), to retailers, or to users of taxable fuel who purchase in bulk quantities and accept delivery into bulk storage tanks; and

"(b) Actually makes more than casual sales of taxable fuel to the producers, retailers, or users described in paragraph(a).

"(2) Special rules. For purposes of the definition of wholesale distributor, the regulations will further provide that --

"(a) The term "bulk storage tank" means a container that holds at least 50 gallons and is not the fuel supply tank of any engine that is mounted on, or attached to, a highway vehicle, a diesel-powered train, or an aircraft. Thus, for example, the term includes containers that hold at least 50 gallons and that serve as the fuel supply tank of a vessel or a home furnace, but the term does not include the fuel supply tank of an engine that powers a refrigeration unit mounted on a semi-trailer. For the definition of "highway vehicle," see section 48.4041-8(b) of the regulations. For the definition of "diesel-powered train," see section IV(D)(1) of Notice 88-30, 1988-13 I.R.B. 7.

"(b) The term "bulk quantities" means 25 gallons or more.

"(c) A person will be considered to make "more than casual sales" if --

"(i) At least 30 percent of its number of sales of taxable fuel during the preceding 12 month period (or some other period as determined by the District Director) is to the producers, retailers, or users described in paragraph (1)(a); or

"(ii) At least 50 percent of its volume of taxable fuel during the preceding 12 month period (or some other period as determined by the District Director) is sold to the producers, retailers, or users described in paragraph (1)(a), and at least 500 of its sales (or a proportional number if a period other than 12 months is used) are made to such buyers.

"(d) The term "wholesale distributor" also includes any person who holds itself out to the public as being engaged in the trade or business of selling taxable fuel to users for the nontaxable uses described in section II(D) of Notice 88-132 (for example, use on a farm for farming purposes or use as heating oil) and actually sells at least 70 percent of its volume of taxable fuel during the preceding 12 month period (or some other period as determined by the District Director) to such users.

"(e) A farmers' cooperative described in sections 521 or 1381 of the Code will be treated as holding "itself out to the public" even though it may sell taxable fuel only to its members.

"(3) Examples. The following examples illustrate these rules:

"EXAMPLE 1. A operates a truck stop that sells diesel fuel at retail. A also advertises that it will make bulk sales of diesel fuel to farmers. During a representative period (as determined by the District Director), A made 1,000 sales of diesel fuel, 300 of which were to farmers for both on-road and off-road use. In each sale, A delivered at least 25 gallons into a 50 gallon tank in the bed of the buyer's pick-up truck. None of these tanks was the fuel supply tank to any engine on the truck. A meets the definition of wholesale distributor.

"EXAMPLE 2. B operates a marina and advertises that it will make sales of diesel fuel to boaters. During the preceding 12 month period, B sold 85 percent of its volume of diesel fuel to fishermen and other boaters. B sold the remaining 15 percent of its volume at its convenience store to truckers. B meets the definition of wholesale distributor.

"EXAMPLE 3. C sells diesel fuel at an unattended location through a "cardlock" system and advertises that it will make sales of diesel fuel for farming purposes. Each of C's buyers has a "taxable" card (used to buy fuel for highway use) and a "nontaxable" card (used to buy fuel for off-highway use). During a representative period (as determined by the District Director), C sold 70 percent of its volume of diesel fuel to users of the "nontaxable" card. C meets the definition of wholesale distributor.

"EXAMPLE 4. D operates a truck stop that sells diesel fuel at retail. D also advertises that it will make bulk sales of diesel fuel for off-road uses. During a representative 6 month period (as determined by the District Director), D made 6,000 sales of diesel fuel, 250 of which were to construction companies for their off-road use. In each sale to a construction company, D delivered 1,000 gallons into its buyer's 1,500 gallon tank trailer. The remaining 5,750 sales during the period were to truckers for their on-road use. In each of these sales, D delivered at least 60 gallons into its buyer's 70 gallon vehicle fuel supply tank. Although D made the requisite number of bulk sales to users during this period (250 in 6 months), less than 50 percent of its volume of diesel fuel was sold in bulk to users. Also, less than 70 percent of its volume was sold for nontaxable uses. Thus, D does not meet the definition of wholesale distributor."

III Taxable Fuel on Hand

Notice 88-132 does not describe the tax consequences of a producer's sale of tax-paid taxable fuel that such producer had in inventory at the time it received its Certificate of Registry. Therefore, section V is amended by adding the following immediately after section V(C):

"D. Producer's Taxable Fuel On Hand

A person is treated as a producer of all of the taxable fuel it has on hand as of the effective date of its Certificate of Registry even though tax has already been paid on such fuel. If an ultimate purchaser subsequently buys taxable fuel from a producer at a price that includes the tax and then uses the fuel in a nontaxable use, such purchaser may claim a credit or refund of the tax under section 6427 of the Code. Alternatively, a producer that has tax-paid taxable fuel on hand as of the effective date of its Certificate of Registry may claim a credit up to the amount of tax included in the price it paid for such fuel, but only against liability the producer incurs under section 4091 of the Code on its later sale of any taxable fuel. This credit must be claimed on Part II, Line 2, ("Adjustments") on Form 720, Quarterly Federal Excise Tax Return, and must be supported by records to substantiate the amount of tax paid fuel on hand."

IV Correction of a Typographical Error

The first sentence of section VII(B) of Notice 88-132 contains an incorrect date. Thus, it is corrected to read as follows:

"Exempt users of diesel and aviation fuel bought and used tax paid after 1988 may claim a quarterly refund of such tax if- . . ."

EFFECTIVE DATE

The rules of this notice are effective January 1, 1989.

EFFECT ON OTHER DOCUMENTS

Notice 88-132 is modified.

ADMINISTRATIVE PRONOUNCEMENT

This document serves as an "administrative pronouncement" as that term is described in section 1.6661-8(b)(2) of the Income Tax Regulations and may be relied upon to the same extent as a revenue ruling or revenue procedure.

DRAFTING INFORMATION

The principal author of this notice is Frank Boland, Office of Assistant Chief Counsel (Passthroughs and Special Industries). For further information, contact Mr. Boland on (202) 566-4077 (not a toll-free call).