Final Regs on Diesel Fuel Dye Color and Concentration

 [4830-01-u]

 ACTION: Final regulations.

 SUMMARY: This document contains final regulations relating to dye color and concentration requirements for tax-exempt diesel fuel. These regulations implement changes made by the Omnibus Budget Reconciliation Act of 1993 and affect refiners, importers, terminal operators, and throughputters.

 EFFECTIVE DATE: These regulations are effective January 1, 1994.

 FOR FURTHER INFORMATION CONTACT: Frank Boland, (202) 622-3130 (not a toll-free number.)

 SUPPLEMENTARY INFORMATION:

BACKGROUND

Section 4081 was amended to apply to diesel fuel by the Omnibus Budget Reconciliation Act of 1993. Temporary regulations relating to the diesel fuel excise tax imposed by section 4081 were published in the Federal Register on November 30, 1993, (58 FR 63069) along with a notice of proposed rulemaking (PS-52-93) cross-referencing the temporary regulations (58 FR 63131). Amendments to these temporary regulations (relating to dye color and concentration) were published in the Federal Register on December 27, 1993, (58 FR 68304) along with a notice of proposed rulemaking (PS-76-93) cross-referencing those amendments (58 FR 68338).

 Written comments responding to these notices were received and a public hearing was held on March 22, 1994. After consideration of the comments relating to the exemption from the diesel fuel tax imposed by section 4081, section 48.4082-1 (as proposed in PS-52-93 and PS-76-93) is adopted as revised by this Treasury decision and the corresponding temporary regulations are removed. The comments and revisions are discussed below. Other sections of the proposed and temporary regulations remain in force until final regulations on those topics are issued.

EXISTING IRS AND EPA REGULATIONS

 Effective October 1, 1993, Environmental Protection Agency (EPA) regulations (40 CFR 80.29) make it unlawful for any person to manufacture, sell, supply, offer for sale or supply, dispense, transport, or introduce into commerce diesel fuel that contains a concentration of sulfur in excess of 0.05 percent (by weight) (high- sulfur diesel fuel) unless the fuel contains visible evidence of the blue dye 1,4 dialkylamino-anthraquinone. A substantial penalty applies to the use of high-sulfur diesel fuel in motor vehicles.

 Effective January 1, 1994, the Federal excise tax on diesel fuel imposed by section 4081 does not apply to removals of diesel fuel that is indelibly dyed (or dyed and marked) in accordance with IRS regulations. Section 48.4082-1T(b) of the Manufacturers and Retailers Excise Tax Regulations and a transitional rule in Notice 94-21, 1994-11 Internal Revenue Bulletin 32, provide that diesel fuel that is required to be dyed blue pursuant to EPA's high-sulfur diesel fuel program satisfies the IRS dyeing requirement only if it contains blue dye of the prescribed concentration level. Diesel fuel that is not required to be dyed blue pursuant to EPA's high-sulfur diesel fuel program satisfies the IRS dyeing requirement only if it contains a red dye of a prescribed type and concentration. In addition, the Commissioner is given authority to modify the dyeing requirements by approving the use of other dyes.

SAFETY ISSUES REGARDING AVIATION GASOLINE

 No Federal regulations require the dyeing of aviation gasoline (avgas). However, avgas is dyed by refiners to differentiate various grades of the fuel and to distinguish avgas from clear, kerosene- based jet fuel. As a result of this practice, more than 90 percent of domestic avgas is dyed blue or green. Extensive training has been conducted within the aviation community to assure that pilots, mechanics, fuel service personnel, and vendors are thoroughly familiar with the meaning and use of color in fuels. This training is important because contamination of avgas by even small amounts of other fuel can cause an engine failure.

 The Federal Aviation Administration, EPA, and IRS are concerned that blue-dyed diesel fuel might be mistaken for blue or green avgas. Of particular concern is the possibility of misfuelings in remote locations where fuels are dispensed into nonstandard containers or where different fuels are stored in similar containers in close proximity to each other.

PUBLIC COMMENTS

 The IRS received comments from refiners, pipeline and terminal operators, and others in the diesel fuel distribution system concerning the dye color and concentration requirements of the temporary and proposed regulations. In general, these comments suggested that the blue dye concentration level should be lower than that scheduled to go into effect on July 1, 1994, and the red dye concentration should be lower than the current requirement (3.9 pounds per thousand barrels (ptb) when expressed as a solid dye standard). The comments expressed concern that the required concentration level might cause sedimentation in pipelines and engines and make the petroleum industry's tests for cloud point and haze more difficult to conduct. A comment from a dye manufacturer indicated, however, that the required red dye is completely soluble in fuel and noted that an independent laboratory had no difficulty in conducting the cloud point and haze test. The IRS carefully considered these public comments in developing the final regulations.

IRS CONCERNS

 In addition to its concerns about aviation safety, the IRS believes that enforcement of the diesel fuel excise tax will be impaired unless the dye in fuel is visible when that fuel is diluted as part of any practicable plan of large-scale tax evasion. In determining the appropriate dye color and concentration requirements to address this concern, the IRS inspected numerous samples of diesel fuel containing various colors and concentrations of dye. Many of these samples were independently produced by the IRS and others were provided by the petroleum industry and dye manufacturers.

EXPLANATION OF FINAL REGULATIONS

 In order to avoid any possible confusion with blue or green avgas, these final regulations provide that beginning October 1, 1994, diesel fuel can no longer be dyed blue for tax exemption purposes. Rather, red dye will be used to identify all tax-exempt diesel fuel, regardless of the sulfur content of that fuel. The Commissioner will retain the authority to modify this requirement by approving the use of other dyes, but will not permit the use of dyes that could cause diesel fuel to be mistaken for avgas. In addition, a transitional rule will permit tax-free removals of high-sulfur diesel fuel that was dyed blue before October 1, 1994.

 The red dye concentration required by the final regulations is the equivalent of the red dye concentration currently required by IRS for tax-exempt low-sulfur diesel fuel. In the final regulations, however, the required red dye concentration is expressed in terms of a solid dye standard, which is uniform among dye manufacturers, rather than in terms of the dye's active ingredient. This change does not impose any additional requirements on diesel fuel that was dyed red under the rules in effect before the issuance of the final regulations. Thus, diesel fuel that was dyed red in accordance with those rules will satisfy the solid dye standard in the final regulations.

 Based on its inspection of dyed diesel fuel samples, the IRS believes the 3.9 ptb concentration required by the final regulations is necessary to address its concerns regarding dilution. In many cases involving the diesel fuel dyed with less than 3.9 ptb, the dye was not visible when the fuel was diluted. Thus, a required concentration level of less than 3.9 ptb could result in considerable diesel fuel tax evasion.

 The IRS understands the petroleum industry's concerns on the concentration issue and will continue to monitor the effectiveness of the 3.9 ptb standard.

ACTION BY EPA

 In conjunction with these IRS final regulations, EPA is issuing regulations in a future issue of the Federal Register that require high-sulfur diesel fuel to be dyed red rather than blue. The EPA rule and the IRS rule have the same effective dates.

SPECIAL ANALYSES

 It has been determined that this Treasury decision is not a significant regulatory action as defined in EO 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and, therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, the notices of proposed rulemaking preceding these regulations were submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

DRAFTING INFORMATION

 The principal author of these regulations is Frank Boland, Office of Assistant Chief Counsel (Passthroughs and Special Industries). However, other personnel from the IRS and Treasury Department participated in their development.

LIST OF SUBJECTS IN 26 CFR PART 48

 Excise taxes, Reporting and recordkeeping requirements.

Treasury Decision 8550

ADOPTION OF AMENDMENTS TO THE REGULATIONS

Accordingly, 26 CFR part 48 is amended as follows:

PART 48 -- MANUFACTURERS AND RETAILERS EXCISE TAXES

Paragraph 1. The authority citation for part 48 is amended by removing the entry for "Sections 48.4082-1T and 48.4082-2T" and adding the following entry in numerical order to read as follows:

Authority: 26 U.S.C. 7805 * * *

Sections 48.4082-1 and 48.4082-2T also issued under 26 U.S.C. 4082(c). * * *

Par. 2. Section 48.4082-1T is removed and section 48.4082-1 is added to read as follows:

SECTION 48.4082-1 DIESEL FUEL TAX; EXEMPTION.

(a) EXEMPTION. Tax is not imposed by section 4081 on the removal, entry, or sale of any diesel fuel if --

(1) The person otherwise liable for tax is a taxable fuel registrant;

(2) In the case of a removal from a terminal, the terminal is an approved terminal; and

(3) The diesel fuel satisfies the dyeing and marking requirements of paragraph (b) of this section.

(b) DYEING AND MARKING REQUIREMENTS -- (1) DYEING; HIGH SULFUR FUEL BEFORE [June 30, 1994]. Diesel fuel that is required to be dyed blue pursuant to the Environmental Protection Agency's high sulfur diesel fuel requirement (40 CFR 80.29) satisfies the dyeing requirement of this paragraph (b) only if it contains --

(i) For periods before April 1, 1994, the blue dye 1,4 dialkylamino-anthraquinone in a concentration of at least 1.2 pounds of active ingredient (exclusive of the solvent) per thousand barrels of diesel fuel;

(ii) For periods after March 31, 1994, and before [INSERT DATE THIS DOCUMENT IS FILED WITH THE FEDERAL REGISTER], the blue dye 1,4 dialkylamino-anthraquinone (Color Index Solvent Blue 98) in a concentration of at least 4 pounds of active ingredient (exclusive of the solvent) per thousand barrels of diesel fuel; or

(iii) Any dye of a type and in a concentration that has been approved by the Commissioner.

(2) DYEING; LOW SULFUR FUEL BEFORE [June 30, 1994]. Before [June 30, 1994], diesel fuel that is not described in paragraph (b)(1) of this section satisfies the dyeing requirement of this paragraph (b) only if it contains --

(i) The dye Solvent Red 164 at a concentration spectrally equivalent to 3.9 pounds per thousand barrels of the solid dye standard Solvent Red 26; or

(ii) Any dye of a type and in a concentration that has been approved by the Commissioner.

(3) DYEING; ALL DIESEL FUEL AFTER [June 30, 1994].

(i) After [INSERT THE DAY BEFORE THE DATE THIS DOCUMENT IS FILED WITH THE FEDERAL REGISTER (June 30, 1994)], and before October 1, 1994, diesel fuel satisfies the dyeing requirement of this paragraph (b) only if it --

(A) Is required to be dyed pursuant to the Environmental Protection Agency's high-sulfur diesel fuel program (40 CFR 80.29) and contains the blue dye 1,4 dialkylamino-anthraquinone (Color Index Solvent Blue 98) in a concentration of at least 4 pounds of active ingredient (exclusive of the solvent) per thousand barrels of diesel fuel;

(B) Contains the dye Solvent Red 164 at a concentration spectrally equivalent to 3.9 pounds per thousand barrels of the solid dye standard Solvent Red 26;

(C) Is a mixture of diesel fuels each of which satisfies the dyeing requirement described in paragraph (b)(3)(i)(A), (B), or (D) of this section; or

(D) Contains any dye of a type and in a concentration that has been approved by the Commissioner.

(ii) After September 30, 1994, diesel fuel (regardless of sulfur content) satisfies the dyeing requirement of this paragraph (b) only if it --

(A) Contains the dye Solvent Red 164 at a concentration spectrally equivalent to 3.9 pounds per thousand barrels of the solid dye standard Solvent Red 26;

(B) Is required to be dyed pursuant to the Environmental Protection Agency's high-sulfur diesel fuel program (40 CFR 80.29) and contains the blue dye 1,4 dialkylamino-anthraquinone (Color Index Solvent Blue 98) that was added to the fuel, in a concentration of at least 4 pounds of active ingredient (exclusive of the solvent) per thousand barrels of diesel fuel, before October 1, 1994;

(C) Is a mixture of diesel fuels each of which satisfies the dyeing requirement described in paragraph (b)(3)(ii)(A), (B), or (D) of this section; or

(D) Contains any dye of a type and in a concentration that has been approved by the Commissioner.

(4) MARKING. [Reserved]

(c) EFFECTIVE DATE. This section is effective January 1, 1994.