CCA 1044004: State-to-state fuel resales can preserve tax relief for exclusive government use

Plain-English summary

Chief Counsel Advice addresses taxable fuel purchased by one state for its exclusive use and later resold to another state for that state's exclusive use. It concludes that the resale does not change the character of the original sale, the first state does not become a registered ultimate vendor, and the original vendor or credit card issuer may continue to claim the applicable relief if the requirements are met. The advice states that the ultimate vendor should list the first state on Form 8849, Schedule 2. It also concludes that the state may not resell the fuel to a federal agency under the state-use certificate because a federal agency is not a state.

Ruling snapshot

• Question: How does a state-to-state resale of taxable fuel affect tax relief and Form 8849 reporting?
• Outcome: Advice given
• Key authorities: IRC §§ 4081, 4101, and 6427; Rev. Rul. 68-141 and Rev. Rul. 94-81

Full text (IRS public release)

       Office of Chief Counsel
       Internal Revenue Service
       Memorandum
       Number: 201044004
       Release Date: 11/5/2010
       CC:PSI:7:CLangley
       PRENO-133522-10

UILC: 6427.01-00

date: October 28, 2010

 to:   Holly McCann
       (Chief, Excise Tax Program)

from: Frank Boland
(Chief, CC:PSI:7)

subject: Sales of taxable fuel to State and local governments; resales to other State and local
governments

       This memorandum responds to your August 17, 2010, request for assistance regarding
       certain fuel sales to state and local governments (States). This advice may not be used
       or cited as precedent.

       Generally, the Internal Revenue Code (Code) allows a credit, refund, or payment
       (except for the amount attributable to the Leaking Underground Storage Tank tax, which
       is excluded from this discussion) related to gasoline, diesel fuel, or kerosene (taxable
       fuel) that has been taxed and that is sold to a State for the State’s exclusive use. This
       system is generally administered through claims by registered ultimate vendors (UV)
       that sell taxable fuel to States at a tax-excluded price and registered credit card issuers
       that bill States at a tax-excluded price on the State’s purchase of taxable fuel with their
       credit cards. Typically, a UV will sell taxed taxable fuel to a State at a tax-excluded
       price and make the claim itself. Alternatively, a State will purchase taxable fuel using a
       credit card. The credit card issuer will bill the State for the taxable fuel at a tax-excluded
       price and make the claim itself.

       The Service has become aware of situations where one State purchases taxable fuel at
       a tax-excluded price because it is for its exclusive use, and then resells it to another
       State for the latter State’s exclusive use. For example, a State-to-State sale happens
       when a county and a city want to consolidate resources. The county purchases enough
       taxable fuel for its own use as well as that of the city, then sells taxable fuel to the city
       for the city’s exclusive use or allows a city employee to purchase taxable fuel with a

PRENO-133522-10 2

credit card issued to the city at county facilities, which will also be for the city’s exclusive
use.

You asked the following questions regarding the validity of claims when States sell the
taxable fuel to other States:

   1. Will this resale of taxable fuel from the first State to the second State change
      the character of the first sale as being for the exclusive use of a State?

   2. If the answer to Question 1 is no, is the initial State required to obtain a
      nontaxable use certificate or other similar certificate on the sales of taxable
      fuel to the subsequent State? Similarly, does the initial state become a UV,
      which would require it to register as UV, buy the taxable fuel (probably at a
      tax-included price), and then make its own UV claim when it sells the taxable
      fuel to another State?

   3. For purposes of the Form 8849, Claim for Refund of Excise Tax, Schedule 2,
      Sales by Registered Ultimate Vendors, which requires the UV to list the name
      and taxpayer identification number of the State to which the UV sold taxable
      fuel, must the UV list the first State or the State that actually used the taxable
      fuel?

   4. May the State that purchased the taxable fuel by certifying that the fuel will be
      used for the exclusive use of a state sell such fuel to a federal agency without
      violating the terms of the certificate?

Section 4081(a)(1)(A) imposes a tax on certain removals, entries, and sales of taxable
fuel. Nothing in the Code exempts these transactions from tax simply because the
person otherwise liable for tax (or that person’s buyer) is a State. Rather, the Code
allows relief from the amount of the tax by certain credits, refunds, and payments,
which, under prescribed conditions, are available to registered credit card issues,
registered ultimate vendors, or the state itself.

The type of claim that a UV or a credit card issuer may make varies depending on the
identity of the claimant and the type of taxable fuel upon which the claimant is making
the claim. However, there are certain conditions that are required by each type of claim.
First, the claimant must be registered under § 4101. Second, § 4081 must have
imposed tax prior to the sale of the taxable fuel to the State. Third, the sale to the State
must be made for the exclusive use of a State. Fourth, the State must sign a certificate
under penalties of perjury certifying that the taxable fuel is for the exclusive use of the
State and the claimant must have no reason to believe that any information in the
certificate is false. Fifth, the claimant generally must have borne the burden of the tax,
or received the State’s written consent to the allowance of the claim.
PRENO-133522-10 3

In Rev. Rul. 68-141, 1968-1 C.B. 483, a municipality purchased gasoline tax free for its
exclusive use but resold some of the gasoline to a county for use by its sheriff’s
department. The ruling holds that the resale of gasoline to the county is a disposition
for the exclusive use of State or local government and is not taxable.

In Example 2 of Rev. Rul. 94-81, 1994-2 C.B. 412, the tribal government of a federally
recognized Indian tribe (which is treated like a State in this example) purchased
gasoline and diesel fuel for resale at a retail service station located on Indian lands.
The ruling holds that there is no exemption that would allow a State (or an Indian tribal
government) to purchase fuel tax free for resale to consumers. Therefore, fuel could
not be sold tax free to the tribal government for resale to consumers and no one could
claim a credit or payment equal to the tax previously imposed.

Although Rev. Rul. 68-141 was issued before the gasoline taxing structure was
changed to its present form, the general holding of the ruling is still valid under current
law; that is, the sale of gasoline from one State to another State for that State’s
exclusive use does not change the character of the original sale as being one for the
exclusive use of a state or local government. Thus, claims by a registered UV or
registered credit card issuer are not invalid simply because their State customer is going
to resell the taxable fuel in question to another State for that State’s exclusive use.
Conversely, if a potential claimant knows that its State customer will resell the taxable
fuel to a person that is not a State, such as a federal agency, then the potential claimant
knows that some information in the certificate is false and it could not make a valid
claim.

Because the character of the initial sale does not change when a State sells taxable fuel
to another State, the first State is not required to obtain a formal nontaxable use
certificate from the second State. Similarly, the first State does not become a UV by
selling taxable fuel to a second State. Therefore, the first State is neither required to
register as a UV nor required to reimburse the actual UV for the amount of the tax and
subsequently make its own UV claim for that amount. However, it is incumbent upon
both States to maintain sufficient records to demonstrate that the taxable fuel was used
exclusively for the use of a state.

Accordingly, if a State purchases taxable fuel for its exclusive use, certifying as such to
either a UV or credit card issuer, and then subsequently resells the fuel to another State
for that State’s exclusive use, the answers to your questions are as follows:

1. The resale of taxable fuel from the first State to the second State for the second
   State’s exclusive use does not change the character of the first sale because the
   fuel is for the exclusive use of a State.

2. Because the character of the initial sale does not change, the first State does not
   need to obtain a formal nontaxable use certificate from the second State and it
   does not become a UV.
   PRENO-133522-10 4

3. For purposes of the Form 8849, Schedule 2, the UV should list the State to which
   it initially sold the fuel.

4. The State that purchased the taxable fuel by certifying that the fuel will be used
   for the exclusive use of a state may not sell such fuel to a federal agency without
   violating the terms of the certificate. Federal agencies are not States and
   therefore such fuel would not be going for the exclusive use of a State. See Rev.
   Rul. 94-81.

Please call Charles J. Langley, Jr. at (202) 622-3130 if you have any further questions.