Is the federal excise tax on jet fuel included in the price Colorado sales tax is calculated on, or is it backed out?
Plain-English summary
An out-of-state aviation and marine fuel marketer asked whether the federal excise tax (FET) on jet fuel gets included in the price on which Colorado sales tax is calculated, or whether it's backed out as a direct federal tax.
The Department's answer turns on a direct-vs-indirect distinction:
- Aviation fuel for Part 121 air carriers, Part 135 commuter air carriers, and direct air carriers is exempt from Colorado excise fuel tax, so those carriers pay sales tax on their fuel instead.
- Colorado sales tax is figured on the price charged to the customer — but a direct federal tax is excluded from that base. A direct federal tax is one levied on the purchaser (here, the buyer of the fuel). An indirect federal tax is levied on someone else — a seller, wholesaler, or manufacturer — and is not excluded, even if its cost is expressly passed through to the buyer. (Example: a federal luxury tax on the buyer of a car is direct and excluded; a federal excise tax on the manufacturer stays in the base even when passed to the consumer.)
- Applied to jet fuel: the FET is excluded from the Colorado sales tax base when the aircraft operator — the buyer and ultimate consumer (a Part 121/135 or direct air carrier) — is itself liable for and pays the FET (e.g., fuel removed directly into the aircraft's tank under qualifying conditions). But if the fuel is owned by a "position holder" who sells it to the end user and the position holder pays the FET, that FET is an indirect tax and is not subtracted from the price paid by the operator — even though the position holder passes the cost along. A two-party-exchange FET that lands on the aircraft operator/ultimate consumer is likewise a direct tax excluded from the base.
In short: the FET is out of the sales tax base only when it is a direct tax on the fuel buyer (the operator); when it's paid by an upstream party and passed through, it stays in the base.
What this means for you
Airlines and aircraft operators
If you (the operator/ultimate consumer) are the party liable for and paying the FET on fuel pumped into your aircraft, that FET is excluded from the Colorado sales tax base — don't pay sales tax on top of your own FET. But if your supplier (a position holder) paid the FET and merely passes the cost to you, it's part of the taxable price.
Fuel marketers and position holders
Who is statutorily liable for the FET drives the answer, not who ultimately bears the cost. FET you pay as a position holder and pass through stays in the buyer's sales tax base; FET the operator pays directly comes out. Track the liable party on each transaction.
Accountants and tax professionals
The base-exclusion rule (§ 39-26-102(7)(a)) backs out only direct federal taxes — those imposed on the purchaser — per Determination No. 2 (1993) (and the immunity analogy in United States v. Lohman). Pass-through of an indirect FET (position holder, manufacturer) doesn't remove it from the base. Liability assignment under the IRC (see IRS Pub. 510) decides direct vs. indirect for each fueling/exchange. Contrast the place-of-sale refund question in [[gil-14-003-domestic-jet-fuel-used-in-international-flights]] and the refundable-FET exception in [[gil-15-014-sales-taxability-of-federal-excise-tax-on-aviation-fuel-later-refunded]].
Common questions
Q: Is the federal excise tax on jet fuel part of the Colorado sales tax base?
A: Only sometimes. It's excluded when it's a direct federal tax on the fuel buyer (the aircraft operator). It's included when an upstream party (like a position holder) pays it and passes the cost through.
Q: What's the difference between a direct and indirect federal tax here?
A: A direct federal tax is levied on the purchaser and is backed out of the sales tax base. An indirect one is levied on a seller, wholesaler, or manufacturer and stays in the base even if passed on.
Q: My supplier passed the FET cost to me on the invoice — is it taxable?
A: If the supplier (e.g., a position holder) was the party liable for the FET, then yes — it's an indirect tax included in the price, even though it was passed through to you.
Q: When do I get to exclude the FET?
A: When you, the aircraft operator and ultimate consumer, are liable for and pay the FET directly (such as fuel removed into your aircraft's tank under qualifying conditions).
Q: Can I rely on this letter?
A: No. A General Information Letter is general guidance, is not binding on the Department, and makes no determination on any specific facts. It also doesn't cover self-collected home-rule city taxes.
Citations and references
Statutes:
- §§ 39-27-101(19), (20), (6), C.R.S. (Part 121, Part 135, and direct air carrier definitions)
- § 39-27-102(1)(a)(IV)(B), C.R.S. (aviation fuel exempt from Colorado excise fuel tax)
- §§ 39-26-102(7)(a), 39-26-104(1)(a), C.R.S. (purchase price; sales tax; direct federal tax excluded from base)
Guidance and authorities:
- Colorado Department of Revenue Determination No. 2 (1/1/1993) (direct vs. indirect federal tax)
- United States v. Lohman (federal-tax immunity for taxes on the purchaser)
- IRS Publication 510 (Rev. July 2012) (FET liability — pp. 5, 11)
- Department Rule 24-35-103.5 (GIL / PLR procedure)
Source
- Landing page: Colorado Sales & Use Tax Letter Rulings
- Original PDF: GIL-14-004.pdf
Original ruling text
Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]
GIL-14-004
February 5, 2014
XXXXXXXXXXXXXXXX
ATTN: XXXXXXXXXXX
XXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXX
Re: Sales Taxability of Federal Excise Tax on Jet Fuel Sales
Dear XXXXXXXXXXX,
You submitted on behalf of XXXXXXXXXXXXXXXXXXXXXXXX (“Company”) a request for
guidance regarding the sales taxability of federal excise taxes on jet fuel sales.
The Colorado Department of Revenue (“Department”) issues general information letters and private
letter rulings. A general information letter provides a general overview of the relevant tax issues
and is not binding on the Department. A private letter ruling provides a specific determination for a
specific set of facts, is binding on the Department but not on the taxpayer, and requires payment of
a fee. For more information about general information letters and private letter rulings, please see
Department regulation 24-35-103.5 at www.colorado.gov/revenue/tax > Tax Library > Rulings.
The Department initially treats your request as one of a general information letter. If you would like
the Department to issue a private letter ruling on the issues you raise, you can resubmit a request
and fee in compliance with regulation 24-35-103.5. It is important to remember that general
information letters, such as this one, are general discussions of tax law and are not a determination
of the tax consequence of any particular action or inaction.
Issue
Are federal excise taxes included in the calculation of Colorado sales taxes on jet fuel sales in
Colorado?
Background
Company is based outside of Colorado and is a leading marketing company of aviation and marine
fuel products. Effective January 2005, the federal government changed the structure of the federal
excise tax. Company asserts that due to this change, the federal excise tax is now considered a
direct federal tax and, thus, not included in the calculation of sales tax because the purchase price
upon which sales tax is calculated excludes any direct tax imposed by the federal government.
Discussion
Colorado levies sales tax on fuel, unless the fuel is subject to Colorado excise tax on fuel described
in §39-27-102, C.R.S. Aviation fuel used by domestic and foreign “Part 121 air carriers,”1 “Part 135
commuter air carriers,”2 and “direct air carriers,”3 are exempt from Colorado excise fuel tax.4
Therefore, these exempt air carriers must pay sales tax on their fuel purchases.
Sales tax is calculated based on the price charged to the customer. However, if the purchaser is
levied a direct federal tax, the sales tax calculation excludes the direct federal tax.5 A direct federal
tax is a tax levied by the United States on the taxpayer, which, in the case of sales tax, is on the
purchaser. A direct federal tax is distinguishable from an indirect federal tax, which is a tax levied
by the United States on a person other than the purchaser, such as the seller, wholesaler, or
manufacturer.6 For example, a federal tax levied on the purchaser of a luxury motor vehicle is
direct tax, and, therefore, excluded from the calculation of the Colorado sales tax. In contrast, a
federal excise tax on a motor vehicle manufacturer is not excluded from the calculation of Colorado
sales tax paid by the consumer to the automotive retailer even if the retailer expressly passes the
cost of the federal tax on to the consumer.
The United States levies an excise tax on, among things, the sale, exchange, or entry of aviation
gasoline and kerosene used in aviation. In some instances, the federal excise tax is a direct federal
tax for purposes of the Colorado sales tax because the tax is levied on the aircraft operator, which
is the ultimate consumer of the aviation fuel. For example, an aircraft operator is liable for federal
excise tax on fuel removed directly into the fuel tank of an aircraft used in commercial aviation if
certain conditions are met.7 The aircraft operator is also liable for Colorado sales tax, and not
Colorado excise fuel tax, if it is a “Part 121 air carrier”, “Part 135 air carrier”, or a “direct air carrier”,
and, if the aircraft operator pays the federal excise tax, that tax is excluded from the calculation of
the Colorado sales tax. However, if the fuel is owned by the position holder, someone who sells
fuel to the end user, and the federal excise tax is paid by the position holder, then the federal excise
tax is not subtracted from the price paid by the end user (i.e., aircraft operator) for purposes of
calculating the Colorado sales tax, even though the position holder expressly passes the cost of the
federal excise tax on to the end user. Similarly, a federal excise tax is imposed on the party
receiving aviation gas as part of a two-party exchange if certain qualifications are met.8 If the
recipient is an aircraft operator which is also the ultimate consumer and, therefore, liable for
Colorado sales tax, then the direct federal excise tax is not included in the sales tax calculation.
Miscellaneous
This letter represents the good faith opinion of Department staff who are knowledgeable of state
taxes issues. However, the Department does not make a specific determination here on any of the
issues raised and the Department is not bound by this general information letter.
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§39-27-101(19), C.R.S.
§39-27-101(20), C.R.S.
§39-27-101(6), C.R.S.
§39-27-102(1)(a)(IV)(B), C.R.S.
§§39-26-102(7)(a) and 104(1)(a), C.R.S.
Colorado Department of Revenue Determination No. 2 (1/1/1993); compare, United States v. Lohman, 74 F.2d
863 (8th Cir. C.A. 1996) (Immunity from direct state tax means a state tax levied on federal government as
purchaser and not state tax that is levied on someone other than the purchaser, even though cost of tax passed
on to federal government).
See IRS Publication 510 (Rev. July 2012), pg. 11.
See IRS Publication 510 (Rev. July 2012), pg. 5.
2
The Department administers state and state-administered local sales and use taxes. This letter
does not address sales and use taxes administered by home-rule cities and home-rule counties.
You may wish to consult with local governments which administer their own sales or use taxes
about the applicability of those taxes. Visit our web site at www.colorado.gov/revenue/tax for more
information about state and local sales taxes.
Enclosed is a redacted version of this letter. Pursuant to statute and regulation, this redacted letter
will be made public within 60 days of the date of this letter. Please let me know in writing within that
60 day period whether you have any suggestions or concerns about this redacted letter.
Sincerely,
Office of Tax Policy
Colorado Department of Revenue
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