When is propane a taxable 'special fuel' in Colorado, and how must propane dealers license, report, and pay tax on it?
Plain-English summary
After Colorado began taxing propane as a "special fuel," the propane industry asked the Department five practical questions about licensing, bonding, and reporting in the Colorado Fuel Tracking System (COFTS) — a system built for motor fuels that fits propane awkwardly, since most propane is sold for home heating and grills, not vehicles.
The Department's answers:
- Licensing. "Special fuel" is fuel that is or may be used to propel a motor vehicle. A dealer must be licensed (§ 39-27-104) unless it is "certain" none of its propane will be used as motor fuel. Because propane is fungible, if any of a dealer's inventory may go to vehicles, all of the commingled inventory is special fuel. (Separate subsidiaries with strictly segregated inventories can split treatment.) Two safe harbors for "certain" non-motor use: propane sold to residential/commercial end users in heating tanks that can't fuel vehicles, and propane sold to retailers in barbeque-type tanks (if the dealer is certain the retailer doesn't sell it as motor fuel). Selling to another dealer is not "certain," so tax must be accrued. The Department expects unlicensed status to be "truly rare."
- Bond. A licensed dealer that makes no motor-fuel (or potentially-motor-fuel) sales need not post the § 39-27-104(2)(b) bond — and a dealer who licenses just to buy tax-free propane needn't bond until it starts making taxable sales.
- COFTS reporting. All licensees must report all propane sales in COFTS (§ 39-27-105(1)).
- Aggregation & gross gallons. § 39-27-105(1.3)(d) lets dealers aggregate sales by class of user; as an interim fix the Department allows reporting under artificial-EIN categories (residential, commercial heating, other commercial, retail-unsuitable-for-motor-fuel) and directs dealers exceeding the 12,000-gallon truckload limit to report via other delivery methods. But propane must be reported in gross gallons — § 39-27-101(11) defines "gallons" as gross gallons, and the CNG exception can't be extended to propane (and even CNG still reports gross).
- Carryover inventory. The excise tax is imposed on the first in-state acquisition, sale, offer for sale, or use (§ 39-27-102(1)(a)). COFTS taxes fuel as purchased, offsetting non-taxable sales — effectively taxing taxable sales plus carryover inventory each month, with a refund for fuel ultimately sold for non-taxable use. A dealer making exclusively non-taxable sales should contact the Department about bills the system wrongly generates.
Several burdens, the Department noted, flow from the statute itself and can't be fixed administratively. (Background point: GIL 13-025 had already held propane not destined for motor-vehicle use isn't subject to fuel tax.) As a GIL, this is general guidance only.
For the later change to net-gallon reporting, see [[gil-15-020-propane-reporting]] — the 2015 legislature (HB 15-1228) moved propane reporting to a net-gallon basis effective January 1, 2016, after this 2014 letter required gross gallons.
What this means for you
Propane dealers and distributors
Assume you must be licensed and report in COFTS in gross gallons unless you are certain your propane will never fuel a vehicle. The safe harbors (heating tanks; barbeque tanks to retailers) are narrow, and selling to another dealer breaks "certainty." If you only license to buy tax-free, you can skip the bond until you make taxable sales.
Dealers selling almost entirely for heating/grills
You'll likely still report through COFTS, but you can aggregate by class of user, and you're entitled to refunds for fuel sold for non-taxable purposes. If the system bills you despite exclusively non-taxable sales, contact the Department — those bills aren't due.
Accountants and tax professionals
Key fault lines: "special fuel" turns on possible motor-vehicle use (§ 39-27-101(27)); fungibility sweeps commingled inventory in; the tax point is the first acquisition/sale/offer/use (§ 39-27-102(1)(a)); and gross-gallon reporting was mandatory in 2014 (§ 39-27-101(11)) — but watch the later HB 15-1228 net-gallon change effective 1/1/2016.
Common questions
Q: Does a propane dealer have to be licensed?
A: Yes, unless it is certain none of its propane will be used to propel a motor vehicle. Because propane is fungible, any possible motor-vehicle use makes the whole commingled inventory special fuel.
Q: Can I report propane in net gallons?
A: Not under this 2014 letter — the statute defines "gallons" as gross gallons. (A later law, HB 15-1228, moved reporting to net gallons effective January 1, 2016.)
Q: Do I owe tax on leftover inventory each month?
A: Effectively, COFTS taxes taxable sales plus carryover inventory, because the tax attaches at purchase; you get a refund for fuel later sold for non-taxable use.
Q: I only sell propane for heating and grills. Am I taxed?
A: Such sales can fall within safe harbors as non-motor-fuel use, and you can claim refunds for non-taxable fuel — but you may still need to report, and selling to another dealer breaks the "certainty" that avoids tax.
Q: Can I rely on this letter?
A: No. It's a General Information Letter — general guidance only, not binding on the Department. A binding answer requires a private letter ruling.
Citations and references
Statutes and prior guidance:
- § 39-27-101(27), (7), (11), C.R.S. ("special fuel"; "distributor"; "gallons" = gross gallons)
- § 39-27-102(1)(a), C.R.S. (tax on fuel acquired/sold/offered/used)
- § 39-27-104, C.R.S. (licensure); § 39-27-104(2)(b) (bond)
- § 39-27-105(1), C.R.S. (COFTS reporting); § 39-27-105(1.3)(d) (aggregation by class of user)
- GIL 13-025 (Dec. 9, 2013) (non-motor-vehicle propane not subject to fuel tax)
- 1 CCR 201-1, Rule 24-35-103.5 (GIL/PLR procedure)
Source
- Landing page: https://tax.colorado.gov/all-letter-rulings
- Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-14-023.pdf
Original ruling text
Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]
GIL-14-023
September 18, 2014
XXXXXXXXXXXXXX
ATTN: XXXXXXXXX
XXXXXXXXXXXXXX
XXXXXXXXXXXXXX
Re: Fuel Taxation and Reporting of Propane
Dear XXXXXXXXXXXX,
You submitted a request for guidance regarding the appropriate treatment of propane for
fuel tax and reporting purposes.
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 Rule 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 Department Rule 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.
Issues
1. Must propane dealers be licensed under Article 27 of Title 39 now that propane is taxed
in the same manner as other "special fuels", as defined by section 39-27-101(27) CRS?
2. If a propane dealer is licensed, is it required to post the bond required by section 3927- 104(2)?
3. Are all propane dealers (licensed or unlicensed) required to report sales of fuel in
the Colorado Fuel Tracking System ("COFTS")?
4. If a propane dealer is required to report on COFTS, may it aggregate sales and report
DR 4010A (06/11/14)
them on a "net gallons" basis?
5. Must a propane dealer that sells no taxable propane pay tax on all of the
dealer's carryover inventory at the end of every month?
Background
Representatives of the propane industry have approached the Department with these
questions because the Department's fuel tracking system ("COFTS") presents difficulties
when applied to fuels that are not generally sold as motor fuels. In particular, COFTS'
calculation of tax imposes tax on substantial quantities of fuel that will ultimately not be
subject to fuel tax. In addition, COFTS requires reporting of fuel sales on a customer by
customer basis, even though many propane customers are individual end users who will
not resell the fuel.
The Department issued GIL 13-025 on December 9, 2013 to answer the question whether
propane sold for uses other than propelling a motor vehicle is subject to fuel tax. As noted
in that GIL, "special fuel" is only fuel that will or may be used to propel a motor vehicle. If a
dealer is certain that propane will not be used for purposes of propelling a motor vehicle,
the dealer may avoid paying fuel tax on such fuel pursuant to Section 39-27-102, C.R.S
and thereby avoid the need for the ultimate consumer of the fuel to apply for a refund of
the tax.
The application of the fuel tax reporting regime to propane raises questions because
propane is a fuel that is transitioning into being used as motor fuels. It is still not in wide
use as a motor vehicle fuel. Therefore, there are many propane dealers whose sales
distribution networks are designed to sell only non-motor vehicle fuel. Two such examples
would be 1) a propane distributor who sells exclusively for home-heating purposes and 2)
a dealer who sells propane to a retailer exclusively for barbeque grills.
Propane industry representatives argue that the COFTS system presents unique and
undue burdens on propane industry participants and ask that the Department review the
fuel tax reporting and taxation requirements with respect to propane specifically.
Discussion
- Licensure - Must propane dealers be licensed under Article 27 of Title 39 now that
propane is taxed in the same manner as other special fuels?
Although "special fuels" are defined as fuels used in a motor vehicle, and although most
propane sales are, at present, not ultimately destined for motor vehicle use, as noted in
GIL 13-025, only propane dealers that are certain the propane will not be used in motor
vehicle use may avoid the designation of "special fuel licensee" under the statutes. Thus,
although the Department understands the problem that propane dealers face in knowing
that much of their fuel is not destined to be motor fuel, nevertheless, as further explained
below, propane dealers that deal in fuel that may be used in a motor vehicle are dealing in
special fuel under the statutes.
All propane dealers who sell propane that may be destined for motor vehicle use must be
licensed under section 39-27-104, C.R.S. Although a dealer exclusively selling propane
2
DR 4010A (06111114)
that the dealer is certain will not be used in a motor vehicle is not a distributor pursuant to
the definition in section 39-27-101(7), C.R.S., the definition of special fuel encompasses all
fuel that is or may be destined for use in motor vehicles. The definition speaks in the
present or past tense ("used to propel"). However, the statute must be enforced with
respect to the future use of fuel because the tax is imposed when the fuel is "acquired,
sold, offered for sale, or used."1 Thus, only fuel that a dealer is certain will not be used as
a motor fuel is not a "special fuel" governed by the fuel tax statutes and regulations.
Because propane is fungible, if a dealer has propane that is or may be destined for motor
vehicle use and also has propane that is not destined for motor vehicle use, all propane in
the dealer's inventory is "special fuel" within the meaning of the statute. The Department
would allow two separate subsidiaries that maintain separate inventories to treat fuel
owned by one subsidiary as "special fuel" and fuel owned by the other subsidiary as non
"special fuel" so long as the two inventories are kept strictly segregated. However, in the
absence of separate corporate form, the Department cannot be assured that the
inventories are not commingled.
The Department recognizes that the term "certain" is a difficult standard to meet. However,
given the structure of the statutes, we believe it to be the appropriate standard. The
Department offers the following "safe-harbors" in determining whether sales are "certain"
not to be used in motor vehicle use.
First, propane sold exclusively to residential and commercial end users in tanks not
equipped to dispense the propane into motor vehicles (e.g., for home or commercial
heating) is not destined for motor vehicle use.
Second, propane sold exclusively to retailers in containers that are intended for end users
and cannot reasonably be used to dispense the propane into a motor vehicle (e.g.,
barbeque tanks) is not propane destined for motor vehicle use if distributor is certain that
the retailer does not sell or use propane as a motor fuel.
In contrast, a propane dealer that sells to another propane dealer cannot be certain of the
end-use of the fuel. Therefore, a propane dealer who sells to another dealer that is not
licensed may not sell propane without accruing the fuel tax. As a consequence, although a
propane dealer that sells fuel exclusively for non-motor vehicle purposes need not be
licensed, such a dealer may choose to license in order to be able to purchase tax free fuel
if they buy from an in-state distributor.
Thus, although the Department recognizes that there may be circumstances in which a
propane dealer need not be licensed, the Department anticipates that this will be a truly
rare circumstance. The statutory scheme of motor fuel taxation is dependent on full
reporting by all participants in the fuel distribution system and the Department must
enforce the statutes accordingly.
2. If a propane dealer is licensed, is it required to post the bond required by section 39-27104(2), C.R.S.?
Any licensed propane dealer who makes no motor fuel (or potentially motor fuel) sales
1
Section 39-27-102( I )(a), C.R.S.
3
DR 4010A (06/11/14)
need not post the bond required by section 39-27-104(2)(b), C.R.S. If a propane dealer
that makes no taxable sales wishes to license in order to facilitate the purchase of tax-free
propane, it need not post a bond until it plans to start making taxable or potentially taxable
sales.
-
Are all propane dealers required to report sales of fuel in the Colorado Fuel Tracking
System ("COFTS'J?
Any licensed propane dealer must also report all sales of propane in COFTS. The
requirements of section 39-27-105(1), C.R.S. apply to all licensees. The Department is
sympathetic to the concerns expressed by propane dealers with regards to the COFTS
reporting requirements.
As noted below, the Department will make a number of concessions to the circumstances
of propane dealers. However, some problems raised by representatives of the propane
industry are a function of the statutory scheme and cannot be altered within the
Department's administrative powers. -
If a propane dealer is required to report on COFTS, may it aggregate sales?
Section 39-27-105(1.3)(d), C.R.S. allows propane dealers to aggregate sales based on a
particular type or class of user. COFTS currently requires sales to be reported on a
transaction by transaction basis. With appropriate funding, COFTS can be reprogrammed
to allow aggregated reporting.
However, in the interim, the Department will allow propane dealers to aggregate in-state
sales by category by treating categories as artificial purchasers and by treating the
aggregated sales as a single sale.
Propane dealers may report under the following categories: - "Residential use" (use artificial EIN 11-1111111);
- "Commercial heating use" (use artificial EIN 22-2222222);
- "Other commercial use" (use artificial EIN 33-3333333); or
- "Retail sales unsuitable for motor fuels" (such as barbeque tanks - use artificial EIN 444444444).
Dealers have also raised concerns that the system limits their reporting to 12,000 gallon
increments. The COFTS system does limit the total gallons for a single truckload to
12,000. However, there are a number of other delivery methods that do not have a gallons
limitation. For propane dealers who are aggregating sales and need to report sales of
more than 12,000 in a category, the Department directs the dealer to report these sales as
other than by truckload.
If the Department is funded to do so, the Department will modify the COFTS system to
allow propane dealers to report aggregated sales by their specific delivery method without
a gallongage limitation.
4.1 May propane dealers report gallons on a "net gallons" basis rather than a gross basis?
With respect to "net" gallonage reporting, section 39-27-101(11), C.R.S. defines "gallons"
4
DR 4010A (06/11/14)
as "gross gallons". Although the statute does contain an exception for compressed natural
gas (CNG), we cannot extend that exception to liquefied petroleum gas because of the
very specific nature of the statute. Moreover, that exception for CNG still requires "gross"
reporting.
- Must a propane dealer pay tax on its carryover inventory every month?
While the Department is sympathetic to the concerns raised by the propane dealers, the
statutes are very specific about the point of taxation and its imposition. It is the nature of
the excise tax that tax is imposed on the purchase of the taxable or potentially taxable fuel.
The tax is imposed on the first in-state occurrence of the fuel being "acquired, sold, offered
for sale, or used".2
Thus, the COFTS system imposes tax on the fuel as it is purchased by the dealer. If a
dealer sells some of that fuel during the month in a non-taxable transaction, the system
offsets the non-taxable fuel sold against the total tax due on fuel purchases made during
the month. This approach has the effect of essentially imposing tax on the sum of taxable
sales made during the month plus any carryover inventory that the dealer has on hand.
As noted above, the COFTS system was designed to deal with fuels that are principally
motor fuels. The addition of propane to the reporting system presents the COFTS system
with certain challenges. In particular, the system does not have a mechanism for accepting
the reporting of a propane dealer who makes exclusively non-motor fuel sales.
The COFTS system will require programming to allow it to accept reporting without
imposing tax from propane dealers who exclusively make non-taxable sales. Such dealers
should contact the Department to deal with bills that may be generated by the COFTS
system that are not due.
With respect, however, to propane dealers who do make some taxable sales, but the bulk
of whose sales are non-taxable, the COFTS system is appropriately calculating the tax at
the time of the filing of the return. As noted above, the statutory scheme imposes the tax
as an excise tax on the first acquisition, sale, offer for sale, or use of taxable or potentially
taxable fuel.3 The dealer will be refunded any tax paid on fuel that is ultimately sold for
non-taxable purposes.
We hope these responses address some of the concerns raised by the industry. We
recognize that a number of issues remain that the Department has not been able to
accommodate. However, we see those issues as arising from statutory requirements over
which the department has no discretion.
Miscellaneous
This letter represents the good faith opinion of Department personnel who are
knowledgeable on state taxes issues. However, the Department does not make a
2
section 39-27-102( I )(a), C.R.S
"The tax imposed shall be computed upon the total amount of gasoline or special fuel ... acquired by each
distributor in this state ..... •· section 39-27-102 ( I )(a), C.R.S.
3
5
DR 4010A (06/11/14)
specific determination here on any of the issues raised and the Department is not bound
by this general information letter.
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
6
DR 4010A (06111114)