When a commercial airline gets a federal-excise-tax refund on aviation fuel, can it also recover the Colorado sales tax it paid on that refunded excise-tax amount?
Plain-English summary
A fuel supplier sells aviation fuel and charges its customers both the federal excise tax (FET) and Colorado sales tax on the full price (which includes the FET). One customer is a commercial airline. The default FET on aviation-grade kerosene is $0.244/gal, levied when the fuel is removed from the refinery/terminal rack — so the supplier is usually directly liable and passes the full $0.244/gal on to the airline, including it in the price on which Colorado sales tax is charged. But fuel actually used in commercial aviation bears only a $0.044/gal FET, so the airline is eligible for a $0.20/gal refund from the IRS. The question: once the airline gets that $0.20/gal FET back, can it also recover the Colorado sales tax it paid on that refunded amount?
The Department's answer is yes — and the reasoning is a careful distinction from its usual rule.
Normally, sales tax is transactional and frozen at the sale. Tax is computed on the purchase price (which includes indirect costs like excise taxes paid by the supplier, Reg. 39-26-102.7(a)), and the parties can't retroactively adjust the price for later events — that's the rule the Department applies when a seller later cuts a price for damages or an early-payment discount (citing Southern California Edison).
But this refund is different. It is not a discretionary, contingent, after-the-fact price cut. The airline was registered as a commercial airline at the time it bought the fuel, and so long as the fuel was actually used for commercial aviation, it was always entitled to the partial FET refund from the moment of purchase. The full $0.244/gal was levied up front only as an administrative measure to prevent diversion of fuel to non-aviation uses. So the refundable $0.20/gal is more like a bond or refundable security deposit than a true part of the purchase price — the IRS merely holds it until it gets proof of commercial-aviation use. The Department called it "more like an exemption than a subsequent price adjustment." Because the refundable amount was never really part of the purchase price, a refund of the state sales tax paid on it reflects that reality.
The Department reinforced the point with a symmetry argument: had the airline instead waived the FET refund and assigned it to the supplier, the supplier would have billed the airline only the $0.044/gal — and the airline would never have paid sales tax on the $0.20/gal at all. Refunding the sales tax now puts the economically equivalent transaction in the same place. (It analogized to GIL-07-033, where a beer maker's later credit for product used as free samples was treated as a correction of the originally intended price, not a post-sale change.)
Who processes the refund? Under § 39-26-703, either the airline may claim the refund or the supplier may claim a credit on its sales tax return after refunding the tax to the airline — at the supplier's election.
What this means for you
Airlines and commercial aircraft operators
If you paid Colorado sales tax on the full $0.244/gal FET built into your fuel price and then received the $0.20/gal commercial-aviation FET refund from the IRS, you can also recover the state sales tax paid on that refunded portion — it was effectively a deposit, not part of the fuel's price. Coordinate with your fuel supplier on who files (you, or the supplier via a credit), since it's the supplier's election.
Aviation-fuel suppliers and FBOs
When you pass on the full default FET and your commercial-airline customer gets the partial FET refund, the matching sales tax on the refunded FET is recoverable. You can either refund the airline and take a § 39-26-703 credit on your return, or let the airline claim the refund directly — your call. Note the special "secure airport" scenario (only a couple of Colorado airports) where the airline is the direct FET payor at $0.044/gal — see GIL 14-004 for that variant.
Accountants and tax professionals
The key move is characterizing the refundable FET as a bond/deposit / quasi-exemption rather than purchase price, which escapes the usual "no retroactive price adjustment" rule (Reg. 39-26-102.7(a); So. Cal. Edison). Mechanically, the recovery runs through § 39-26-703 (buyer refund or retailer credit). Aviation fuel itself is taxable under § 39-26-715(1)(a)(I); the FET framework is I.R.C. §§ 4081 and 6427(l).
Common questions
Q: Can an airline recover Colorado sales tax on the refunded part of the federal excise tax?
A: Yes. The refundable FET acts like a deposit rather than part of the fuel's purchase price, so the sales tax paid on that refunded amount should be refunded too.
Q: Why isn't this barred by the "no retroactive price adjustment" rule?
A: Because the refund isn't a discretionary post-sale price cut. A commercial airline was entitled to the partial FET refund from the moment of purchase, so the refundable amount was never truly part of the price — it's more like an exemption or a refundable deposit.
Q: Who files for the sales-tax refund — the airline or the supplier?
A: Either, under § 39-26-703 — the airline can claim a refund, or the supplier can refund the airline and take a credit on its return, at the supplier's election.
Q: What's the "secure airport" exception?
A: At certain secure airports (only two in Colorado as of 2015), the fuel goes directly into the aircraft and the airline is the direct FET payor at the $0.044/gal commercial rate. GIL 14-004 addresses the state-sales-tax treatment there.
Q: Can I rely on this letter?
A: No. A General Information Letter is general guidance and is not binding on the Department; it makes no determination on any specific facts. It also doesn't cover self-collected home-rule city taxes.
Citations and references
Statutes and rules:
- § 39-26-715(1)(a)(I), C.R.S. (sales tax on aviation fuel)
- § 39-26-104(1)(a), C.R.S. (sales tax on retail sales)
- § 39-26-102(7)(a), C.R.S. (purchase price)
- § 39-26-703, C.R.S. (buyer refund / retailer credit)
- 1 CCR 201-4, Reg. 39-26-102.7(a) (purchase price includes indirect costs such as excise taxes)
Federal references:
- I.R.C. § 4081 (FET on kerosene/aviation fuel; removal from refinery/terminal rack); I.R.C. § 6427(l) (commercial-aviation refund); IRS Publication 510; IRS Notice 2005-4
Department guidance:
- GIL 07-033 (later credit for free-sample product = correction of originally intended price)
- GIL 14-004 (state sales tax at "secure" airports where the airline is the direct FET payor)
Cases cited:
- Southern California Edison Co. v. State Board of Equalization, 7 Cal. 3d 652, 498 P.2d 1014 (1972)
Source
- Landing page: Colorado Sales & Use Tax Letter Rulings
- Original PDF: GIL-15-014.pdf
Original ruling text
Office of Tax Policy, P.O. Box 17087, Denver, CO 80217-0087
GIL-15-014 — May 28, 2015
Re: Sales Taxability of Federal Excise Tax on Aviation Fuel Later Refunded to Customers
You submitted on behalf of the Company a request for guidance to determine whether an airline who received a refund of federal excise tax is entitled to a refund of state sales tax paid on the amount of federal excise tax refunded. […] The Department treats this request as one for a general information letter.
Issue
- An airline receives a refund of federal excise tax paid on an earlier purchase of aviation fuel. Would the airline be entitled to a refund of state sales tax paid on the amount of federal excise tax refunded?
- If so, should the aviation fuel supplier refund the state sales tax to the airline directly or should the airline seek the refund from the Department?
Background
Company is a supplier of aviation fuel and services. Company charges its customers both federal excise tax and Colorado state sales tax on its sales of aviation fuel. One of its customers is a commercial airline ("Airline") which requests a refund of state sales tax paid on refunded federal excise tax for aviation fuel it purchased. Company purchases aviation fuel from a supplier. The IRS levied a federal excise tax ("FET") of $.244/gal on this sale. Company passed on the full cost of the FET on the aviation fuel to Airline. Company also charged Airline state sales tax on the full purchase price of the sale, including the FET. Airline is registered with the IRS as a "commercial airline." Aviation fuel used in commercial aviation is subject to a $.044/gal FET. Airline is eligible for a $.20/gal refund from the IRS. Airline is requesting that Company credit them for state sales tax paid on this exempted amount ("Refundable Amount").
Discussion
1. Taxability of the Refundable Amount. Company's sales of aviation fuel to Airline are subject to Colorado sales tax. [§ 39-26-715(1)(a)(I), C.R.S.] Generally, the United States levies by default a $.244/gal FET on the sale, removal, or entry of kerosene, including special kerosene blends used as aviation fuel. The incidence of taxation is the removal of the kerosene from either a refinery or terminal rack. The aviation fuel supplier removes the kerosene … and is, thus, directly liable for the FET. … In contrast, the incidence of state sales tax always falls on the last step in the transaction — the retail sale of the aviation fuel from the retail supplier to the aircraft operator. [§ 39-26-104(1)(a), C.R.S.; Reg. 26-102.9.]
In some instances, the aircraft operator itself can be the direct payor of the FET [at "secure" airports — only two in Colorado as of 2015; see GIL 14-004]. … If the aviation fuel is not directly removed into the aircraft operator's aircraft, the default FET of $.244/gal is initially levied on the aviation fuel supplier. If the aircraft operator is registered as a commercial airline and it used the aviation fuel for commercial aviation purposes, the $.044/gal commercial aviation rate is achieved through a refund of $.20/gal to either the aviation fuel vendor or the aircraft operator. … In either case, the aircraft operator effectively pays an FET rate of $.044/gal. … in the first case the aircraft operator would, at least initially, pay a higher state sales tax because the full default $.244 FET is included in the purchase price.
We start with the general rule that sales tax is a transactional tax. … Any events that occur after the transaction generally do not affect the taxability of the transaction. The initial purchase price, including any indirect costs such as excise taxes paid by the retailer or manufacturer, determines the amount of sales tax paid by the purchaser. The parties cannot retroactively adjust this price in light of subsequent events. [Reg. 39-26-102.7(a); §§ 39-26-102(7)(a), 39-26-104(1)(a); cf. So. Cal. Edison.] This principle is usually applied when a retailer retroactively lowers the initial purchase price as compensation for damages or provides a discount as an inducement to accelerate payments …
However, this situation is somewhat different from the general rule. It is not a price adjustment based on a subsequent, unanticipated contingency or a later discretionary act by the buyer or seller. Instead, it is based on a non-contingent price adjustment. It is more like an exemption than a subsequent price adjustment.
The Airline's initial purchase of the aviation fuel and the subsequent FET refund can be thought of as one transaction: the purchase of aviation-grade kerosene for its use as fuel for commercial aircraft. Airline was registered with the IRS as a "commercial airline" when it initially purchased the aviation fuel … As long as the aviation fuel was actually used for commercial aviation purposes, Airline was always entitled to a partial refund of the FET from the time of the purchase. The default FET rate was levied … as an administrative measure to prevent diversion … Therefore, the Refundable Amount is more like bond or refundable security deposit than an actual part of the purchase price. … It is not part of the purchase price of the transaction. A refund of the state sales tax paid on the Refundable Amount would reflect this reality.
[Symmetry example: had Airline waived its right to the FET refund and assigned it to Company, Company would have assessed Airline only $.044/gal and Airline would never have paid state sales tax on the Refundable Amount. … Without this refund, Airline would be in effect paying a higher state sales tax on a functionally equivalent transaction.]
Our guidance here is similar to that given in GIL-07-033 [beer manufacturer's later credit for free-sample product treated as a correction of the originally intended price, not a post-sale change]. We think the same result applies here with respect to the aviation fuel price adjustment.
2. Either the Airline or Company may apply for the refund of sales tax. Section 39-26-703, C.R.S. authorizes either the buyer to claim a refund or the retailer to claim a credit on its sales tax return if it refunds the sales tax to the buyer. Thus, in this case, either the Airline or Company may effectuate the refund, at the Company's election.
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 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.
(Condensed from the official PDF; see the linked source for the complete text and footnotes.)