Is the federal excise tax on fuel included in the Kansas sales tax base when it is a separate line on the invoice?

Plain-English summary

A petroleum retailer asked a "tax on a tax" question: should Kansas sales tax be charged on the federal excise tax on dyed diesel, dyed kerosene, or aviation fuel when the federal excise tax is a separate line on the invoice? The answer is yes — the federal excise tax is part of the "selling price" and goes into the Kansas sales tax base.

Why sales tax reaches this fuel at all. Kansas motor fuel tax is imposed on the number of gallons sold (K.S.A. 79-3408), at the special-fuel rate (K.S.A. 79-34,141). But there is no motor fuel tax on dyed diesel (non-highway use) or on aviation fuel sold as such. When Kansas motor fuel tax is not charged, sales tax is imposed on the selling price unless the sale is otherwise exempt (K.S.A. 79-3602(g)). K.S.A. 79-3606(a) exempts fuel on which a Kansas sales or excise tax has already been paid — so if the gallonage fuel tax was not paid (dyed diesel, aviation fuel), the retailer must instead collect sales tax on the selling price, unless a specific exemption (e.g., consumed-in-production by farmers, interstate common-carrier refrigeration units, aviation fuel used by licensed airlines/carriers) is claimed with a completed exemption certificate.

Why the federal excise tax is inside the tax base. The Department explained that the analysis turns on where the legal incidence of the federal excise tax lies. Where that incidence falls on the producer/retailer rather than the consumer, the tax is simply part of the retailer's cost of doing business and gross receipts — even if it is passed through to the customer as a separate line item. The U.S. Supreme Court held exactly this in Gurley v. Rhoden, 421 U.S. 200 (1975), allowing the federal fuel excise tax to be included in a state's sales tax base because its legal incidence is on the statutory producer. The Kansas Supreme Court reached the same result on similar reasoning in In re Tax Appeal of Atchison Cablevision, L.P., 262 Kan. 223 (1997) (city franchise fees imposed on the provider are in the sales tax base even when billed as a line item).

Bottom line. Federal fuel excise taxes (the ruling cites IRC § 4081 rates on gasoline, aviation gasoline, and diesel, and the IRC § 4091 one-cent leaking-underground-storage-tank tax on aviation fuel) are not taxes on consumers; they must be included in the "selling price" subject to Kansas sales tax, and sales tax should be charged on them even when the federal excise tax is a separate line item.

What this means for you

Fuel retailers and distributors

When you sell fuel on which no Kansas motor fuel (gallonage) tax was collected — such as dyed diesel or aviation fuel — you generally must collect Kansas sales tax on the selling price unless the buyer gives you a valid exemption certificate. And when you compute that sales tax, include the federal excise tax in the taxable base, even if you show it as its own line on the invoice.

The "separate line item" doesn't change the answer

Passing a tax through as a labeled line item does not remove it from the sales tax base when the tax's legal incidence is on you (the producer/retailer). This is the core holding of Gurley v. Rhoden and Atchison Cablevision.

Confirm current rates and citations

The ruling quotes 2002-era rates (special-fuel tax of $.25/gallon; specific IRC § 4081/§ 4091 cents-per-gallon figures) and the then-current statutes. Fuel tax rates and code sections change frequently — confirm the current rates and statutory citations before relying on the specific numbers here.

Common questions

Q: Is Kansas sales tax charged on the federal excise tax on fuel?
A: Yes. The federal excise tax is part of the selling price and is included in the Kansas sales tax base, even when it is a separate line item on the invoice.

Q: Why isn't this an improper "tax on a tax"?
A: Because the legal incidence of the federal fuel excise tax falls on the producer/retailer, not the consumer, so it is part of the retailer's cost and gross receipts (Gurley v. Rhoden).

Q: Why does sales tax apply to dyed diesel or aviation fuel at all?
A: Those fuels are not subject to the Kansas gallonage motor fuel tax, so Kansas sales tax applies to the selling price unless a specific exemption is claimed with an exemption certificate.

Q: What exemptions did the ruling mention?
A: Fuel consumed-in-production by farmers, fuel used by interstate common carriers to power refrigeration units, and aviation fuel used by licensed airlines and carriers — each claimed with a completed exemption certificate.

Citations and references

• K.S.A. 79-3606(a) — exempts fuel/articles on which a Kansas sales or excise tax has already been paid (not subject to refund).
• K.S.A. 79-3602(g) — when motor fuel tax is not charged, sales tax is imposed on the selling price unless otherwise exempt.
• K.S.A. 79-3408; 79-34,141; 79-3401 — Kansas motor fuel tax imposition (per gallon), special-fuel rate, and definitions.
• Gurley v. Rhoden, 421 U.S. 200 (1975) — federal fuel excise tax's legal incidence is on the producer, so it is properly included in a state sales tax base.
• In re Tax Appeal of Atchison Cablevision, L.P., 262 Kan. 223, 936 P.2d 721 (1997) — line-item franchise fees imposed on the provider are within the sales tax base.
• IRC §§ 4081, 4091 — federal excise taxes on gasoline, aviation gasoline, diesel, and aviation fuel referenced for the amounts to include.
• K.A.R. 92-19-59 — the regulation authorizing Kansas private letter rulings.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2002-072

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

August 22, 2002

XXXX
XXXX
XXXX

RE: Your letter dated July 26, 2002

Dear XXXX:

Thank you for your recent letter. You work for a petroleum retailer. You ask:

Should Kansas sales tax be charged on the Federal excise tax on dyed diesel, dyed kerosene, or aviation fuel when the Federal excise tax is a separate line on the invoice?

The answer is yes. Federal excise taxes charged on fuel is part of the "selling price" for sales tax purposes and, therefore, should be included in the tax base for Kansas sales tax. To understand how this answer was arrived at requires an understanding of the Kansas motor fuel law and the Kansas retailers' sales tax act.

The Kansas fuel tax on special fuel tax rate is currently $.25 per gallon. K.S.A. 79-34,141. Special fuel includes diesel fuel, gasoline, aviation gasoline, and gasohol, among other things. K.S.A. 79-3401. There is no fuel tax on sales of dyed diesel fuel, which is dyed in accordance with IRS guidelines and is intended to be used only for non-highway purposes. K.S.A. 79-3408(d)(5). Similarly, there is no tax on special fuel that is sold as aviation fuel. K.S.A. 79-3408(d)(4). It is important to note that Kansas motor fuel tax is imposed on the number of gallons or fractions of gallons of fuel sold. K.S.A. 79-3408. When Kansas motor fuel tax is not charged, sales tax is imposed on the selling price unless the sale is otherwise exempted. K.S.A. 79-3602(g).

K.S.A. 79-3606(a) provides:

The following shall be exempt from the tax imposed by this act:
(a) All sales of motor-vehicle fuel or other articles upon which a sales or excise tax has been paid, not subject to refund, under the laws of this state except cigarettes as defined by K.S.A. 79-3301 and amendments thereto, cereal malt beverages and malt products as defined by K.S.A. 79-3817 and amendments thereto, including wort, liquid malt, malt syrup and malt extract, which is not subject to taxation under the provisions of K.S.A. 79-41a02 and amendments thereto, motor vehicles taxed pursuant to K.S.A. 79-5117, and amendments thereto, tires taxed pursuant to K.S.A. 65-3424d, and amendments thereto, and drycleaning and laundry services taxed pursuant to K.S.A. 2001 Supp. 65-34,150, and amendments thereto; (emphasis provided)

The effect of this statute is that Kansas sales tax is imposed on the selling price of motor fuel if the Kansas motor fuel tax has not been charged. On a practical basis, this means that retailers' sales tax must be collected on sales of dyed diesel fuel, unless a sales tax exemption applies. Some of the significant sales tax exemptions that apply to fuels exempt: (1) fuel that is consumed-in-production by farmers; (2) fuel that the interstate common carriers use to power their refrigeration units, and (3) aviation fuel that licensed airlines and carriers use.

Sales tax exemptions are not extended automatically. To claim a sales tax exemption, the purchaser must provide the retailer with a completed exemption certificate that is appropriate for the exemption claim. Exemption certificates are available on our web site, www.ksrevenue.org. These certificates may be downloaded, completed by the purchaser, and given to the fuel dealer to retain as part of its book and records. Retailers must be able to produce these certificates when audited by the department.

The specific question raised in your letter is whether the Federal excise tax should be included in the tax base when retailers' sales tax is charged on fuel. This raises the issue of a tax on a tax, which has been a contentious issue in the United States.

Many taxes that a retailer pays becomes part of the retailer's overhead. When a retailer determines the selling price of a piece of tangible personal property, the selling price is high enough to factor in the taxes that the retailer must pay. These taxes includes property tax, income tax withheld from employee wages, sales taxes paid on purchases, and so forth. These "taxes" are overhead expenses that are routinely included in the selling price of tangible personal property as an expense. There are no legitimate concerns with factoring these hidden taxes into the selling price.

This rational applies where the legal incidence of a Federal tax falls on the retailer rather than the consumer. In such a case, the Federal excise tax is simply part of the retailer's cost of doing business, even when the Federal excise tax is billed to the consumer as a line item. This concept was recognized by the United States Supreme Court in Gurley v. Rhoden, 421 US 200 (1975). This case considered whether Federal excise taxes on gasoline should be included in the measure of the Mississippi sales tax. The Court held that the Federal excise tax was properly included in the state sales tax base.

In Gurley, the taxpayer operated a gasoline distributorship in which the taxpayer purchased gasoline from other states and brought it into Mississippi to sell at is own service stations. Under the definitions set forth in Federal law, taxpayer was a producer for Federal excise tax purposes. Taxpayer would add Federal excise tax of 4 cents per gallon to his pump price. He also added a 9 cent per gallon state excise tax to the pump price. The State of Mississippi computed its 5 per cent sales tax without any deduction for either of the foregoing excise taxes. Taxpayer paid the sales tax under protest and brought suit in state court for a refund. The Mississippi Supreme Court upheld the tax and the U.S. Supreme Court affirmed.

The pivotal issue was where the legal incidence of the Federal excise tax lay. The taxpayer contended that he was merely a collection agent for the Federal government and that the legal incidence of the tax was upon the consumer. The taxpayer argued that the Federal tax and the state sales tax attached simultaneously upon the sale to the consumer and that the Federal tax was not a part of his gross receipts. The taxpayer also contended that since it was merely a collection agent for the Federal government, inclusion of the Federal tax in the sales tax base amounted to a tax on the United States.

The Court held that the legal incidence of the Federal excise tax falls upon the statutory producer. The Court pointed out that by making the producer the sole party from whom the government could enforce collection of the tax, Congress intended to place the legal burden for the tax on the producer. The Court in effect held that payment of the Federal tax by a producer is simply an additional cost of doing business, much like insurance or utility costs. The fact that the producer recovered this tax by passing it on to the consumer as a line item on its billing did not make it a tax on the consumer.

Under the Supreme Court decision in Gurley v. Rhoden, supra, the Federal excise tax on gasoline and petroleum products should be included in the tax base for sales tax purposes. This tax does constitute part of the retailer's gross receipts and is part of the total selling price charged to the consumer. Many states include the Federal excise tax on fuel in state sales tax base. See, People v. Werner, 364 Ill. 594, 5 N.E.2d 238 (1936); Martin Oil Service, Inc. v. Dept. of Revenue, 273 N.E.2d 823 (Ill. 1971); State v. Thoni Oil Magic Benzol Gas Stations, Inc., 121 Ga. App. 454 , 174 S.E.2d 224 (1970); Sun Oil Company v. Gross Income Tax Division, 238 Ind. 111 , 149 N.E.2d 115 (1958). Gurley v. Rhoden overrules other state court decisions that had held that the Federal excise tax was really a tax on the consumer and hence was not part of a retailer's gross receipts for sales tax purposes. Standard Oil Co. v. State, 283 Mich. 85 , 276 N.W. 908 (1937); Standard Oil Co. of Indiana v. State Tax Commission of North Dakota, 71 N.D. 146 , 209 N.W. 447 , 135 A.L.R. 1481 (1941);Esso Standard Oil Co. v. City of Danville, 45 C.L.O. 358 (Corp. Court of Danville, Va., 1950); Socony-Vacuum Oil Co. v. City of New York, 247 App. Div. 163, 287 N.Y.S. 288 Aff'd 272 N.Y. 668, 5 N.E.2d 385; Kesbec, Inc. v. Taylor, 253 App. Div. 353, 2 N.Y.S.2d 241; Gulf Oil Corp. v. McGoldrich, 256 App. Div. 207, 9 N.Y.S.2d 544; Tax Review Board of Philadelphia v. Esso Standard Division of Humble Oil and Refining Co., 424 Pa. 355 , 227 A.2d 657 .

The Kansas Supreme Court recently came to the same conclusion in the case of In re the Tax Appeal of Atchison Cablevision, L.P., 262 Kan. 223, 936 P.2d 721 (1997), although our court followed a more circuitous route. In Atchison Cablevision, the Court recognized that the tax base for sales tax base should include city franchise fees that were imposed on a cable provider and collected as a line-item charge from the consumer. The franchise fees were fees that the cable company was obligated to make to the city regardless of whether the fees were charged to the consumer as a line item or included as a hidden part of the charge for cable television services.

Therefore, Federal fuel excise taxes should be included in the selling price that is subject to sales tax if the legal incidence of the fuel tax is not on the consumer. IRC Section 4081 imposes a Federal excise tax on gasoline of 18.3 cents per gallon, on aviation gasoline of 19.3 cents per gallon, and on diesel fuel of 24.3 cents per gallon. These Federal excise taxes are not taxes on consumers. Accordingly, they are required to be included in the "selling price" that is subject to Kansas sales tax, even when the manufacturer or importer is also the retailer. Sales tax should be charged on these excise taxes even when the Federal excise tax is billed as a separate line item. IRC 4091 imposes a one cent per gallon tax on aviation fuel, the "leaking underground storage tank trust fund tax." This Federal excise tax shall be included in the "selling price" that is subject to Kansas sales tax. Sales tax should be charged on this excise tax even when the Federal excise tax is billed as a separate line item.

I hope that I have adequately explained this area of the law. If you have any additional questions, please call me at 785-296-3081. This private letter ruling is based solely on the facts provided in your request. If it is determined that undisclosed facts were material or necessary to make an accurate determination by the department, this ruling is null and void. This private letter ruling will be revoked in the future by operation of law without further department action if there is a change in the statutes, administrative regulations, or case law, or a published revenue ruling, that materially affects this private letter ruling.

Sincerely,

Thomas E. Hatten
Attorney/Policy & Research

Date Composed: 08/26/2002 Date Modified: 08/27/2002

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