If a fuel distributor blends cheap marine diesel or off-spec No. 2 heating oil with enhanced diesel motor fuel to make standard No. 2 heating oil, is the result taxable 'enhanced' diesel motor fuel?

Plain-English summary

A diesel fuel distributor, Castle Oil Corporation, wanted to buy two cheap off-spec products and blend each up to standard No. 2 heating oil (unenhanced diesel): (1) marine diesel fuel — a high-sulfur product that doesn't meet No. 2 heating-oil specs and can't run a diesel car engine — and (2) substandard No. 2 heating oil that misses industry specs. To bring either up to spec, Castle would blend it with low-sulfur enhanced diesel motor fuel (or with in-spec No. 2 heating oil). Castle asked whether the resulting blends would be treated as "enhanced" diesel motor fuel for the Article 12-A excise tax, Article 13-A petroleum business tax, and Article 28 prepaid sales tax — because that label controls whether tax-free inter-distributor sales are possible.

The answer: the blends are unenhanced diesel motor fuel, so previously-untaxed inter-distributor sales of them are not subject to those taxes.

• "Enhancement" has a specific statutory meaning (Tax Law § 282(16)): adding kerosene or another substance/additive (like a cetane improver) to a middle distillate so it performs better in a diesel motor-vehicle engine. The blended result of that act is "enhanced diesel motor fuel."
• Marine diesel + enhanced diesel is not enhancement. Marine diesel is a residual petroleum product (a blend of No. 2 diesel and No. 6 residual oil), not a middle distillate, so blending it doesn't fit the definition — and the result meets and is sold as No. 2 heating oil, not an automotive product.
• Substandard No. 2 heating oil + enhanced diesel is not enhancement either, as long as the enhanced diesel carries no kerosene or additive that would improve the heating oil's automotive-engine performance, and the blend is invoiced and sold in good faith as No. 2 heating oil, not identified for the automotive market.
• Because the results are unenhanced, previously-untaxed inter-distributor sales (registered distributor to registered distributor, not a retail sale or a filling-station/vehicle-fueling delivery) are exempt from the excise tax (§ 282-a(3)(b)(ii)), the petroleum business tax (§ 301-b), and the prepaid sales tax (§ 1102).
• Two cautions. If the heating oil is delivered into a repository able to dispense fuel into a motor vehicle's tank, or sold/used in any other non-exempt way, all three taxes apply regardless of the "unenhanced" characterization. And Castle could reach the same result by blending with low-sulfur No. 2 heating oil instead of enhanced diesel, buying that heating oil tax-free under the same inter-distributor exemption.

What this means for you

In New York's diesel tax scheme, "enhanced" vs. "unenhanced" is the switch that decides taxation — and it turns on the product's chemistry and how it's sold, not on what you blended in. Diesel tailored for the automotive market ("enhanced") is taxed on its first sale; undifferentiated No. 2 fuel oil used for heating passes tax-free between registered distributors and to consumers for heating. Blending an off-spec stock up to heating-oil grade doesn't create a taxable automotive product — unless the blend actually improves automotive-engine performance or is marketed for vehicles.

The good-faith sale designation matters. The Department leaned on the fact that the finished product meets No. 2 heating-oil specifications and is invoiced and sold in good faith as No. 2 heating oil, not identified for automotive use. If you blend in enhanced diesel that contains a cetane improver or other automotive-performance additive, or you market/deliver the result for vehicle fueling, you can lose the unenhanced treatment.

Distributors: the exemption is only as good as the transaction. Tax-free treatment here is the inter-distributor exemption for previously-untaxed product moving between registered distributors. A retail sale, or a delivery into a repository that can fuel a motor vehicle, triggers the excise, petroleum business, and prepaid sales taxes even on "unenhanced" heating oil.

Common questions

Q: Does blending cheap marine diesel into enhanced diesel make "enhanced" fuel?
A: No. Marine diesel is a residual petroleum product, not a middle distillate, so blending it isn't "enhancement" under Tax Law § 282(16), and the result is sold as No. 2 heating oil — unenhanced diesel motor fuel.

Q: What makes a blend count as "enhancement"?
A: Adding kerosene or another substance/additive (such as a cetane improver) to a middle distillate to improve its performance in a diesel motor-vehicle engine. The improvement to automotive performance is the key.

Q: If the product is unenhanced, is every sale of it tax-free?
A: No. Only previously-untaxed sales between registered distributors qualify. If it's a retail sale, or delivered into a repository that can dispense fuel into a vehicle's tank, the excise, petroleum business, and prepaid sales taxes apply.

Q: Was there a simpler way to reach the same result?
A: Yes — the Department noted Castle could blend the off-spec stock with in-spec low-sulfur No. 2 heating oil (rather than enhanced diesel), and buy that heating oil tax-free under the inter-distributor exemption.

Citations and references

Statutes and legislative history:

• Tax Law § 282(16) — Article 12-A definitions of "enhancement" and "enhanced diesel motor fuel"
• Tax Law § 282-a(1) — Article 12-A excise tax on the first sale or use of diesel motor fuel
• Tax Law § 282-a(3)(b)(ii) — excise tax inter-distributor exemption for previously untaxed unenhanced diesel motor fuel
• Tax Law § 301-a — Article 13-A petroleum business tax on diesel motor fuel; § 301-b — inter-distributor exemption
• Tax Law § 1102 — Article 28 prepaid sales tax on diesel motor fuel; inter-distributor exemption; joint administration of the three taxes
• L. 1988, Ch. 261 (Governor's Bill Jacket) — legislative intent that undifferentiated No. 2 fuel oil passes tax-free between distributors and to consumers for heating

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/gasoline_ao.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/multitax/a96_1m_46s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-96 (1)M
Miscellaneous Tax
TSB-A-96 (46)S
Sales Tax
July 15, 1996

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. Z951113A

On November 13, 1995, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Castle Oil Corporation, 290 Locust Avenue, Bronx, New York 10454.
The issue raised by Petitioner, Castle Oil Corporation, is whether the blends resulting from
combining marine diesel fuel or substandard No. 2 heating oil with low-sulfur enhanced diesel motor
fuel will be deemed to be enhanced diesel motor fuel for purposes of Articles 12-A, 13-A and 28 of
the Tax Law.
Petitioner presents the following facts. Castle Oil Corporation and its wholly-owned
subsidiary Castle Supply & Marketing, Inc. (collectively, "Castle") are distributors of diesel motor
fuel, selling primarily No. 2 heating oil (unenhanced diesel fuel). Castle also sells limited quantities
of enhanced diesel motor fuel, as well as other products not relevant to the instant matter.
Castle has identified a supplier who can provide Castle with marine diesel fuel at a favorable
price. Marine diesel fuel is an unenhanced, high-sulfur product that does not meet the specifications
of No. 2 heating oil and is not suitable for the operation of a motor vehicle engine of the diesel type.
In order for marine diesel fuel to meet the specifications of No. 2 heating oil, it would be necessary
to blend the marine diesel fuel with either low-sulfur enhanced diesel motor fuel or No. 2 heating
oil.
Castle is also able to obtain, from time to time, substandard No. 2 heating oil that does not
meet the industry specifications for No. 2 heating oil. In order for the substandard heating oil to meet
the specifications of No. 2 heating oil, it is necessary to blend it with either low-sulfur enhanced
diesel motor fuel or No. 2 heating oil. The blending process results in the creation of industry
standard No. 2 heating oil.
Castle does not currently engage in blending enhanced diesel motor fuel with either marine
diesel fuel or substandard heating oil. However, if the blends would not be taxable upon their sale,
it would be economically advantageous for Castle to engage in producing these blends.
Subdivision (16) of section 282 of Article 12-A of the Tax Law provides in part:
"Enhancement" when used in this article with respect to Diesel motor fuel shall mean
the addition or blending of kerosene or any other substance or additive, such as a
cetane improver, to or with fuel oil or other middle distillate which improves or
enhances such middle distillate's performance in the operation of a motor vehicle
engine of the diesel type, provided, enhancement shall not include the production of
fuel oil by the addition of a substance to number two fuel oil for the purpose of
lowering the cloud point or pour point of such product to that of generally accepted

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industry standards for number two fuel oil and such resulting product is invoiced and
sold, in good faith, by the producer thereof as number two fuel oil. "Enhanced Diesel
motor fuel" shall mean the combined or blended product which has resulted from the
act of enhancement (not the purchase of the ingredients to make the blend) and any
product specifically designated "Diesel fuel" or "No. 1 Diesel fuel" or "No. 2 Diesel
fuel" or any like industry designation commonly used to refer to a fuel used in the
operation of a motor vehicle engine of the Diesel type which meets standard industry
specifications for such fuel.
Subdivision (1) of section 282-a of Article 12-A of the Tax Law provides in part:
The excise tax is imposed on the first sale or use of Diesel motor fuel to occur which
is not exempt from tax under this article. Provided, however, if the tax has not been
imposed prior thereto, it shall be imposed on the delivery of Diesel motor fuel to a
filling station or into the fuel tank connecting with the engine of a motor vehicle for
use in the operation thereof whichever event shall be first to occur.
Section 301-a of Article 13-A of the Tax Law imposes a petroleum business tax on diesel
motor fuel. Section 1102 of Article 28 of the Tax Law imposes a prepaid sales tax on diesel motor
fuel. Pursuant to statutory provisions, the excise tax, the petroleum business tax and the prepaid sales
tax on diesel motor fuel are, to the extent possible, administered on a joint basis. A determination
of whether diesel motor fuel is enhanced or unenhanced that is made in accordance with the
provisions of the excise tax will also apply for purposes of the petroleum business tax and the
prepaid sales tax.
Section 282-a(3)(b)(ii) of Article 12-A provides that a sale of previously untaxed unenhanced
diesel motor fuel by one registered distributor to another registered distributor is exempt from the
imposition of the excise tax (as long as the sale is not a retail sale or a sale involving delivery of the
fuel at a filling station or into a repository which is equipped with a hose or other apparatus by which
the fuel could be dispensed into the fuel tank of a motor vehicle). However, an inter-distributor sale
of enhanced diesel motor fuel does not receive the benefit of this exemption.
Section 301-b of Article 13-A and section 1102 of Article 28 provide an exemption from the
imposition of the petroleum business tax and the prepaid sales tax, respectively, for inter-distributor
sales of previously untaxed unenhanced diesel motor fuel, similar to the exemption from the excise
tax contained in section 282-a of Article 12-A.
Information contained in the bill jacket for Chapter 261 of the Laws of 1988, which, among
other things, amended Article 12-A to add the definition of "enhancement," states as follows:

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This . . . bill follows general industry practice by recognizing the difference between
the various products that are included in the class defined as "Diesel motor fuel."
Accordingly, Diesel product tailored to the automotive market is taxed on its first
sale in the State. Undifferentiated product, such as No. 2 fuel oil (which is usually
used as heating fuel), will pass tax-free between registered distributors and will also
be sold tax-free to the consumer for heating or production purposes. Therefore, the
sale of No. 2 fuel oil to a consumer for heating fuel will not be subject to tax. No. 2
fuel oil will, however, be subject to tax if it is identified for the automotive market;
e.g., delivered into the storage tanks of filling station.
*
*
*
Enhanced product is product invoiced as automotive diesel fuel and also the blended
product which results from the addition of kerosene or a cetane improver to No. 2
fuel oil so as to improve the operation of such fuel oil in a motor vehicle engine of
the Diesel type. (Letter of Commissioner of Taxation and Finance, Governor's Bill
Jacket, L. 1988, Ch. 261)
We reach the following conclusions regarding the issue raised by Petitioner.
The blend at issue resulting from combining marine diesel fuel with enhanced diesel motor
fuel would not be deemed to be enhanced diesel motor fuel. Marine diesel fuel is not a middle
distillate, but is instead a residual petroleum product formed by blending No. 2 diesel fuel oil and
No. 6 residual fuel oil to produce a lower volatility fuel. This fuel is commonly used in medium
speed marine engines, often for commercial fishing. Because marine diesel fuel is not a middle
distillate, the process of blending it with enhanced diesel motor fuel does not meet the statutory
definition of the term "enhancement." Additionally, the resulting product is not identified for use in
the automotive market, but is a product that meets the specifications of No. 2 heating oil and which
will be sold as No. 2 heating oil.
The blend at issue resulting from combining substandard No. 2 heating oil with enhanced
diesel motor fuel would not be deemed to be enhanced diesel motor fuel as long as the enhanced
diesel motor fuel does not contain kerosene or any other substance or additive (such as a cetane
improver) which would improve the substandard heating oil's performance in a diesel automotive
engine. If the automotive performance of the substandard heating oil were not improved, the
blending process would not constitute "enhancement," as that term is defined in the Tax Law.
Additionally, the resulting product meets the industry specifications for No. 2 heating oil,
will be invoiced and sold, in good faith, as No. 2 heating oil, and will not be identified for use in the
automotive market.
Accordingly, the resulting heating oil is unenhanced diesel motor fuel for purposes of
Articles 12-A, 13-A and 28 of the Tax Law. Sales of this heating oil by one registered distributor to
another registered distributor may be made (if the product is previously untaxed) in accordance

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with the inter-distributor exemption, without imposition of the excise tax, the petroleum business
tax or the prepaid sales tax on diesel motor fuel, as long as the sales are not retail sales or sales
involving delivery of the fuel at a filling station or into a repository which is equipped with a hose
or other apparatus by which the fuel could be dispensed into the fuel tank of a motor vehicle.
It should be noted that if the resulting heating oil were sold and delivered to a repository
equipped with a hose or other apparatus by which the fuel could be dispensed into the fuel tank of
a motor vehicle, or otherwise sold and/or used under any circumstances not exempt from tax under
Articles 12-A, 13-A and/or 28 of the Tax Law, these taxes would be imposed, without regard to
whether the heating oil is deemed to be unenhanced diesel motor fuel.
It should also be noted that Castle may accomplish its objective of producing an unenhanced
diesel product meeting the specifications of No. 2 heating oil by blending either the marine diesel
fuel or the substandard No. 2 heating oil with low-sulfur No. 2 heating oil, rather than low-sulfur
enhanced diesel motor fuel. The No. 2 heating oil could be purchased by Castle in this State exempt
from taxes under the inter-distributor sales exemption.

DATED: July 15, 1996

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.