Is diesel fuel sold for use in locomotives exempt from Utah tax, and can the Commission exempt railroad fuel from sales tax to match neighboring states' prices?

Plain-English summary

A fuel marketers' trade association wrote to the Utah State Tax Commission on behalf of a Utah fuel distributor whose monthly locomotive-fueling sales had fallen from about 380,000 gallons to as little as 108,000 after Utah began applying sales tax to diesel sold for locomotive use. The distributor's rail customer had shifted its fueling to out-of-state stops because Utah's total price (with sales tax) was no longer competitive. The trade association asked the Commission to exempt locomotive fuel from sales tax to level the playing field with neighboring states.

The Commission gave two distinct answers. First, on the legal mechanics: dyed diesel fuel sold and used for any purpose other than propelling a vehicle on public highways — which includes locomotives — isn't subject to Utah's special fuel (excise) tax. But fuel that is exempt from the special fuel tax is still subject to sales tax. So there's no inconsistency: locomotive fuel legitimately owes sales tax even though it's excused from the separate special fuel tax. If a distributor sells both taxable (highway) and non-taxable (off-highway, e.g., locomotive) diesel, it must purchase undyed (taxable) fuel and can then apply for a refund of special fuel tax on the portion actually used off-highway, provided it documents that use on its return or refund request.

Second, on the trade association's real ask — a sales tax exemption to restore price competitiveness — the Commission declined outright: it has no authority to legislate or create tax exemptions. That's the Legislature's job, not the Commission's, so the competitive-pricing argument would need to go to state lawmakers instead.

What this means for you

Fuel distributors and marketers selling to railroads

Locomotive fuel is exempt from Utah's special fuel tax as an off-highway use, but that's a separate question from sales tax — which still applies. If you sell both highway and off-highway diesel, purchase undyed fuel and pursue special-fuel-tax refunds on the documented off-highway portion rather than assuming any single purchase is fully tax-free.

Rail carriers and other off-highway diesel users comparing state fuel costs

Utah's sales tax on diesel applies regardless of whether the fuel is used on-highway or off-highway (like locomotives) — only the separate special fuel excise tax turns on highway use. If you're comparing all-in fuel costs across states, don't assume an off-highway-use exemption covers sales tax too.

Trade associations or businesses seeking a new tax exemption

The Tax Commission administers the tax code as written; it cannot create new exemptions or match another state's incentives through a ruling or policy, no matter how compelling the competitive argument. That kind of change requires legislation, so direct advocacy efforts at the Legislature rather than at the Commission.

Common questions

Q: Is diesel fuel used in locomotives exempt from Utah tax?
A: It's exempt from the special fuel (excise) tax as an off-highway use, but it is still subject to sales tax. The two taxes are analyzed separately.

Q: Can a fuel seller get a refund on tax paid for locomotive fuel?
A: If it purchased taxable undyed diesel and some was actually used off-highway (e.g., in locomotives), it can seek a refund of the special fuel tax on that documented portion.

Q: Why didn't the Commission just exempt locomotive fuel from sales tax to match other states?
A: The Commission has no authority to create new tax exemptions or set policy beyond what the Legislature has enacted. A competitiveness-based exemption would require a legislative change.

Q: Can I rely on this ruling for my own fuel sales?
A: No — it binds the Commission only for the taxpayer and facts described. Confirm your own documentation and refund procedures with the Commission or a Utah tax professional.

Citations and references

Statutes cited:

• Utah Code Ann. § 59-13-301 (special fuel tax; dyed diesel used other than to propel a highway vehicle is exempt)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/97-065.pdf

Original ruling text

97-065

Response November 18, 1997

REQUEST LETTER

October 13, 1997

Dear Commissioner Oveson:

I am writing on behalf of one of our marketer members, COMPANY A in Utah.

In 1993-94, he sold 380,000 plus gallons a month to the COMPANY B (COMPANY B). NAME was forced to buy a new, larger truck so they could haul more fuel and be able to fuel at two locations. In March 1995, the COMPANY B created a job for one individual to be responsible for the fueling of locomotives. The purpose is to cut costs and determine least expensive fueling locations.

During 1993-94, Utah's fuel prices were competitive with the surrounding states. Now, with the imposed Utah State sales tax on diesel fuel, Utah's prices are higher than in surrounding states by the sales tax imposed on locomotives. Due to the cost difference, COMPANY B will not fuel their locomotives in Utah. Westbound trains fuel in CITY or CITY, STATE, eastbound trains are fueled in CITY, STATE and southbound trains fuel in CITY, STATE.

As a result. COMPANY A has sold fewer and fewer gallons to the locomotives. What was once 380,000 gallons of fuel sold per month has dropped well over half to 108,000 - 150,000 gallons per month. Utah's economy is losing business and money.

A solution to this problem might be the following. If the Utah State Sales Tax was exempted from fueling of locomotives, Utah would be on a level playing field with the surrounding states. COMPANY B could resume fueling in Utah because it is more accommodating to their needs. The loss of sales tax from these purchases could be offset by the additional taxes collected by the creation of additional jobs to handle the increase in fuel sales.

The State needs to consider its loss and the loss of Utah fuel marketers, such as NAME, and exempt the sales tax on fuels for locomotives.

I appreciate your time and attention to this matter. If you have any questions, please feel free to

contact me at your convenience.

Sincerely,

NAME

Regulatory Affairs Director

RESPONSE LETTER

November 18, 1997

NAME

ADDRESS

CITY STATE ZIP

Advisory Opinion - Tax on sales of diesel fuel for use in locomotives

Dear NAME,

We have received your request for tax guidance pertaining to the tax on diesel fuel purchased for use in locomotives. We offer the following:

No special fuel tax is imposed or collected upon dyed diesel fuel that is sold and used for any purpose other than to operate or propel a motor vehicle on public highways. However, fuel that is exempt from the special fuels tax is subject to sales tax.

With regard to the special fuels tax, COMPANY A may purchase non-taxable dyed diesel fuel for use in locomotives. If COMPANY A is purchasing diesel fuel for both taxable and non- taxable use, it must purchase taxable undyed fuel. However, it is eligible for a refund on taxes paid on fuel that is actually sold and used to operate locomotives. In that case, COMPANY A must document the distribution of tax exempt fuel for off highway uses on its return or refund request.

You have raised a concern about tax exemptions on fuels in surrounding states. We understand your concerns, but the Tax Commission has no authority to legislate or to create tax exemptions. This matter should be addressed with the state legislature.

Please let us know if you have other questions.

For the Commission,

Joe B. Pacheco,

Commissioner

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