Do I owe Virginia use tax on off-road (dyed) diesel fuel if the sales tax was already built into the price at the pump?

Plain-English summary

A contractor that provides excavating and grading services (and also sells sand, stone, mulch, and hardscapes) was assessed use tax on its purchases of off-road (dyed) diesel fuel used in its equipment. The contractor argued the sales tax had already been paid because it was built into the pump price.

The Commissioner set out the rule for non-highway fuel. Dyed diesel and other fuel not used in a highway vehicle is exempt from Virginia's separate fuels tax (Va. Code § 58.1-2226 4), but fuel that escapes the fuels tax is subject to the retail sales and use tax unless separately exempt (Va. Code § 58.1-609.1 1). A dealer selling such fuel is a retail dealer for sales-tax purposes and may either add the tax on top or include the sales tax in the per-gallon price — but if the tax is built into the price, the dealer must display a notice on the pump that the sales tax is included (Virginia Tax Bulletin 10-9; P.D. 12-188).

Here the contractor produced photographs of the dealer's pump, clearly labeled "Off Road Diesel," showing the price already included the sales tax. On that evidence, the Commissioner found the buyer could reasonably have understood the sales tax was already paid on every gallon, and abated the use-tax assessment on the fuel in full.

What this means for you

Contractors and others buying off-road/dyed diesel

Off-road diesel isn't tax-free just because it's exempt from the highway fuels tax — the sales and use tax still applies. If you accrue use tax on off-road fuel you bought at retail, first check whether the dealer already collected the sales tax in the pump price. A pump notice that "tax is included" (and supporting evidence like a photo of the dealer's signage) can show you already paid, so you don't owe use tax again on the same fuel.

Fuel dealers

If you fold the sales tax into your per-gallon price rather than adding it separately, post the required notice on the pump. That notice is what lets your customers demonstrate the tax was paid — and its absence can leave both sides exposed in an audit.

Common questions

Q: Is off-road (dyed) diesel exempt from Virginia tax?
A: It's exempt from the Virginia fuels tax, but it is subject to the retail sales and use tax unless another exemption applies.

Q: I bought off-road diesel at a pump — do I owe use tax on it?
A: Not if the dealer already collected the sales tax in the price. Dealers may include the tax in the per-gallon price if the pump displays a notice saying so; in that case the tax is already paid.

Q: How did this taxpayer win?
A: It provided photographs of the pump, labeled "Off Road Diesel," showing the sales tax was included in the price. That let the Commissioner conclude the buyer reasonably understood the tax was already paid, and the assessment was abated in full.

Q: Does this ruling apply to me?
A: Not automatically. It resolves one taxpayer's appeal on its facts. It shows how the tax-included-in-price rule works, but you would need your own proof the tax was collected.

Citations and references

Statutes:

• § 58.1-2226 4 (dyed diesel and other non-highway fuel exempt from the Virginia fuels tax)
• § 58.1-609.1 1 (fuel exempt from the fuels tax is subject to the retail sales and use tax)

Guidance referenced in the ruling:

• Virginia Tax Bulletin 10-9 (8/24/2010) and 23 VAC 10-210-220 (bracket system) on how the sales tax is collected on non-highway fuel
• P.D. 12-188 (11/15/2012) on the pump-notice requirement when tax is included in the price

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 20-118

Original ruling text

July 7, 2020

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *:

This is in response to your letter submitted on behalf of * (the “Taxpayer”), in which you seek correction of the retail sales and use tax assessment issued for the period November 2013 through October 2016. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer is a contractor specializing in excavating and grading services. The Taxpayer also makes retail sales of sand, stone, mulch, and decorative hardscapes. The auditor assessed use tax on the purchase of off-road diesel fuel used in the performance of the Taxpayer’s excavating and grading services. The Taxpayer contends the retail sales and use tax is included in the sale price of the off-road diesel fuel, and the sales tax had already been paid. The Taxpayer requests abatement of the assessment issued with respect to the purchases of the off-road diesel fuel.

DETERMINATION

Virginia Code § 58.1-2226 4 provides that dyed diesel fuel and other fuel that is not used in a highway vehicle is exempt from the Virginia fuels tax. Pursuant to Virginia Code § 58.1-609.1 1, fuels exempt from the Virginia fuels tax are subject to the retail sales and use tax, unless such taxes are specifically exempted. Any person selling fuel at retail that is not subject to the Virginia fuels tax is considered a dealer for the purpose of the retail sales and use tax. The retail sales and use tax must be paid on these fuels, unless an exemption from the retail sales and use tax applies to the sale.

Virginia Tax Bulletin 10-9 (8/24/2010) provides guidance to taxpayers regarding the proper collection of the sales and use tax on sales of fuel that are not subject to the Virginia fuels tax and states:

The retail sales and use tax on fuel may either be included in the unit measure of fuel using the bracket system set forth in Title 23 of the Virginia Administrative Code 10-210-220 to determine the proper amount of tax to be added to the sales price of each unit, or the tax may be computed at a straight five percent of the sales price and separately stated from the selling price. The bracket system does not relieve the dealer from the liability of paying an amount equal to five percent of his gross taxable sales. If the tax is computed at a straight five percent of the sales price, one-half cent or more is treated as one cent.

In instances where the dealer includes the tax in the unit measure of fuel, the dealer should display a notice at the dispensing pump that the sales tax is included in the unit price of the fuel. See, Public Document 12-188 (11/15/2012).

In accordance with the cited authorities, sales of the off-road fuel at issue are subject to the retail sales and use tax. The dealer making sales of the off-road fuel may include the retail sales tax in the price per gallon, provided the dealer displays on the dispensing pump that the sales tax is included in the price. In this instance, the Taxpayer provides photographs of the dealer’s pump that clearly identifies the pump as “Off Road Diesel”. The photographs further show that all fuel dispensed by this pump includes the sales tax in the price of the fuel. Based upon this information, I find that the Taxpayer could have reasonably understood that the sales tax was included in the sales price for the off-road fuel purchased from the dealer during the audit period. Accordingly, the purchases of fuel assessed in the audit will be abated in full.

The Code of Virginia sections, tax bulletin and public document cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s web site. If you have any questions about this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1403.P

Related Documents

10-9

12-188