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Tax changes for natural gas marketers

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LNG Industry,

Natural gas is an emerging motor fuel option, especially for fleets in the trucking, rail, and mass transit industries. Even with the recent collapse of oil prices, natural gas continues to have a price advantage on an energy equivalence basis over gasoline or diesel. As a cleaner-burning fuel, natural gas has a lower environmental impact, and remains a compelling alternative fuel choice.

LNG rate equalisation

The most visible tax challenge faced by the LNG industry is the federal excise tax disparity between LNG and diesel. Since LNG has a lower energy density, when it is taxed the same as diesel per liquid volume – currently 24.3 cents per gallon – LNG users are typically paying 70% higher taxes. In order to address this, a proposed bill in the US House, the LNG Excise Tax Equalization Act of 2015 (HR 905), would change the excise tax on LNG to 14.1 cents per gallon, equalising the tax on an energy content basis.

While a reduction in the LNG excise tax would help level the playing field with diesel, this change is typically grouped with other proposed ‘tax preferences’ designed to encourage alternative fuel adoption, making it more controversial. Thus, LNG rate equalisation is unlikely to become law without debate.

Additional tax challenges

While federal tax regulations get more attention, LNG marketers are well-advised to monitor state and local tax jurisdictions, which will have a greater impact on their businesses. Although most states and some counties and cities now charge motor fuel taxes on LNG, there are a wide range of approaches to calculation and filing. Many states simply add natural gas to existing fuel excise tax forms. Some states, such as Minnesota, North Carolina, New Mexico, Oklahoma, Pennsylvania, Virginia, and Wisconsin, have special alternative fuel tax returns that must be filed for natural gas sales. Other states, such as Alabama, Louisiana, Missouri, and Washington, require users to pay excise tax by purchasing a decal for their vehicle each year. Florida and Michigan do not tax natural gas as a motor fuel.

To calculate motor fuel excise tax correctly, LNG marketers often need to convert from the sale unit of measure to the tax rate unit of measure. If the LNG is sold in tons, what is the tax if the tax rate is based on gallons? Conducting the unit of measure conversion is not as simple as you would think. The rate may require liquid gallons such as the federal excise tax, or sometimes the tax is based on a diesel gallon equivalent (DGE), an energy metric that effectively takes care of the rate equalisation. Getting to a ‘gallon equivalent’ measurement when needed requires a conversion using state-specified conversion factors. For example, California specifies a conversion at the standard rate of 6.06 lbs./gal., but Massachusetts specifies 4.23 lbs./gal., and Tennessee specifies 5.66 lbs./gal. Getting the taxable units of measure right is just one more headache for the LNG marketer.

Over the past two years, fuel excise tax rule, rate, and form changes in state and local jurisdictions have increased by 106%. This tax volatility creates a further challenge for tax managers needing to maintain tax compliance, especially if they do business in multiple states. In a recent Avalara survey, 67% of respondents currently selling or using natural gas considered their biggest tax challenge to be staying current with the evolving natural gas tax regulations and rates for each state in which they operate.

Tax complexity is here to stay

Tax complexity makes it difficult for natural gas marketers to ensure that their indirect taxes are calculated and filed accurately, leaving them at higher risk for audits, fines, and penalties. Tax managers new to motor fuels taxation will find it especially challenging. Motor fuel tax complexity will only increase as state legislatures struggle to address declining revenues for road maintenance caused by greater vehicle fuel efficiency and lower fuel prices.

LNG rate equalisation is an important issue, but tax errors resulting from state and local motor fuel tax complexities and lack of standards add audit liability and increase business risk. As they expand their natural gas businesses, tax managers need to become educated or get help from motor fuel tax experts in order to ensure tax compliance.

Written by Gary Davis, Senior Product Manager, Excise Tax Division, Avalara. Edited by

Davis is an Avalara tax expert, but is not a practicing attorney. The information provided in this article should not be relied upon as legal opinion.

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