period for their interpretation of the impending biodiesel tax credits.
It strikes me that a whole bunch of folks have been working very hard
at getting their comments in on time, and that no extension is
necessary.
Here is the sixth version of what may hit the IRS on time:
CC:PA:LPD:PR (REG-153838-04)
Room 5203
Internal Revenue Service
POB 7604
Ben Franklin Station
Washington, DC 20044
Re: Biodiesel Excise Tax Credit and Biodiesel Income Tax Credit
Dear Commissioner:
I am writing on behalf of a broad constituency of organizations, which
are listed
below as signatories to this letter. As you may know, the
organizations listed below are
stakeholders in the biodiesel industry throughout the nation, many of
whom have played a key role in advancing the use of neat biodiesel
(100% biodiesel or B100) as a renewable
transportation fuel.
In response to Internal Revenue Bulletin 2005-2, dated January 10,
2005, we would
like to raise the following concerns:
1. B100 should be eligible for the Excise Tax Credit under Section 6426
2. All biodiesel blends should be eligible for the Excise Tax Credit
3. The definition of a "retail sale" for tax and credit purposes
should be consistent
4. The Biodiesel Income Tax Credit should be able to be carried forward
5. Calculation of the credit for Agri-biodiesel and all other
biodiesel should be clarified
6. Section 4041(a)(1) tax should not be imposed on a biodiesel mixture
B100 should be eligible for the Excise Tax Credit under Section 6426
We understand that the Service has initially interpreted Section 6426
in a manner that
would exclude B100 form the Excise Tax Credit. We believe that
interpretation is
unfortunate for several reasons and respectfully request that the
Service take a more expansive interpretation of Section 6426.
We believe the spirit of the Biodiesel Excise Tax Credit created by
the American Jobs
Creation Act of 2004 is to encourage growth of the biodiesel industry
through financial
incentives which bring the cost of biodiesel down for the consumer.
The most direct and effective way to reduce the cost of biodiesel to
consumers and encourage growth of the biodiesel industry is for the
Excise Tax Credit to apply to all blends of biodiesel up to and
including B100.
We believe the Service should broadly interpret the reference to
"Biodiesel Mixture
Credit" in Section 6426(c) to include all biodiesel blends from B1 to
B100. The common
terminology in the industry is to refer to blends of biodiesel – B20,
B50, B100; similar to grades of gasoline – regular, unleaded, premium.
Since biodiesel is inherently a blended mixture, it seems appropriate
that the Service broadly interpret "mixture" to include all biodiesel
blends including B100.
We further believe the Service should take an expansive interpretation
Section 6426(a)
so that it includes B100 as eligible for the Excise Tax Credit.
Section 6426(a) that states
"There shall be allowed as a credit against the tax imposed by Section
4081 an amount equal to . . ." As was outlined in Rev. Rul. 2002-76,
biodiesel is taxed pursuant to Section 4041(a)(1). Section 4041(a)(1)
imposes tax on any liquid other than gasoline sold for use or used as
a fuel in a diesel-powered highway vehicle, unless tax was imposed on
the liquid by Section 4081 and not credited or refunded. Section
4041(a)(1)(C) provides that "the rate of the tax imposed by this
paragraph (4041(a)(1)) shall be the rate of tax specified in section
4081(a)(2)(A) on diesel fuel which is in effect at the time of such
sale or use". Thus, the biodiesel excise tax imposed by Section
4041(a)(1) is identical to the excise tax imposed by 4081 and thus
should qualify for the Excise Tax Credit.
The most unfortunate implication of the possibility of B100 not
qualifying for the
Excise Tax Credit is the disincentive this would provide to non-income
tax paying entities such as 501(c)(3)s, municipalities, and state
government agencies. After talking to Renee
Kramer at the Service, we understand that government agencies are
subject to the diesel excise tax in some cases and not in others and
that 501(c)(3)s are generally subject to the diesel excise tax, but
not always. If our understanding is correct, we are concerned that
unless the Excise Tax Credit is available for B100 these non-income
tax paying entities receive no tax benefit from using B100. These
non-income tax paying entities are key biodiesel consumers and,
consistent with Congress' intent, the Service should be looking for
ways to provide incentives to these key consumers to use biodiesel.
If B100 is not eligible for the Excise Tax Credit, and these
non-income tax paying entities cannot make use of the Income Tax
Credit by virtue of the fact that they do not pay income tax, the cost
of B100 for such users will remain prohibitively high. Without the
Excise Tax Credit for B100, it will place an undue financial burden on
non-income tax paying entities to use cleaner burning B100.
Furthermore, not allowing the Excise Tax Credit for B100 would create
perverse
incentives. The B100 community will have a strong financial incentive
to add the minimum
amount of diesel fuel to the B100 in order to qualify for the Excise
Tax Credit. This limits
consumer choice and harms air quality, as B100 is better for the
environment than any biodiesel blend that includes petroleum diesel
("petro-diesel") fuel.
Finally, we are concerned about the complexity of compliance if the
Excess Tax Credit
does not include B100. If a distributor purchases 10,000 gallons of
biodiesel and sells a
portion of it as B100 and blends the rest with petro-diesel, the
distributor must keep one set of
records to claim the Excise Tax Credit for the blended portion of the
biodiesel and another set
of records for the portion of the biodiesel sold as B100 to facilitate
a retailer or user of the B100 to claim the Income Tax Credit. Such
complexity generally adds costs to the taxpayer's
business and leads to noncompliance. It would be far simpler if all
biodiesel, including B100, were eligible for the Excise Tax Credit, as
is the case with the Income Tax Credit.
We kindly request that the Service consider a broad interpretation of
Section 6426
consistent with the above and allow B100 to be eligible for the Excise
Tax Credit.
All biodiesel blends should be eligible for the Excise Tax Credit
The Treasury and Service specifically invited comments regarding the
definition of
"diesel fuel" and "diesel fuel blendstocks" that should be classified
as diesel fuel. We believe the following framework should be used for
diesel fuel and diesel fuel blendstocks.
Section 6426(c)(3) defines a "biodiesel mixture" as ". . . a mixture
of biodiesel and
diesel fuel (as defined in Section 4083(a)(3)) . . ." Accordingly, we
believe it was Congress' intent that any biodiesel mixture,
irrespective of the percentage of diesel and biodiesel (and
irrespective of the percentage of paraffin), would qualify for the
Biodiesel Mixture Credit.
The alternative framework that we have heard articulated is that the
biodiesel mixture
itself must be a "diesel fuel" as defined in Section 48.4081-1(c)(2)
of the Manufacturers
and Retailers Excise Tax Regulations in order for the biodiesel
mixture to qualify for the
Excise Tax Credit. Such a rule would require that the biodiesel
mixture contain at least 4%
normal paraffins, or else the biodiesel mixture would be an excluded
liquid under Section
48.4081-
1(b). This approach seems contrary to the clear intent of Congress.
We believe the bright line rule set forth by Congress in Section
6426(c)(3) provides
the better framework for determining what is diesel and what biodiesel
mixtures qualify for the
Excise Tax Credit. The alternative framework outlined above would
create unnecessary
uncertainty and confusion for the biodiesel blenders, who would
constantly have to determine the paraffin level of the mixture under
such a system.
We would also support a change in the definition of diesel fuel, as
defined in Section
48.4081-1(c)(2), to include biodiesel. Several different fuels,
including biodiesel, currently
meet the definition of "diesel fuel" under Section 4083(a)(3).
Section 4083(a)(3) simply states
that " the term "diesel fuel" means any liquid (other than gasoline)
which is suitable for use as a fuel in a diesel-powered highway
vehicle or a diesel-powered train." We see no reason why biodiesel
should be excluded from the definition of diesel fuel in Section
48.4081-1(c)(2) and believe that the 4% paraffins level required by
Section 48.4081-1(c)(2) is irrelevant.
The definition of a "retail sale" for tax and credit purposes should
be consistent
Section 40A(b)(2) specifies that in order for a sale of B100 to
qualify for the Biodiesel
Income Tax Credit, the B100 "(i) is used by the taxpayer as a fuel in
a trade or business, or (ii)
is sold by the taxpayer at retail to a person and placed in the fuel
tank of such person's
vehicle." The requirement that the fuel be "placed in the fuel tank
of such person's vehicle" does not reflect the way B100 is often sold
to the public and appears to be inconsistent with IRS Rev. Rule
2002-76 regarding the taxation of biodiesel. These inconsistencies
need to be
resolved.
First, biodiesel is often sold to the public in intermediate portable
storage containers,
such as five gallon containers or 55 gallon drums. The purchaser then
places the fuel into
their own fuel tank at some later time.
Second, Rev. Rul. 2002-76 states that biodiesel is taxed pursuant to
Section
4041(a)(1) ". . . sold for use or used as a fuel in a diesel-powered
highway vehicle . . ." There is no requirement that the biodiesel be
"placed in the fuel tank of such person's vehicle."
Thus, there appears to be an inconsistency in how biodiesel is taxed
and how the Biodiesel
Income Tax Credit operates. This inconsistency creates a situation
where the sale of
biodiesel in intermediate storage containers is taxable pursuant to
Section 4041(a)(1), but is not eligible for the Income Tax Credit
because it was not placed into the persons vehicle at the time of
sale.
We would greatly appreciate clarification on when the Section
4041(a)(1) tax is
applicable and when the Income Tax Credit is applicable for sales of
biodiesel where the fuel is not placed into fuel tank of the person's
vehicle.
The Biodiesel Income Tax Credit should be able to be carried forward
It is not clear to us whether or not the Biodiesel Income Tax Credit
can be carried
forward. In a phone conversation with Susan Athy on February 10,
2005, she was unable to answer whether or not the Biodiesel Income Tax
Credit can be carried forward. Ms. Athy kindly referred me to Susan
Reman, in department 5 of passthroughs, but as of today, I have not
heard back from Ms. Reman. We believe the Biodiesel Income Tax Credit
should be able to be carried forward. Many of the businesses selling
biodiesel are small businesses, and like many new businesses, they
have limited or no taxable income. Thus, if the Biodiesel Income Tax
Credit cannot be carried forward, it would not provide the incentive
Congress intended when it passed the Biodiesel Income Tax Credit as
part of the American Jobs Creation Act of 2004, because it would be of
limited use to the nascent biodiesel industry.
Calculation of the credit for Agri-biodiesel and all other biodiesel
It is unclear from the Bulletin how the credit for a mixture that
included both agri-
biodiesel and non-agri-biodiesel would be calculated. We believe that
the credit should be
based on the individual credits of each fuel. This should be
administratively easy, since a
certificate from the producer of the biodiesel is required to claim
the credit.
For example, in a 10,000 gallon mixture comprised of 5,000 gallons of
diesel, 2,500
gallons of agri-biodiesel and 2,500 gallons of non-agri-biodiesel, the
calculation of the tax
incentive should be 2,500g x $1.00 + 2,500g x $0.50 for a total Excise
Tax Credit of $3,750.
Section 4041(a)(1) tax should not be imposed on a biodiesel mixture
Section 4041(a)(1) imposes tax on any liquid other than gasoline sold
for use as a fuel
in a diesel-powered highway vehicle, unless tax was imposed on the
liquid by Section
4081 and not credited for refunded. Since Section 6426 provides a
credit against the tax
imposed by Section 4081 for a Biodiesel Mixture, it seems that the
Biodiesel Mixture may be
taxable under Section 4041(a)(1). We do not believe that this was the
intention of Congress and there may be a provision in 4041 or Section
6426 that addresses this issue, but if there is we were unable to find
it. Please confirm that a Biodiesel Mixture, which is taxed pursuant
to Section 4081 and which receives a credit pursuant to Section 6426
is not taxable pursuant to Section 4041.
We respectfully request that you carefully evaluate the likely
negative consequences
of the proposed regulations.
Thank you for consideration of this important matter. If you have any
questions or
need anything further please contact me at 415-218-3766.
Sincerely,
Eric M. Bowen
Attorney-at-Law
On behalf of:
BioFuel Oasis - CA
Central Oklahoma Clean Cities Program - OK
CoopPlus - MA
CoopPower – MA
East Tennessee Clean Cities Program - TN
Ft. Lauderdale Clean Cities Program - FL
Greater Philadelphia Clean Cities Program - PA
Harbec Plastics, Inc. – NY
Healthfuel - CA
Peoples Power & Light –RI
Philadelphia Fry-O-Diesel - PA
Piedmont Biofuels Coop- NC
San Francisco Biofuels Cooperative – CA
The Energy Cooperative - MA
Yokayo Biofuels - CA
Lyle Estill
V.P. Stuff
Piedmont Biofuels
www.biofuels.coop
919-542-2900
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