Diesel Fuel Excise Tax; Dye Color and Concentration

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 48

[TD 8550]

RIN 1545-AP48; 1545-AS32

Diesel Fuel Excise Tax; Dye Color and Concentration

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations relating to dye color

and concentration requirements for tax-exempt diesel fuel. These

regulations implement changes made by the Omnibus Budget Reconciliation

Act of 1993 and affect refiners, importers, terminal operators, and

throughputters.

EFFECTIVE DATE: These regulations are effective January 1, 1994.

FOR FURTHER INFORMATION CONTACT: Frank Boland, (202) 622-3130 (not a

toll-free number.)

SUPPLEMENTARY INFORMATION:

Background

Section 4081 was amended to apply to diesel fuel by the Omnibus

Budget Reconciliation Act of 1993. Temporary regulations relating to

the diesel fuel excise tax imposed by section 4081 were published in

the Federal Register on November 30, 1993, (58 FR 63069) along with a

notice of proposed rulemaking (PS-52-93) cross-referencing the

temporary regulations (58 FR 63131). Amendments to these temporary

regulations (relating to dye color and concentration) were published in

the Federal Register on December 27, 1993, (58 FR 68304) along with a

notice of proposed rulemaking (PS-76-93) cross-referencing those

amendments (58 FR 68338).

Written comments responding to these notices were received and a

public hearing was held on March 22, 1994. After consideration of the

comments relating to the exemption from the diesel fuel tax imposed by

section 4081, Sec. 48.4082-1 (as proposed in PS-52-93 and PS-76-93) is

adopted as revised by this Treasury decision and the corresponding

temporary regulations are removed. The comments and revisions are

discussed below. Other sections of the proposed and temporary

regulations remain in force until final regulations on those topics are

issued.

Existing IRS and EPA Regulations

Effective October 1, 1993, Environmental Protection Agency (EPA)

regulations (40 CFR 80.29) make it unlawful for any person to

manufacture, sell, supply, offer for sale or supply, dispense,

transport, or introduce into commerce diesel fuel that contains a

concentration of sulfur in excess of 0.05 percent (by weight) (high-

sulfur diesel fuel) unless the fuel contains visible evidence of the

blue dye 1,4 dialkylamino-anthraquinone. A substantial penalty applies

to the use of high-sulfur diesel fuel in motor vehicles.

Effective January 1, 1994, the Federal excise tax on diesel fuel

imposed by section 4081 does not apply to removals of diesel fuel that

is indelibly dyed (or dyed and marked) in accordance with IRS

regulations. Section 48.4082-1T(b) of the Manufacturers and Retailers

Excise Tax Regulations and a transitional rule in Notice 94-21, 1994-11

Internal Revenue Bulletin 32, provide that diesel fuel that is required

to be dyed blue pursuant to EPA's high-sulfur diesel fuel program

satisfies the IRS dyeing requirement only if it contains blue dye of

the prescribed concentration level. Diesel fuel that is not required to

be dyed blue pursuant to EPA's high-sulfur diesel fuel program

satisfies the IRS dyeing requirement only if it contains a red dye of a

prescribed type and concentration. In addition, the Commissioner is

given authority to modify the dyeing requirements by approving the use

of other dyes.

Safety Issues Regarding Aviation Gasoline

No Federal regulations require the dyeing of aviation gasoline

(avgas). However, avgas is dyed by refiners to differentiate various

grades of the fuel and to distinguish avgas from clear, kerosene-based

jet fuel. As a result of this practice, more than 90 percent of

domestic avgas is dyed blue or green. Extensive training has been

conducted within the aviation community to assure that pilots,

mechanics, fuel service personnel, and vendors are thoroughly familiar

with the meaning and use of color in fuels. This training is important

because contamination of avgas by even small amounts of other fuel can

cause an engine failure.

The Federal Aviation Administration, EPA, and IRS are concerned

that blue-dyed diesel fuel might be mistaken for blue or green avgas.

Of particular concern is the possibility of misfuelings in remote

locations where fuels are dispensed into nonstandard containers or

where different fuels are stored in similar containers in close

proximity to each other.

Public Comments

The IRS received comments from refiners, pipeline and terminal

operators, and others in the diesel fuel distribution system concerning

the dye color and concentration requirements of the temporary and

proposed regulations. In general, these comments suggested that the

blue dye concentration level should be lower than that scheduled to go

into effect on July 1, 1994, and the red dye concentration should be

lower than the current requirement (3.9 pounds per thousand barrels

(ptb) when expressed as a solid dye standard). The comments expressed

concern that the required concentration level might cause sedimentation

in pipelines and engines and make the petroleum industry's tests for

cloud point and haze more difficult to conduct. A comment from a dye

manufacturer indicated, however, that the required red dye is

completely soluble in fuel and noted that an independent laboratory had

no difficulty in conducting the cloud point and haze test. The IRS

carefully considered these public comments in developing the final

regulations.

IRS Concerns

In addition to its concerns about aviation safety, the IRS believes

that enforcement of the diesel fuel excise tax will be impaired unless

the dye in fuel is visible when that fuel is diluted as part of any

practicable plan of large-scale tax evasion. In determining the

appropriate dye color and concentration requirements to address this

concern, the IRS inspected numerous samples of diesel fuel containing

various colors and concentrations of dye. Many of these samples were

independently produced by the IRS and others were provided by the

petroleum industry and dye manufacturers.

Explanation of Final Regulations

In order to avoid any possible confusion with blue or green avgas,

these final regulations provide that beginning October 1, 1994, diesel

fuel can no longer be dyed blue for tax exemption purposes. Rather, red

dye will be used to identify all tax-exempt diesel fuel, regardless of

the sulfur content of that fuel. The Commissioner will retain the

authority to modify this requirement by approving the use of other

dyes, but will not permit the use of dyes that could cause diesel fuel

to be mistaken for avgas. In addition, a transitional rule will permit

tax-free removals of high-sulfur diesel fuel that was dyed blue before

October 1, 1994.

The red dye concentration required by the final regulations is the

equivalent of the red dye concentration currently required by IRS for

tax-exempt low-sulfur diesel fuel. In the final regulations, however,

the required red dye concentration is expressed in terms of a solid dye

standard, which is uniform among dye manufacturers, rather than in

terms of the dye's active ingredient. This change does not impose any

additional requirements on diesel fuel that was dyed red under the

rules in effect before the issuance of the final regulations. Thus,

diesel fuel that was dyed red in accordance with those rules will

satisfy the solid dye standard in the final regulations.

Based on its inspection of dyed diesel fuel samples, the IRS

believes the 3.9 ptb concentration required by the final regulations is

necessary to address its concerns regarding dilution. In many cases

involving the diesel fuel dyed with less than 3.9 ptb, the dye was not

visible when the fuel was diluted. Thus, a required concentration level

of less than 3.9 ptb could result in considerable diesel fuel tax

evasion.

The IRS understands the petroleum industry's concerns on the

concentration issue and will continue to monitor the effectiveness of

the 3.9 ptb standard.

Action by EPA

In conjunction with these IRS final regulations, EPA is issuing

regulations in a future issue of the Federal Register that require

high-sulfur diesel fuel to be dyed red rather than blue. The EPA rule

and the IRS rule have the same effective dates.

Special Analyses

It has been determined that this Treasury decision is not a

significant regulatory action as defined in EO 12866. Therefore, a

regulatory assessment is not required. It also has been determined that

section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)

and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to

these regulations, and, therefore, a Regulatory Flexibility Analysis is

not required. Pursuant to section 7805(f) of the Internal Revenue Code,

the notices of proposed rulemaking preceding these regulations were

submitted to the Chief Counsel for Advocacy of the Small Business

Administration for comment on their impact on small business.

Drafting Information

The principal author of these regulations is Frank Boland, Office

of Assistant Chief Counsel (Passthroughs and Special Industries).

However, other personnel from the IRS and Treasury Department

participated in their development.

List of Subjects in 26 CFR Part 48

Excise taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 48 is amended as follows:

PART 48--MANUFACTURERS AND RETAILERS EXCISE TAXES

Paragraph 1. The authority citation for part 48 is amended by

removing the entry for ``Sections 48.4082-1T and 48.4082-2T'' and

adding the following entry in numerical order to read as follows:

Authority: 26 U.S.C. 7805 * * *

Sections 48.4082-1 and 48.4082-2T also issued under 26 U.S.C.

4082(c). * * *

Par. 2. Section 48.4082-1T is removed and Sec. 48.4082-1 is added

to read as follows:

Sec. 48.4082-1 Diesel fuel tax; exemption.

(a) Exemption. Tax is not imposed by section 4081 on the removal,

entry, or sale of any diesel fuel if--

(1) The person otherwise liable for tax is a taxable fuel

registrant;

(2) In the case of a removal from a terminal, the terminal is an

approved terminal; and

(3) The diesel fuel satisfies the dyeing and marking requirements

of paragraph (b) of this section.

(b) Dyeing and marking requirements--(1) Dyeing; high sulfur fuel

before June 28, 1994. Diesel fuel that is required to be dyed blue

pursuant to the Environmental Protection Agency's high sulfur diesel

fuel requirement (40 CFR 80.29) satisfies the dyeing requirement of

this paragraph (b) only if it contains--

(i) For periods before April 1, 1994, the blue dye 1,4

dialkylamino-anthraquinone in a concentration of at least 1.2 pounds of

active ingredient (exclusive of the solvent) per thousand barrels of

diesel fuel;

(ii) For periods after March 31, 1994, and before June 28, 1994,

the blue dye 1,4 dialkylamino-anthraquinone (Color Index Solvent Blue

98) in a concentration of at least 4 pounds of active ingredient

(exclusive of the solvent) per thousand barrels of diesel fuel; or

(iii) Any dye of a type and in a concentration that has been

approved by the Commissioner.

(2) Dyeing; low sulfur fuel before June 28, 1994. Before June 28,

1994, diesel fuel that is not described in paragraph (b)(1) of this

section satisfies the dyeing requirement of this paragraph (b) only if

it contains--

(i) The dye Solvent Red 164 at a concentration spectrally

equivalent to 3.9 pounds per thousand barrels of the solid dye standard

Solvent Red 26; or

(ii) Any dye of a type and in a concentration that has been

approved by the Commissioner.

(3) Dyeing; all diesel fuel after June 27, 1994.

(i) After June 27, 1994, and before October 1, 1994, diesel fuel

satisfies the dyeing requirement of this paragraph (b) only if it--

(A) Is required to be dyed pursuant to the Environmental Protection

Agency's high-sulfur diesel fuel program (40 CFR 80.29) and contains

the blue dye 1,4 dialkylamino-anthraquinone (Color Index Solvent Blue

98) in a concentration of at least 4 pounds of active ingredient

(exclusive of the solvent) per thousand barrels of diesel fuel;

(B) Contains the dye Solvent Red 164 at a concentration spectrally

equivalent to 3.9 pounds per thousand barrels of the solid dye standard

Solvent Red 26;

(C) Is a mixture of diesel fuels each of which satisfies the dyeing

requirement described in paragraph (b)(3)(i)(A), (B), or (D) of this

section; or

(D) Contains any dye of a type and in a concentration that has been

approved by the Commissioner.

(ii) After September 30, 1994, diesel fuel (regardless of sulfur

content) satisfies the dyeing requirement of this paragraph (b) only if

it--

(A) Contains the dye Solvent Red 164 at a concentration spectrally

equivalent to 3.9 pounds per thousand barrels of the solid dye standard

Solvent Red 26;

(B) Is required to be dyed pursuant to the Environmental Protection

Agency's high-sulfur diesel fuel program (40 CFR 80.29) and contains

the blue dye 1,4 dialkylamino-anthraquinone (Color Index Solvent Blue

98) that was added to the fuel, in a concentration of at least 4 pounds

of active ingredient (exclusive of the solvent) per thousand barrels of

diesel fuel, before October 1, 1994;

(C) Is a mixture of diesel fuels each of which satisfies the dyeing

requirement described in paragraph (b)(3)(ii) (A), (B), or (D) of this

section; or

(D) Contains any dye of a type and in a concentration that has been

approved by the Commissioner.

(4) Marking. [Reserved]

(c) Effective date. This section is effective January 1, 1994.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved: June 17, 1994.

Leslie Samuels,

Assistant Secretary of the Treasury.

[FR Doc. 94-15799 Filed 6-28-94; 2:29 am]

BILLING CODE 4830-01-U