Gasoline and Diesel Fuel Excise Tax; Dye Injection Systems and Markers; Measurement

[[Page 10490]]

DEPARTMENT OF THE TREASURY

26 CFR Part 48

[PS-6-95]

RIN 1545-AT18

Gasoline and Diesel Fuel Excise Tax; Dye Injection Systems and

Markers; Measurement

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations relating to the

gasoline and diesel fuel excise tax. The proposed regulations reflect

and implement certain changes made by the Revenue Reconciliation Act of

1990 and the Omnibus Budget Reconciliation Act of 1993 (the 1993 Act).

They affect certain enterers, refiners, terminal operators, and

throughputters. This document also provides a notice of public hearing

on these proposed regulations.

DATES: Written comments and outlines of oral comments to be presented

at the public hearing scheduled for June 20, 1996, must be received by

June 12, 1996.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (PS-6-95), room 5228,

Internal Revenue Service, POB 7604, Ben Franklin Station, Washington,

DC 20044. In the alternative, submissions may be hand delivered between

the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (PS-6-95), Courier's

Desk, Internal Revenue Service, 1111 Constitution Avenue, NW.,

Washington, DC. The public hearing will be held in the IRS Auditorium,

Seventh Floor, 7400 Corridor, Internal Revenue Building, 1111

Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,

Frank Boland, (202) 622-3130; concerning submissions and the hearing,

Christina Vasquez at (202) 622-7190; (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in this notice of proposed

rulemaking has been submitted to the Office of Management and Budget

for review in accordance with the Paperwork Reduction Act of 1995 (44

U.S.C. 3507).

Comments on the collection of information should be sent to the

Office of Management and Budget, Attn: Desk Officer for the Department

of the Treasury, Office of Information and Regulatory Affairs,

Washington, DC 20503, with copies to the Internal Revenue Service,

Attn: IRS Reports Clearance Officer, T:FP, Washington, DC 20224.

Comments on the collection of information should be received by May 13,

1996.

An agency may not conduct or sponsor, and a person is not required

to respond to, a collection of information unless the collection of

information displays a valid control number.

The collection of information is in Sec. 48.4082-1(c). This

information is required by the IRS to monitor manual dyeing at

terminals. This information will be used to ensure the collection of

the proper amount of tax imposed by section 4081. The likely

recordkeepers are business or other for-profit institutions and

organizations. Responses to this collection of information are required

to obtain exemption from the diesel fuel excise tax.

Books or records relating to a collection of information must be

retained as long as their contents may become material in the

administration of any internal revenue law. Generally, tax returns and

tax return information are confidential, as required by 26 U.S.C. 6103.

Estimated total annual recordkeeping burden: 200 hours.

Estimated average annual burden per recordkeeper: 1 hour.

Estimated number of recordkeepers: 200.

Background

Section 4081 imposes a tax on certain removals, entries, and sales

of diesel fuel. However, under section 4082, the tax is not imposed if,

among other conditions, the diesel fuel (1) is indelibly dyed in

accordance with regulations that the Secretary shall prescribe, and (2)

meets such marking requirements (if any) as may be prescribed by the

Secretary in regulations.

The regulations currently provide that the section 4082 exemption

applies only to diesel fuel that contains a prescribed type and amount

of dye. However, the regulations do not prescribe the time or method

for adding the dye to diesel fuel and do not require the use of a

marker.

Dye Injection Systems

Dyeing Methods

Diesel fuel is usually dyed at a terminal rack by either manual

dyeing or mechanical injection.

At a terminal using a typical manual dyeing technique, a measured

amount of dye is manually placed into an empty tank compartment of a

transport trailer while the trailer is at the terminal rack. Then, as

diesel fuel is pumped into the compartment at the rack, the dye and the

fuel are mixed together. Further mixing occurs through the motion of

the trailer as it moves on the highway.

At a terminal using a typical mechanical injection system, a

measured amount of dye is automatically injected into the diesel fuel

as the fuel is delivered into a compartment of a transport trailer at

the terminal rack.

Conerns About Manual Dyeing

The Federal government, State governments, and various segments of

the petroleum industry have long been concerned with the problem of

diesel fuel tax evasion, and to address this problem Congress changed

the law to require that untaxed diesel fuel be indelibly dyed. The IRS

is concerned, however, that tax can still be evaded through removals at

a terminal of undyed fuel that has been designated as dyed.

Manual dyeing is inherently difficult to monitor. It occurs after

diesel fuel has been withdrawn from a terminal storage tank, generally

requires the work of several people, is imprecise, and does not

automatically create a reliable record.

Mechanical dye injection, on the other hand, occurs while the fuel

is still under the control of the terminal operator, is computer

regulated, and can automatically create a reliable record of the amount

of dye that was injected and fuel that was dyed. Thus, dye injection is

the preferred method of combining diesel fuel and dye at a terminal.

Explanation of Provisions

Diesel fuel removed from a terminal at the rack may be dyed before

the fuel is received at the terminal, while the fuel is in a bulk

storage tank at the terminal, or at the terminal rack. Under the

proposed regulations, as under existing law, diesel fuel must contain a

prescribed type and amount of dye at the time of the removal, entry, or

sale that would otherwise be subject to tax. For example, high-sulfur

diesel fuel, which is required to be dyed at a refinery under

Environmental Protection Agency regulations, must contain the

prescribed type and amount of dye at the time of the removal at the

terminal rack even if additional dye must be added at that point.

Under the proposed regulations, a terminal operator that dyes

diesel fuel at a terminal generally must use a prescribed mechanical

injection system or else give a bond to the district

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director as a condition of retaining its registration. The prescribed

system contains calibrated measurement devices, shut-off devices, and

locks and similar equipment to secure these devices. If the system

malfunctions at a particular terminal, the terminal operator may

manually dye the fuel if the operator notifies the district director of

the malfunction.

The proposed regulations also prescribe the records that the

terminal operator must maintain with respect to any manual dyeing

performed at its terminals.

Markers

A marker is a material that is placed in diesel fuel to designate

the fuel as untaxed. Unlike dye, a marker does not reveal its presence

until the fuel into which it is introduced is subjected to a special

test. Markers are effective even if diluted and can be detected even if

there is no visual evidence of dye.

The proposed regulations do not require the use of markers.

However, the IRS expects to issue a notice of proposed rulemaking with

respect to markers within the next year. In the meantime, the IRS is

interested in receiving comments relating to the type and concentration

of markers, the cost of markers, and whether lower concentrations of

dye could be used in conjunction with a marker.

Measurement

Existing regulations provide that gallons of taxable fuel may be

measured on the basis of actual volumetric gallons, gallons adjusted to

60 degrees Fahrenheit, or any other temperature adjustment method

approved by the Commissioner.

These proposed regulations modify this rule by generally providing

that measurement is to be made on the basis of actual volumetric

gallons or gallons adjusted to 60 degrees Fahrenheit, whichever is the

basis for measurement under the position holder's terminaling agreement

with the terminal operator.

Special Analyses

It has been determined that this notice of proposed rulemaking 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, this notice of proposed rulemaking will be

submitted to the Chief Counsel for Advocacy of the Small Business

Administration for comment on its impact on small business.

Comments and Public Hearing

Before these proposed regulations are adopted as final regulations,

consideration will be given to any written comments (a signed original

and eight (8) copies) that are submitted timely to the IRS. All

comments will be available for public inspection and copying.

A public hearing has been scheduled for Thursday, June 20, 1996, at

10 a.m. in the Auditorium, Internal Revenue Building, 1111 Constitution

Avenue NW., Washington, DC. Because of access restrictions, visitors

will not be admitted beyond the building lobby more than 15 minutes

before the hearing starts.

The rules of 26 CFR 601.601(a)(3) apply to the hearing.

Persons that wish to present oral comments at the hearing must

submit written comments and an outline of topics to be discussed and

the time to be devoted to each topic (signed original and eight (8)

copies) by June 12, 1996.

A period of 10 minutes will be allotted to each person for making

comments.

An agenda showing the scheduling of the speakers will be prepared

after the deadline for receiving outlines has passed. Copies of the

agenda will be available free of charge at the hearing.

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.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 48 is proposed to be amended as follows:

PART 48--MANUFACTURERS AND RETAILERS EXCISE TAXES

Paragraph 1. The authority citation for part 48 continues to read,

in part, as follows:

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

Par. 2. Section 48.4081-8 is revised to read as follows:

Sec. 48.4081-8 Taxable fuel; measurement.

(a) Removals from a terminal. For purposes of the tax imposed under

Secs. 48.4081-2 and 48.4081-3(d), taxable fuel is measured on the basis

of actual volumetric gallons or gallons adjusted to 60 degrees

Fahrenheit, whichever is the basis for measurement under the position

holder's terminaling agreement with the terminal operator.

(b) Other taxable events. For purposes of the taxes imposed under

Secs. 48.4081-3(b), 48.4081-3(c), 48.4081-3(e), and 48.4082-4, and the

tax imposed on the removal of taxable fuel under Sec. 48.4081-3(g),

taxable fuel is measured on the basis of actual volumetric gallons or

gallons adjusted to 60 degrees Fahrenheit. For purposes of the tax

imposed under Sec. 48.4081-3(f) and the tax imposed on the sale of

taxable fuel under Sec. 48.4081-3(g), taxable fuel is measured on the

basis of actual volumetric gallons or gallons adjusted to 60 degrees

Fahrenheit, whichever basis is used to invoice the buyer.

(c) Effective date. This section is applicable as of October 1,

1996.

Par. 3. Section 48.4082-1 is amended as follows:

1. In the introductory text of paragraph (a), the language ``if--''

is removed and ``if, at the time of the removal, entry, or sale--'' is

added in its place.

2. Paragraph (d) is revised.

The revision reads as follows:

Sec. 48.4082-1 Diesel fuel tax; exemption

* * * * *

(d) Time for adding the dye and marker--(1) Removals from a

terminal at the terminal rack; in general. With respect to any removal

from a terminal at the terminal rack, diesel fuel satisfies the dyeing

and marking requirements of this paragraph (d) only if the dye and

marker required by paragraphs (b) and (c) of this section are combined

with diesel fuel--

(i) Before the fuel is received at the terminal;

(ii) While the fuel is in a bulk storage tank at the terminal; or

(iii) At the terminal rack by means of--

(A) A mechanical injection system described in paragraph (d)(2) of

this section; or

(B) Nonconforming dyeing, under the conditions of paragraph (d)(3)

of this section.

(2) Removals from a terminal at the terminal rack; mechanical

injection systems. A mechanical injection system is described in this

paragraph (d)(2) only if the district director has determined (and such

determination has not been withdrawn) that the system contains--

(i) Features that automatically inject a measured amount of dye and

marker into diesel fuel as the fuel is delivered

[[Page 10492]]

into the transport compartment of a truck, trailer, railroad car, or

other means of nonbulk transfer;

(ii) Calibrated devices that accurately measure and record the

amount of dye, marker, and fuel that is dispensed at the rack for each

removal;

(iii) Shut-off devices that prevent the removal of more than 50

gallons of undyed diesel fuel in the case of a system malfunction; and

(iv) Locks or similar security equipment that secure the

measurement devices and shut-off devices.

(3) Removals from a terminal at the terminal rack; conditions for

nonconforming dyeing. Nonconforming dyeing meets the conditions of this

paragraph (d)(3) only if diesel fuel is dyed and marked in the manner

described in paragraph (d)(4) of this section and--

(i) The terminal operator has given a bond as a condition of

registration under the provisions of Sec. 48.4101-1(f)(4)(i); or

(ii) In the case of a terminal containing a mechanical injection

system described in paragraph (d)(2) of this section--

(A) The accurate mechanical injection of dye and marker at the

terminal cannot occur because of an equipment malfunction or a shutdown

for maintenance purposes;

(B) Before beginning any nonconforming dyeing described in

paragraph (d)(4) of this section, the terminal operator notifies the

district director of the time, location, and type of malfunction or

maintenance shutdown; and

(C) Immediately after correction of the malfunction or completion

of the maintenance, the terminal operator notifies the district

director that mechanical injection has resumed.

(4) Removals from a terminal at the terminal rack; description of

nonconforming dyeing--(i) In general. Diesel fuel is dyed and marked in

a manner described in this paragraph (d)(4) only if the diesel fuel is

dyed and marked by means of a mechanical injection system described in

paragraph (d)(4)(ii) of this section or manual dyeing described in

paragraph (d)(4)(iii) of this section.

(ii) Mechanical injection. Diesel fuel is dyed and marked in a

manner described in this paragraph (d)(4)(ii) if the diesel fuel is

dyed and marked by means of a mechanical injection system that is not

described in paragraph (d)(2) of this section and, with respect to the

diesel fuel so dyed and marked, the terminal operator maintains a

record of--

(A) The identity and registration number of the position holder;

(B) The identity and taxpayer identification number of the

individual that physically receives the fuel at the terminal;

(C) The identity and taxpayer identification number of any

individual that physically operates the mechanical injection equipment;

and

(D) The volume of the fuel dyed and marked and the date and time of

the dyeing.

(iii) Manual dyeing. Diesel fuel is dyed and marked in a manner

described in this paragraph (d)(4)(iii) if--

(A) The terminal operator places a dye and marker of the type and

concentration required by paragraphs (b) and (c) of this section into a

compartment of a truck, trailer, railroad car, or other means of

nonbulk transfer;

(B) The diesel fuel is removed from the terminal at the rack and is

immediately delivered into the compartment described in paragraph

(d)(4)(iii)(A) of this section; and

(C) With respect to the diesel fuel so dyed and marked, the

terminal operator maintains a record of--

(1) The identity and registration number of the position holder;

(2) The identity and taxpayer identification number of the

individual that physically receives the fuel at the terminal;

(3) The identity and taxpayer identification number of the

individual that physically places the dye and marker into the

compartment described in paragraph (d)(4)(iii)(A) of this section; and

(4) The volume of the fuel dyed and marked and the date and time of

the manual dyeing.

(5) Removals from refineries, sales or entries. With respect to any

removal from a refinery, sale, or entry, diesel fuel satisfies the

dyeing and marking requirements of this paragraph (d) only if the dye

and marker required by paragraphs (b) and (c) of this section are

combined with diesel fuel before the removal, sale, or entry that would

otherwise be subject to the tax imposed by section 4081. Thus, for

example, diesel fuel that is entered into the United States by means of

nonbulk transfer (such as in a railroad car) does not satisfy the

requirements of this paragraph (d)(5) if the required dye and marker

are combined with the diesel fuel after the fuel has been entered into

the United States.

(6) Cross reference. For rules allowing inspection of equipment

used for the dyeing of fuel, see section 4083.

(7) Effective date. This paragraph (d) is applicable as of April 1,

1997.

* * * * *

Par. 4. Section Sec. 48.4101-1 is amended as follows:

1. Paragraph (b)(7) is added.

2. Paragraph (f)(4)(i) is amended by adding a sentence at the end

of the paragraph.

3. In the first sentence of paragraph (j)(2) introductory text, the

language ``A bond'' is removed and ``Except as provided in the last

sentence of paragraph (f)(4)(i) of this section, a bond'' is added in

its place.

4. Paragraph (l)(4) is added

The additions read as follows

Sec. 48.4101-1 Registration.

* * * * *

(b) * * *

(7) Nonconforming dyeing amount. The nonconforming dyeing amount is

the product of--

(i) The rate of tax on diesel fuel provided by section 4081(a)(2);

and

(ii) An amount up to the total number of gallons of diesel fuel

expected to be dyed by nonconforming dyeing (and removed at terminal

racks of the applicant that do not have a mechanical injection system

described in Sec. 48.4082-1(d)(2)) during a representative one-month

period (as determined by the district director).

* * * * *

(f) * * *

(4) * * * (i) * * * An applicant that operates a terminal where

diesel fuel is dyed by nonconforming dyeing (and removed at a rack that

is not equipped with a mechanical injection system described in

Sec. 48.4082-1(d)(2)) meets the adequate security test only if the

applicant has given a bond (in addition to any bond given under

paragraph (j) of this section) equal to the nonconforming dyeing

amount.

* * * * *

(l) * * *

(4) The last sentence of paragraph (f)(4)(i) of this section is

applicable as of April 1, 1997.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

[FR Doc. 96-5587 Filed 3-13-96; 8:45 am]

BILLING CODE 4830-01-P