Fuel Tax Evasion via the Fuel Tax Refund Process

Abstract

Despite data that estimate the amount of fuel tax evasion, few papers have examined fuel tax evasion through the fuel tax refund process. This paper presents data analysis indicating that the fuel tax refund process, though susceptible to errors, is not a common means of evasion. Motor fuel taxes are excise taxes meant to benefit transportation infrastructure. However, some fuel use occurs off the roadway. For example, a farm tractor expends fuel while plowing a field; well-drilling trucks expend fuel while drilling a well; and truck refrigeration units with separate fuel tanks expend fuel powering the refrigerator pump. Arguably, users should not have to pay an excise tax for fuel used for off-road purposes. For diesel, at least, the federal government created tax-exempt, dyed diesel. However, some users are not able to purchase dyed diesel, or they require another type of fuel. The federal government and some state governments provide processes for these off-road users to obtain tax credits or refunds when tax-exempt fuel is unavailable, but these processes are susceptible to errors, omissions, and evasion. This paper examines data from 3 years for three types of refunds in Montana, but the results have implications for all states. The data indicate that mathematical errors and errors relating to the forms required to file for refunds most commonly plague the refund process. The data do not indicate that much evasion is occurring within the fuel tax refund process.

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“…Whilst Chiarini et al (2013) focused on VAT tax evasion in Italy, Church et al (2013) investigated fuel tax evasion in the United States of America. Fuel taxes are charged on the users of fuel in order to help fund road construction in American cities (Church et al, 2013). Americans who use diesel for off-road duties like farming are permitted to purchase tax exempt fuel which is dyed.…”

“…Americans who use diesel for off-road duties like farming are permitted to purchase tax exempt fuel which is dyed. However, in the event they do not have access to this taxexempt fuel, they are allowed to reclaim fuel taxes paid using a tax refund process (Church et al, 2013). Church et al (2013) sought to determine to what extent people in Montana abused the fuel tax refund process in order to evade legitimate fuel taxes they owe to the government.…”

“…However, in the event they do not have access to this taxexempt fuel, they are allowed to reclaim fuel taxes paid using a tax refund process (Church et al, 2013). Church et al (2013) sought to determine to what extent people in Montana abused the fuel tax refund process in order to evade legitimate fuel taxes they owe to the government. An analysis of Montana fuel tax refund data for three years revealed that most errors identified in the request for tax refunds actually favoured the state rather than individual claimants which led the authors to conclude that people living in Montana did not actively practice fuel tax evasion via the tax refund process.…”