New Rebate Procedures On
Federal Gas Tax

Effective January 1,1988, all local governments will have to pay the nine cent federal gas tax when purchasing gasoline and file for a refund of the tax at a later date. Authorized by provisions in the Tax Reform Act of 1986, the Internal Revenue Service proposed rules to implement the tax and refund procedures in the November 18, 1987, Federal Register. On January 5, 1988, the IRS held a public hearing in Washington, D.C.; public comments are now under review prior to issuance of final regulations.

However, regardless of the certainty of the language for the final regulations, the tax will be required at time of purchases for gasoline sold after December 31, 1987. Under prior law, the gas tax was generally collected at the wholesale level; municipal governments were exempt and were not required to pay the tax when purchasing gasoline from the wholesaler. Arguments were made to Congress that there was widespread evasion of the gas tax by those, including organized crime, who purchased gasoline without tax payment by using the registration numbers of exempt organizations, including municipal governments. The new "solution" to the evasion problem is to hold the terminal operator liable for tax payments; with fewer terminal operators with which to deal than wholesalers, IRS's collection and enforcement is simplified. Collection of gas taxes from municipalities and others, followed by a tax rebate at a later date, also enables the federal government to earn unlimited arbitrage earnings on the tax funds not yet returned.

The proposed regulations impose recordkeeping and refund requirements on "taxpayers," i.e., local government, who expect to purchase tax-paid gasoline for certain exempt purposes. The records to support a refund must contain a statement showing the number of gallons purchased, the purpose for which the gas was purchased, and the rate of federal tax in effect. A refund may be applied for quarterly as long as the claim is for over $1,000; otherwise, the claim is carried until the quarter in which $1,000 in claims has been reached or the last quarter in the fiscal year. The claim for refund should be filed on IRS Form 843.

Reprinted, with permission of the League of Oregon Cities from the League of Cities' Information Update, Salem, Oregon. •

Page 12 / Illinois Municipal Review / April 1988