Tax Talk: It pays to buy fuel in the right places

Eleven states raised their diesel tax rates on July 1, and some of them are big increases. Illinois jacked up its diesel tax by 24 cents a gallon. Ohio raised its diesel tax by 19 cents per gallon.

In California, the increase was 5.6 cents per gallon. Provincial or state fuel taxes really are fuel-use taxes, because the amount you owe is calculated based on where you burn the fuel and not where you buy it. For instance, if you travel 100,000 miles in Alberta but purchase no fuel there, Alberta is still owed fuel tax on those 100,000 miles.

The International Fuel Tax Agreement makes it easier to sort this out. Instead of filing fuel tax returns with each state or province, you file one each quarter with your base jurisdiction and it apportions any tax you paid based on the number of miles traveled in each IFTA-member state or province. If you’re like most owner-operators, your carrier is responsible for fuel tax, permitting and licensing reporting for your vehicle.

But who actually pays state or provincial taxes depends on your contract. If your contract states that the carrier charges you when you owe fuel taxes or pays you when you’re due a refund, you really should consider where you buy your fuel so you can maximize your refund. The big-picture goal is to pay the least amount for your fuel including the upfront purchase cost and factoring in the IFTA refund or payable.

And the fact is, you don’t really know how much fuel costs until you take the taxes out.
Another factor in the “where-to-buy” decision is the exchange rate. If you purchase most of your fuel in Canada, then your Canadian-currency fuel tax refund must be credited against your U.S.-currency fuel tax debt. This could put you in a payable or reduced refund situation.

Even though it appears to be more money up front, buying more fuel in the U.S. could create the opposite. Every time you drive in the U.S., it costs more – and you’re paying for it in Canadian dollars. It may pay to buy as much fuel as possible from states and provinces with the best net price (you can see our free and regularly updated fuel price comparison chart here).

You’ll find out soon enough when you file your quarterly IFTA return. One factor that should not affect where you buy fuel is Canada’s carbon tax. The Federal Carbon Pricing Backstop is a tax on CO2 emissions.

Like IFTA, if you pay the carbon tax in the pump price, you may get some of that back or owe more based on where you travel and consume your fuel. Provinces that have a carbon pricing program typically adjust their IFTA rate to include the carbon tax. But because the new carbon tax is federal, it cannot be added to IFTA rates since they are provincially controlled.

Because the carbon tax is refundable, the fuel charge is removed when you calculate the net fuel price. If you have to drive 100 kilometers in Saskatchewan, you’re going to pay carbon tax on your fuel consumption for those kilometers whether you buy the fuel there or anywhere else. Buying diesel in the U.S. is not the answer to avoiding the tax because you’ll just have to pay it later based on your travel in Canada.

That said, the reverse is also true: any carbon tax paid in Canada is refundable for travel in the U.S.

With your Q3 IFTA return due at the end of October, keep a close eye on how IFTA and carbon taxes are reflected on your broker settlements.

If your carrier charges your net IFTA to you, then you should see a net carbon tax refund or payable also being charged.

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