Off-road diesel marketers in California may soon be able to recoup biodiesel tax
they paid upfront as the Golden State is considering removing the excise tax on
biodiesel blended into red-dyed diesel.
The bill, AB1032, sponsored by the California Biodiesel Alliance, provides that,
where tax is not imposed on dye-blended biodiesel fuel upon removal from the
terminal rack, if tax was previously imposed on the biodiesel fuel portion, then
a claim for refund is allowed for the tax paid on that biodiesel fuel. This bill
passed the Assembly on June 3 with a vote of 80-0, and it is now making its way
through the committees in the Senate.
This biodiesel tax refund could result in a bottom line boost of several
thousand dollars a month for some marketers, depending on individual sales
volumes. It also depends on locations. The more agriculture-heavy markets such
as Fresno would see a bigger impact.
Some marketers are now paying biodiesel excise tax for sales of red-dyed diesel
even though the off-road diesel is designated as a tax-free fuel. Some marketers
are recouping this biodiesel tax by tagging on half a penny per gallon more on
the price of red-dyed diesel, widening the price gap between off-road and on-
road diesel to a penny. This practice could price these marketers with prices
half a penny higher out of the wholesale market.
A blender has to pay 11cts/gal for biodiesel excise tax, and a 5% biodiesel
blend in diesel will translate to a tax cost of about half a penny per gallon.
OPIS reported in May that Tesoro, Apex and Idemitsu are tagging an extra half a
penny per gallon to their red-dye diesel in an effort to recoup the biodiesel
tax that suppliers pay for blending up to 5% of biodiesel into rack diesel
A majority of other marketers at the same terminals, including Colton, Fresno
and San Jose, are pegging their rack price spread between off-road and on-road
diesel at half a penny a gallon.
Unlike on-road diesel, suppliers are not allowed to charge the biodiesel tax to
off-road diesel prices because red-dyed diesel is designated as tax-free.
This penny price disparity is evident in only some terminals due to the limited
blending availability of biodiesel in California. These include Kinder Morgan
terminals in Colton, Fresno and San Jose.
While the bill, if passed, could allow diesel marketers to recoup the biodiesel
excise tax paid upfront before blending at the terminals, the exact procedure of
recouping and calculating this tax refund or claim retroactively remains
Marketers pay the biodiesel excise tax upfront for supplies into one common
biodiesel tank at Kinder Morgan terminal. This supply is for blending into both
on-road and off-road diesel racks sales. The biodiesel is blended in-line by
Kinder Morgan, which specifies that diesel sold at its racks could contain up to
5% of biodiesel. Red dye is added at the truck loading racks.
Based on that 5% blend specification, the biodiesel percentage in diesel sold at
Kinder Morgan terminals could range from 0.001% to a maximum of 5%. This could
prove to be a headache for marketers to quantify the biodiesel tax paid for red-
Some marketers said that the current Kinder Morgan terminal system does not have
separate biodiesel tanks for on-road and off-road diesel.
However, some other marketers said that the solution to this problem of
recouping biodiesel tax retroactively is to nominate 5% biodiesel for off-road
diesel blending at Kinder Morgan terminals and file for a tax refund based on
that nomination, regardless of the actual biodiesel percentage on the finished
While the proposed tax refund would boost rack profits and margin for off-road
diesel, most marketers expect more back-office paperwork to match racks sales
volumes with biodiesel nominations retroactively.
Level Playing Field
According to the bill, some suppliers have been unable to obtain a credit or
refund for taxes paid on biodiesel that enters California, or is produced in-
state, and is delivered into their terminals as tax-paid, but is subsequently
removed at the terminal rack for a nontaxable purpose.
While current law allows reimbursement for tax paid on diesel fuel that has been
taxed more than once, the current statutory regime does not account for tax-paid
diesel fuel that is taxed coming into the terminal but removed for nontaxable
purposes (i.e., dyed biodiesel blends), the bill said.
In such cases, the supplier is unable to recover the tax from the customer and
is also unable to seek reimbursement for the tax from the State Board of
Since the tax-paid biodiesel portion is blended with ex-tax dyed diesel fuel, it
is not subject to taxation when removed from the terminal rack. Because there is
no subsequent taxable event with which to claim the credit, the current statute
does not provide for a reimbursement of the tax-paid portion of the biodiesel.
This bill allows a diesel fuel tax refund to a supplier for that portion of tax-
paid biodiesel fuel removed from the terminal rack as a dyed biodiesel blend.
The BOE estimates that this bill would have resulted in roughly $779,000 in
refunds in fiscal year (FY) 2012-2013, and roughly $2.83 million in FY 2013-
AB 1032 would help level the playing field for biodiesel in California. The
Diesel Fuel Tax Law, which imposes a tax on diesel fuel, currently provides for
a reimbursement for the amount of that tax to entities who have used that tax-
paid fuel in certain nontaxable uses.
However, because clear biodiesel is currently transported to terminals for
blending by truck rather than pipeline, biodiesel producers, who have paid the
Diesel Fuel excise or "road tax," must charge the refiner/blenders for the tax,
and the refiner/blender is not currently able to recoup the funds for the tax
paid on the biodiesel fuel portion of dyed blended diesel fuel removed from the
The bill said that the allowance for a reimbursement (through a claim for
refund), when the supplier can show that they have paid the tax on that
biodiesel removed from an approved terminal, is a necessary and widely agreed
upon solution to this problem.
The BOE would not have any administrative issues with the refund provisions. The
BOE administers all provisions of the Diesel Fuel Tax Law, including the
exemption and refund provisions. BOE staff works closely with the fuel industry
to remain aware of industry trends and practices, and provides information and
assistance in the form of special notices, publications and reports, answers to
frequently asked questions, and newsletters.
The BOE has previously provided guidance to suppliers that refunds are not
allowed for tax-paid biodiesel fuel converted to dyed biodiesel fuel.
--Edgar Ang, email@example.com