September 2, 1998
FEDERAL TAX CHANGE AS OF JULY 1, 1998
Effective July 1, 1998, the Internal Revenue Service (IRS) changed the way kerosene is treated for federal excise tax purposes. The following information should help you comply with the law.
Low sulfur kerosene, commonly referred to as 1-K kerosene, has historically been "clear and water white." This is the type of kerosene you would find at a service station or convenience store available for purchase in 5-gallon cans. Service stations and other retail sales points have had STATE exemption numbers permitting state tax-free purchase and sale of this fuel for non-highway purposes. The STATE tax process has not changed for kerosene.
Effective July 1, 1998, IRS applied the federal excise tax of $.244 on each gallon of undyed (clear) kerosene sold to any retailer or end-user. Therefore, the retailer who has been selling clear 1-K kerosene will see a cost increase in the amount of the federal excise tax on all purchases from the supplier. The supplier can not sell any undyed kerosene to a retailer without collecting the federal tax.
In order for any retailer to sell undyed kerosene, without having to absorb the cost of the federal tax, the retailer will have to qualify and apply for a Federal 637 registration as an "Ultimate Vendor-Blocked Pump" registrant. In the end, the retailer will be able to apply to IRS for a refund of the taxes paid on kerosene. In order to qualify, the retail kerosene pump must:
- Not be on any fuel island with any other pump (gasoline or diesel);
- Be set off to the side away from traffic;
- Be blocked, to prevent any vehicle getting near the pump (use of permanently imbedded steel pipes or concrete barriers as an example);
- Have a short hose - one that will not reach beyond, over or through the barrier; and
- Display the required federal label.
Chain operators selling kerosene at more than one location must qualify at ALL of their locations before they can qualify for a Federal 637 registration.
After the retailer has received notice of 637 registration from IRS, the retailer will need to follow federal guidelines for filing refund requests.
Key points to remember regarding kerosene as of July 1…….
- The cost of undyed kerosene to the retailer will include $.244 federal tax.
- There is no change to the state tax status of kerosene.
- Undyed kerosene, purchased without the state or federal motor fuel tax, cannot be used in any taxable use.
- Dyed kerosene can not be used in any motor vehicle and it cannot be used as a winter blend stock for undyed, low-sulfur diesel fuel.
- It is very strongly recommended that dyed kerosene NOT be sold for use in kerosene space heaters.
If a retailer does not receive 637 registration, only federal tax-paid undyed kerosene should be available at the retailer for kerosene customers. Once the retail customer purchases kerosene with the $.244 per gallon tax included, the customer cannot apply for a tax credit or refund of the kerosene tax paid.
If you need a 637 registration form, you may phone IRS at 1-800-TAX-FORM (1-800-829-3676) and ask for this form to be mailed to you.
Please note this form has not been updated to reflect the new classification of "Ultimate Vendor-Blocked Pump." IRS has advised that any person applying for the new registration, write the "Ultimate Vendor-Blocked Pump" phrase in the Activities section on the first page of the application.