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Taxation of Alternative Fuels

Taxation of Alternative Fuels

Updated August 2012

By Simon Workman and Jaime Rall

gas pumpsStates are facing a well-documented and worsening transportation funding crisis, characterized by chronic, structural gaps between existing revenues and infrastructure needs. One reason for this crisis is the growing use of alternative fuel vehicles, as all states still rely mainly on federal and state gas taxes for transportation funding.

States are seeking both funding and financing options to help maintain and improve their transportation systems, especially given concerns about the long-term sustainability of the fuel tax. One option states have pursued is special taxes on alternative vehicle fuels with the revenues dedicated to transportation. Other states have enacted tax incentives or credits to encourage the use of such fuels.

The charts below provide information about state statutes and legislative activity related to taxation of alternative fuels. The definition of alternative fuels varies from state to state, but in general the category includes methanol, ethanol and other alcohols; blends of alcohol with gasoline; compressed natural gas and liquefied natural gas; liquefied petroleum gas (propane); hydrogen; electricity; and pure biodiesel.

Chart 1 details the 27 states that have statutes imposing a tax on a type of alternative fuel. Of these, 16 states (Calif., Ga., Idaho, Ill., Maine, Mich., Mont., Neb., Nev., N.J., Okla., Pa., S.D., Utah, Va. and Wis.) dedicate all alternative fuel tax revenue to transportation, and seven states (Ark., Kan., La., Miss., N.M., S.C. and Tenn.) dedicate a portion of the tax revenue to transportation.

Chart 2 shows the eight states (Mont., N.M., N.Y., R.I., S.D., Utah, Va. and Wis.) with statutes that provide for a tax exemption or deduction for alternative fuels.

Chart 3 shows the six states (Ill., Iowa, Mass., N.Y., Okla. and Pa.) that, as of April 10, 2012, were known to have bills pending in 2012 sessions related to alternative fuels.

Finally, Chart 4 lists relevant bills that have failed in state legislatures in recent years. 

In at least nine states (Ala., Ark., Colo., Fla., Mo., Okla., Texas, Utah and Wash.), operators of motor vehicles powered by certain alternative fuels are required to pay an annual flat rate fee instead of a sales or excise tax on the fuel, for example by purchasing an annual permit or decal. In five states (Calif., Idaho, Kan. and N.M.), operators of certain alternative fuel vehicles have the option of paying either an annual fee or a tax on the fuel. More information can be found in the Federation of Tax Administrators Summary of State Fuel Taxation 2012 report and the U.S. Department of Energy Alternative and Advanced Vehicles Data Center.

Chart 1: Statutes Imposing a Tax on Alternative Fuel 

Alaska | Arkansas | California | Georgia | Hawaii | Idaho | Illinois | Kansas | Louisiana Maine | Michigan | Minnesota | Mississippi | Montana | Nebraska | Nevada | New Jersey | New Mexico | North DakotaOklahoma | Pennsylvania | South Carolina | South Dakota | Tennessee | Utah | Virginia | Wisconsin

State

Relevant Citations

Revenues dedicated to transportation?

Provisions

Alaska

Alaska Stat. §43.40.010 (tax)

 

Alaska Const. Art. IX, §7 (dedication)

No. The Alaska constitution prohibits dedication of any revenues to any special purpose.

 

The tax rate on fuel containing ethanol is $0.06 per gallon less than the tax rate on other motor fuels in certain geographic areas. The reduced rate is only in effect during months in which fuel containing ethanol must be sold, transferred or used in an effort to reduce carbon monoxide emissions and attain federal or state air quality standards.

Arkansas

Ark. Stat. Ann. §26-62-201 (tax)

 

Ark. Stat. Ann. §26-62-109 (dedication)

Partial. After a 3 percent set-aside, 70 percent of remaining revenue is deposited in the State Highway and Transportation Department Fund.

Excise taxes on alternative fuels are imposed on a gasoline gallon equivalent basis. The rate for each alternative fuel type is based on the number of vehicles licensed in the state using that type of fuel and ranges from $0.050 to $0.165 per gasoline gallon equivalent.

California

Cal. Rev. & Tax. Code §8651 et seq. (tax)

 

Cal. Rev. & Tax. Code §9301 (dedication)

Yes.

Excise taxes on alternative fuels are $0.07 per cubic feet for compressed natural gas; $0.06 per gallon for liquefied natural gas; $0.06 per gallon for propane; and half of the current tax on gasoline and diesel for ethanol and methanol fuel blends containing up to 15 percent gasoline or diesel. In addition, California is one of four states that provides the option of purchasing an annual decal in lieu of paying the excise tax.

Georgia

Ga. Code Ann. §48-9-3 (tax)

 

Ga. Const. Art. 3, §9 ¶VI (dedication)

Yes.

Distributors of motor fuels, including special fuels, are subject to an excise tax of $0.075 per gallon, or per gasoline gallon equivalent.

Hawaii

Hawaii Rev. Stat. §243-4 (tax)

No.

Distributors of alternative fuels must pay a license tax of $0.0025 per gallon of fuel sold or used, plus an additional license tax depending on the type of alternative fuel.

Idaho

Idaho Code §63-2407 (tax)

 

Idaho Code §63-2412 (dedication)

Yes.

Special fuels are subject to the same tax rates as other motor fuels, being $0.25 per gallon or per gasoline gallon equivalent. Special fuels include compressed natural gas, liquefied natural gas, liquefied petroleum gas and hydrogen. In addition, Idaho is one of four states that provides the option of purchasing an annual decal in lieu of paying the excise tax.

Illinois
 

Ill. Ann. Stat. ch. 35, §105/3-10 (tax)

 

Ill. Ann. Stat. ch. 35, §5/20-101 (dedication)

Yes.
 

Sales and use taxes apply to only 80 percent of the proceeds from the sale of fuels containing 10 percent ethanol (E10) until Dec. 31, 2018. Reverts to 100 percent of proceeds if the tax rate is imposed at a rate of 1.25 percent. Sales and use taxes do not apply to fuels containing between 70 and 90 percent ethanol until Dec. 31, 2018.

Kansas

Kan. Stat. Ann. §79-34,141 (tax)

 

Kan. Stat. Ann. §79-34,142 (dedication)

Partial. The production accounts of the Kansas qualified agricultural ethyl alcohol producer incentive fund are allocated $875,000 each calendar quarter. Of the remaining revenue, 66.37 percent goes to the State Highway Fund and 33.63 percent to the Special City and County Highway Fund.

The minimum motor vehicle fuel tax rate on E85 ethanol fuel is $0.17 per gallon, on liquefied petroleum gas (propane) the rate is $0.23 per gallon, and on special fuels the rate is $0.26 per gallon. The conventional motor fuel tax rate is $0.24. (Note: ”Special fuels” means all combustible liquids suitable for the generation of power for the propulsion of motor vehicles including, but not limited to, diesel fuel, alcohol and such fuels not defined under the motor-vehicle fuels definition.) In addition, Kansas is one of four states that provides the option of purchasing an annual decal in lieu of paying the excise tax. Users of propane-powered vehicles who do have a decal can pre-pay their propane tax annually on a mileage basis or pay it monthly on a mileage basis; users with no decal must pay the $0.23 per gallon tax at the time of fueling.

Louisiana

La. Rev. Stat. Ann. §§47:801 et seq. (tax and dedication)

Partial. The revenues are credited to the Bond Security and Redemption Fund and can only be used to fund projects of the Highway Priority Program, the Parish Transportation Fund, the Statewide Flood-Control Program and the Parish Bridge Replacement Program.

The tax rate for all special fuels except compressed natural gas and liquefied petroleum gas (propane) is $0.16 per gallon. Owners or operators of vehicles fueled by compressed natural gas or propane that weigh less than 10,000 pounds may either pay an annual flat rate of $120 per vehicle or a variable rate of 80 percent of the current special fuels tax rate; owners or operators of such vehicles weighing more than 10,000 pounds must pay 80 percent of the special fuels tax rate, but not less than $120 per vehicle per year. The flat rates are based on the special fuels tax rate of $0.16 per gallon and specified miles per gallon values for each vehicle type, and are subject to change.

Maine

Maine Rev. Stat. Ann. tit. 36, ch. 45, §3203 (tax)

 

Maine Rev. Stat. Ann. tit. 36, ch. 459, §3219 (dedication)

Yes.

Blended fuels that contain at least 10 percent gasoline or diesel are taxed at the full tax rates for gasoline ($0.30 per gallon) or diesel ($0.312 per gallon). Tax rates on qualifying alternative fuels are $0.30 per gallon for E85; $0.312 per gallon for biodiesel blends of up to 90 percent; $0.287 for biodiesel blends of 90 - 100 percent; $0.219 per gallon for propane or liquefied petroleum gas; $0.243 per 100 cubic feet for compressed natural gas; $0.07 per 100 cubic feet for hydrogen; and $0.208 per 100 cubic feet for hydrogen compressed natural gas.

Michigan

Mich. Comp. Laws §207.1008 (tax)

 

Mich. Const. art. IX, §9 (dedication)

Yes.

A tax of $0.12 per gallon is imposed on gasoline containing at least 70 percent ethanol (E70) and diesel fuel containing at least 5 percent biodiesel (B5).

Minnesota

Minn. Stat. §296A.07 and §296A.08 (tax)

 

No.

An excise tax is imposed on the first licensed distributor that receives alternative fuels. Tax rates on qualifying alternative fuels are $0.1775 per gallon for E85; $0.1425 per gallon for M85 (a methanol blend); $0.1875 per gallon for liquefied petroleum gas or propane; $0.15 per gallon for liquefied natural gas; and $0.25 per gasoline gallon equivalent for compressed natural gas. All other gasoline is taxed at the rate of $0.25 per gallon.

Mississippi

Miss. Code Ann. §27-59-11 and §65-39-35 (tax)

 

Miss. Code Ann. §27-5-101 (dedication)

Partial. After set asides, revenue is deposited in the State Aid Road Construction Fund and the State Highway Fund.

A tax at the rate of $0.18 per one hundred cubic feet until the date specified in Miss. Code Ann. §65-39-35 and $0.144 per one hundred cubic feet thereafter, is levied on distributors of compressed gas or liquefied natural gas for use in a motor vehicle.

Montana

Mont. Code Ann. §15-70-711 (tax)

 

Mont. Code Ann. §15-70-101 (dedication)

Yes.

Retail sales for compressed natural gas and liquefied petroleum gas are subject to a modified tax based on energy content. (Also see Chart 2 for exemptions.)

Nebraska

Neb. Rev. Stat. §§66-6,102 et seq. (tax)

 

Neb. Rev. Stat. §66-6,108 (dedication)

Yes.

An excise tax of $0.075 per gallon or per gasoline gallon equivalent is imposed on all compressed natural gas, liquefied natural gas and liquefied petroleum gas (propane) sold for use in motor vehicles.

Nevada

Nev. Rev. Stat. §366.190

 

Nev. Rev. Stat. §366.700 (dedication)

Yes.

Special fuels, including biodiesel blends, have a reduced tax rate of $0.27 per gallon. Liquefied petroleum gas and compressed natural gas are taxed at a rate of $0.22 and $0.21 per gallon respectively.

New Jersey

N.J. Stat. Ann. §54:39-102 (definitions)

 

N.J. Stat. Ann. §54:39-103 (tax)

 

N.J. Const. art. VIII, §2 (dedication)

Yes.

Gasohol, ethanol, methanol, fuel grade alcohol and other blended fuels are taxed at the same rate as other motor fuels ($0.105 per gallon); kerosene and biodiesel are taxed at the same rate as other diesel fuel ($0.135 per gallon). Liquefied petroleum gas is taxed at half the rate of gasoline, or $0.0525 per gallon.

New Mexico

N.M. Stat. Ann. §7-16B-4 (tax)

 

N.M. Stat. Ann. §7-1-6.10 (dedication)

Partial. Tax receipts go to the State Road Fund, the State Aviation Fund, the Motorboat Fuel Tax Fund, local governments, qualified tribes and the General Fund.

Liquefied petroleum gas, propane, compressed natural gas and liquefied natural gas are subject to a $0.12 per gallon excise tax. In addition, New Mexico is one of four states that provides the option of purchasing an annual decal in lieu of paying the excise tax. (Also see Chart 2 for exemptions.)

North Dakota

N.D. Cent. Code §57-43.2-03 (tax)

No.

A special excise tax rate of 2 percent is imposed on the sale of liquefied petroleum gas and a tax of $0.04 per gallon is imposed on all special fuel sales, including compressed natural gas.

Oklahoma
 

Okla. Stat. Ann. tit. 68, §500.4 (tax)

 

Okla. Stat. Ann. tit. 68, §500.6 (dedication)

Yes.
 

The tax rate on compressed natural gas is  $0.05 per until Jan. 1, 2015, and $0.13 per gasoline gallon equivalent thereafter.
 

Pennsylvania

Pa. Cons. Stat. Ann. tit. 75, §9004(d) (tax)

 

Pa. Const. art. VIII, §11 (dedication)

Yes. The state constitution dedicates all proceeds from gasoline and other motor fuel excise taxes to highway and bridge purposes.

Alternative fuels used to propel vehicles on highways are subject to the alternative fuels tax. Alternative fuels include any other fuel not otherwise taxable as liquid fuels, including natural gas, propane, alcohols, gasoline-alcohol mixtures containing at least 85 percent alcohol by volume, hydrogen and electricity. The rate of the excise tax is computed on a gasoline gallon equivalent basis; the tax applied to each gasoline gallon equivalent equals the current liquid fuels tax and oil company franchise tax applicable to one gallon of gasoline.

South Carolina

S.C. Code Ann. §12-28-310 and §12-36-2150(15) (tax)

 

 

S.C. Code Ann. §§12-28-2710 et seq. (dedication)

Partial. Revenue is dedicated to the state Department of Transportation, mass transit, the County Transportation Fund, the State Highway Fund and the state Department of Natural Resources. 

Alternative fuels and blended fuels are subject to a state fuels user fee of $0.16 per gallon. However, they are exempt from the state sales and use tax.

South Dakota

S.D. Codified Laws Ann. §§10-47B-3 to 10-47B-10 (tax)

 

 

S.D. Const. art. XI, §8 and S.D. Codified Laws Ann. §10-47B-148 (dedication)

Yes.

The biodiesel and biodiesel blends tax rate will be reduced from $0.22 per gallon to $0.20 per gallon when production facilities in the state reach a specified capacity and production level. Ethyl alcohol and methyl alcohol motor fuels are taxed at a rate of $0.08 per gallon. Compressed natural gas is taxed at a rate of $0.10 per gallon, and liquefied petroleum gas at a rate of $0.20 per gasoline gallon equivalent. (Also see Chart 2 for exemptions.)

Tennessee

Tenn. Code Ann. §§67-3-1101 et seq. (tax)

 

Tenn. Code Ann. §67-3-905 and §67-3-908 (dedication)

Partial. After a set aside to the General Fund, revenue is apportioned to County Highway Funds, municipalities and the State Highway Fund. 

A use tax of $0.14 per gallon for liquefied gas and $0.13 per gallon for compressed natural gas is imposed when the fuel is used for operating a motor vehicle. Users of liquefied gas must also pay an additional pre-paid, flat rate annual vehicle tax; users of compressed natural gas must also purchase an annual permit.

Utah 
 

Utah Code Ann. §59-13-301 (tax)

 

Utah Code Ann. §59-13-301 (dedication)

Yes.
 

Imposes a reduced-rate fuel tax of $0.085 per gasoline gallon equivalent on liquefied natural gas and compressed natural gas used for motor vehicle operation. This rate will be modified proportionally with any changes to the traditional motor fuel rate.

Virginia

Va. Code §58.1-2249 (tax)  

 

Va. Code §58.1-2289 (dedication)

Yes.
 

Levies a tax at the rate of $0.175 per gallon on liquid alternative fuel and other alternative fuels used to operate a highway vehicle. (Also see Chart 2 for exemptions.)

Wisconsin

Wis. Stat. Ann. §78.40 (tax)

 

Wis. Stat. Ann. §25.40 (dedication)

Yes.

The tax rate on propane is $0.226 per gallon and the tax rate on compressed natural gas is $0.247 per gallon. (Also see Chart 2 for exemptions.)

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Chart 2: Statutes Providing a Tax Exemption or Deduction for Alternative Fuels

Montana | New Mexico | New York | Rhode Island | South Dakota | Utah | Virginia | Wisconsin

 

State

Relevant Citations

Provisions

Montana

Mont. Code Ann. §15-70-320
 

Exempts certain biodiesel produced from waste vegetable oil feedstock from the special fuel tax.

New Mexico

N.M. Stat. Ann. §7-16A-10
 

Provides that special fuel consisting of at least 99 percent vegetable oil or animal fat can be deducted from the tax due on special fuel excise tax.

New York

N.Y. Tax Law §1115

E85, compressed natural gas and hydrogen fuel used exclusively to operate a motor vehicle engine is exempt from state sales and use taxes. This exemption expires Sept. 1, 2012.

Rhode Island

R.I. Gen. Laws §31-36-1
 

Defines the meaning of a manufactured biodiesel fuel with regard to its exemption from the state motor fuel tax.

South Dakota

S.D. Codified Laws Ann. §10-47B-167

Liquefied petroleum gas is exempt from the fuel excise tax when sold from a licensed propane vendor to a licensed propane user or propane vehicle owner.

Utah

Utah Code Ann. §59-13-301

Propane and electricity used to operate motor vehicles are exempt from state fuel taxes. (Also see Chart 1 for the reduced tax on compressed natural gas and liquefied natural gas.)

Virginia

Va. Code §58.1-2250
 

Exempts from the alternative fuel tax any alternative fuel produced by the owner or lessee of an agricultural operation and used exclusively for farm use in any vehicle registered, or in any motor vehicles operated, by the owner or lessee or any of his immediate family members.

Wisconsin Wis. Stat. Ann. §78.01 Exempts personal renewable fuel production and use from the motor vehicle fuel tax.

 

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Chart 3: Pending Bills

Illinois | Iowa | Massachusetts | New York | Oklahoma | Pennsylvania

State

Bill

Provisions

Illinois

2011 HB 3769

Would reduce the sales and use tax rate imposed on motor fuel and gasohol from 6.25 percent to 1.25 percent, from  July 1, 2011, to Dec.31, 2011.

Iowa

2012 SSB 3141

Would increase the excise tax on special fuel used in diesel engines by $0.05 beginning Jan. 1, 2013, and by an additional $0.05 beginning Jan. 1, 2014. Special fuel is defined as any fuel oil or combustible gas or liquid suitable for the generation of power for propulsion of motor vehicles or turbine-powered aircraft, other than gasoline.

Massachusetts

2011 HB 2547

Would define “biofuel” as any blend of fuel which is at least 20 percent renewable motor fuel by volume. Would establish a tax credit for the cost of renewable motor fuel or biofuel purchased in Massachusetts.

New York

2011 SB 1200

 

 

2011 AB 6999

Would amend the tax law to change the current exemption for B20 biodiesel (20 percent biodiesel, 80 percent diesel) to include all biodiesel blends, and would base the amount of the exemption on the percentage of biodiesel per gallon.

 

Would establish a biodiesel tax exemption.

Oklahoma

2011 HB 1975

Would define and provide for a tax levy on compressed natural gas. Would exclude compressed natural gas from the definition of special fuel and eliminate references to compressed natural gas for purposes of tax decals.

Pennsylvania

2011 HB 558

Would reduce the tax on diesel fuel and alternative fuels by $0.06 per gallon.

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Chart 4: Failed Bills

Arizona | California | Illinois | Maryland | Michigan | Mississippi | Montana | Nebraska | New York | Oregon | Texas | Utah | Virginia | Wyoming

State

Bill

Provision

Arizona

2009 HB 2586

Would have exempted alternative fuels from the use fuel tax.

California

2010 AB 922

 

 

2008 AB 1190

Would have exempted from the Diesel Fuel Tax Law biomass-based diesel fuel produced in California with Californian feedstock.

 

Would have revised the definition of “motor vehicle fuel,” under the Motor Vehicle Tax Law, to include ethanol, methanol, and butanol that has been produced from biomass feedstocks. Would have exempted Category 1 (low-carbon) fuel from taxation, and reduced taxation on Category 2 (reduced-carbon) fuel.

Illinois

2007 HB 4098

 

 

2008 HB 6318

Would have amended the Use Tax Act. Would have reduced the tax rate on motor fuel and gasohol from 6.25 percent to 1.25 percent from July 1, 2007, to Sept. 3, 2007.

 

Would have reduced the sales and use tax on motor fuel and gasohol from 6.25 percent to 1.25 percent from May 1, 2008, to Sept. 15, 2008.

Maryland

2009 SB 93

 

 

2011 HB 844
 

Would have required a person to be licensed by the Comptroller before the person may buy, produce, acquire, receive or store biodiesel fuel on which the motor fuel tax has not been paid and use it in specified motor vehicles.

 

Would reduce the motor fuel tax rate for biodiesel fuel at least 10 percent of which is derived from agricultural products or animal fats, from $0.2425 per gallon to $0.1425 per gallon.

Michigan

2010 SB 551

Would have exempted certain gasoline and diesel fuel blends from sales tax.

Mississippi

2009 HB 1535

Would have provided that the provisions of the gasoline tax law do not apply to certain producers of ethanol who produce ethanol exclusively for their own motor vehicles. Also, would have provided that biodiesel or biofuel are not be subject to the special fuel tax until blended with petroleum diesel fuel.

Montana

2010 D 638

Would have applied the Montana fuel tax to electric and hybrid plug-in vehicles.

Nebraska

2009 LB 421

Would have suspended collection of fuel tax on compressed natural gas for a prescribed period.

New York

2009 AB 3159

Would have authorized the county of Suffolk to elect to be exempt from certain taxes related to hybrid, fuel efficient, alternative fuel, clean fuel or electric motor vehicles.

Oregon

2011 D 1440

Would have required persons operating electric motor vehicles and plug-in hybrid electric motor vehicles to pay vehicle road usage charge as of Jan. 1, 2014. Would have permitted a person paying the vehicle road usage charge to apply for refund of motor vehicle fuel tax.

Texas

2009 HB 797

Would have exempted fuel ethanol derived from cellulosic biomass and blended with gasoline from the motor fuels tax.

Utah

2011 SB 239

Would have increased the tax rate on motor fuel, special fuel and compressed natural gas. Included an automatic increase of the motor fuel and special fuel tax rate by $0.0075 every two years beginning in 2013. Would have also increased the tax on liquefied natural gas to $0.10 per gasoline gallon equivalent.

Virginia

2008 HB 275

 

2008 HB 1266

 

2010 SB 223
 

Would have increased the tax on gasoline, diesel fuel and alternative fuel by $0.10 per gallon.

 

Would have increased the tax on gasoline, diesel fuel and alternative fuel by $0.055 per gallon.


Would have replaced the current fuels tax on gasoline, gasohol and diesel with a tax that is a percentage of the wholesale price of a gallon of self-serve unleaded regular gasoline.

Wyoming

2011 HB 261

Would have created an ethanol tax credit recoupment program and would have provided for the recoupment of fuel taxes lost due to statutorily designated ethanol tax credits.

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