BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  SB 1485
                                                                  Page  1

          Date of Hearing:  July 2, 2012

                     ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
                                Henry T. Perea, Chair
                    SB 1485 (Kehoe) - As Amended:  April 19, 2012

          Majority vote.  Tax levy.  Fiscal committee.  

           SENATE VOTE  :  39-0
           
          SUBJECT  :  Fuel taxes:  blended fuels

           SUMMARY  :  Authorizes a person who uses tax-paid motor vehicle 
          fuel (MVF) as a blending component of a fuel taxed under the Use 
          Fuel Tax (UFT) Law (e.g., E-85) to receive a refund of the 
          excise tax paid on that MVF.  Specifically,  this bill  :

          1)Allows a refund of MVF tax to any person who buys MVF to 
            produce a blended fuel that will be used to operate motor 
            vehicles on the state's highways, when that blended fuel is 
            taxed under the UFT Law, but only to the extent the person can 
            show that the applicable California fuel tax has been paid on 
            the blended fuel produced by the person.

          2)Provides that, to be eligible for a refund, "a person must 
            show that the applicable California fuel Ýtax] has been paid 
            and Ýmust have] submitted the refund application request on or 
            after January 1, 2011."   

          3)Takes immediate effect as a tax levy.  

           EXISTING LAW  :

          1)Imposes, pursuant to the MVF Tax Law and the Diesel Fuel Tax 
            (DFT) Law, state excise taxes at specified rates per gallon on 
            the removal, entry, sale, delivery, or specified use of MVF 
            and diesel fuel respectively. 

          2)Imposes, pursuant to the UFT Law, a state excise tax on the 
            use of other fuel at specified rates.  

          3)Allows certain persons who have paid a tax for MVF, as 
            specified, to be reimbursed and repaid the amount of the tax.  










                                                                  SB 1485
                                                                  Page  2

           FISCAL EFFECT  :  The Senate Appropriations Committee estimates 
          costs of roughly $288,000 in fiscal year (FY) 2012-13 to pay 
          past refunds, and ongoing costs of $199,000 annually, beginning 
          in FY 2012-13.

           COMMENTS  : 

           1)Background information provided by the author  :  According to 
            the author, California relies on petroleum-based fuels to meet 
            almost 96% of its on-road fuel demands.  California's oil 
            fields, however, produce only 38% of the total oil needed to 
            fuel our transportation system.  The remaining 62% of our 
            state's oil comes from foreign nations and from Alaskan 
            imports.  

            To diversify our state's transportation energy sources, both 
            state and national policymakers allow the use of E-85, a fuel 
            that is comprised of 85% ethanol (derived from corn) and 15% 
            gasoline.  This fuel can be used in so-called "flex-fueled 
            vehicles" designed to run on both conventional gasoline and 
            E-85.  

            The author notes that E-85 makes its way to retail gas 
            stations in two ways.  In some regions, it can be purchased at 
            the "rack" pre-blended.  In other locations, it is "splash 
            blended" through a process whereby ethanol and gasoline are 
            purchased separately and then blended together to create E-85 
            fuel.  

            While E-85 can be procured either directly at the rack 
            pre-blended, or by mixing two fuels together, the two 
            procurement methods result in differential taxation by the 
            state.  Specifically, the author notes:

               Right now when someone brings their tanker trucks to 
               load-up on E-85 in order to sell it
               at their fueling station, they are charged the use fuel tax 
               (UFT) when the fuel is finally sold at the gas station 
               (retail level) at $.09 per gallon.  

               However, those who "splash blend" their E-85, are required 
               to pay the motor vehicle fuel (MVF) tax on the gasoline 
               ($.353 per gallon) up front, at the "rack", at the time of 
               purchase and then must pay the UFT when the E-85 is later 
               sold at the gas station. 








                                                                  SB 1485
                                                                  Page  3


               Essentially, these groups of E-85 "splash blenders" are 
               being taxed twice, while their competitors who Ýprovide] 
               pre-blended E-85 are not.

               The California Board of Equalization understood that 
               "splash-blenders" were being taxed twice on their E-85 fuel 
               and created a re-fund process so that the MVT could be 
               returned via the State Controller.  But in March of 2011, 
               the Controller issued an opinion stating that the Revenue 
               and Taxation Code did not give him express authority to 
               provide a tax refund to E-85 "splash blenders".  

            The author contends that this bill "evens the playing field" 
            by clarifying that E-85 "splash-blenders" are entitled to a 
            MVF tax refund from the State Controller.  In this manner, 
            everyone will pay the same tax (UFT), regardless of whether 
            the E-85 is pre-blended or "splash-blended."  

          2)The California Independent Oil Marketers Association (CIOMA) 
            is sponsoring this bill.  By way of background, the CIOMA 
            notes:

               Several fuel marketers in this state, who are blending 
               E-85, have encountered a problem regarding the refund of 
               excessive state excise tax paid on the gasoline component 
               of this alternative fuel.  The agency that issues the 
               refund checks to marketers / fuel blenders, the State 
               Controller's Office, does not believe the refunds are due.  
               However, conversations with the Board of Equalization, the 
               state's taxing policy agency and tax collector, indicate 
               they believe the refund is due since the blended fuel is 
               taxed under the state's use fuel tax law.  Under this 
               situation marketers should pay 9 cents / gallon, total tax, 
               as the state vendor use tax on the blended E-85.    

               However, some marketers must purchase gasoline at the rack 
               as an excise-taxed product and desire to obtain a refund of 
               the 37.5 cents per gallon excise taxes paid on the gasoline 
               component, while paying the 9 cents / gallon use fuel tax 
               on the blended product.  The Controller has opined that 
               they cannot issue the excise tax refund.

               Since this measure is correcting an apparent conflict in 
               state law, where one agency, the Board of Equalization, 








                                                                  SB 1485
                                                                  Page  4

               already believes this refund is due to marketers, we 
               believe this measure  will not  have a significant effect on 
               state revenues since marketers should already be receiving 
               this refund.  It is important to note that installation of 
               E-85 fueling infrastructure is expensive, since, typically, 
               a separate tank and fueling location / dispenser are 
               required.  The lower excise tax burden on this alternative 
               fuel helps marketers to make a business case for installing 
               the separate fueling capacity needed to market and dispense 
               E-85.    

          3)Committee Staff Comments:

              a)   The UFT Law  :  Under the UFT Law, the state imposes an 
               excise tax of $0.18 per gallon for the use of fuel, with 
               certain exceptions.  ÝR&TC Section 8651(a)(5).]  R&TC 
               Section 8604 defines "fuel" to include any combustible gas 
               or liquid used in an internal combustion engine to propel 
               motor vehicles on the highways, except fuel that is subject 
               to tax under the MVF Tax Law or the DFT Law.  

             R&TC Section 8651.8(a), however, provides that the excise tax 
               imposed on ethanol or methanol containing no more than 15% 
               gasoline or diesel fuels shall be one-half the rate set for 
               most fuels under the UFT Law (i.e., $0.09 per gallon).  
               E-85 fuel, an ethanol and gasoline blend, is the 
               predominant blended fuel under the UFT Law.    
             
                While the UFT is imposed on the use of the fuel, pursuant 
               to R&TC Section 8732, the fuel's vendor is required to 
               collect the tax from the user and give the user a receipt.  
               Thus, vendors are required to collect and remit to the BOE 
               the $0.09 per gallon UFT on the full volume of E-85 sold or 
               dispensed from a retail pump.     
                
              b)   The MVF Tax Law  :  Under the MVF Tax Law, the state 
               imposes an excise tax of $0.357 per gallon ($0.18 excise 
               tax and $0.177 surtax) on the removal of gasoline at the 
               refinery or terminal rack, upon entry into the state, and 
               upon sale to an unlicensed person.  R&TC Section 8101, in 
               turn, requires the refund of the excise tax paid on 
               gasoline to certain persons under specified circumstances.

               The BOE notes:









                                                                  SB 1485
                                                                  Page  5

                    With respect to Ýthe] California excise tax on 
                    gasoline, the ÝBOE] is responsible for registration, 
                    licensing, return processing, auditing functions, and 
                    appeals, while the State Controller's office (SCO) is 
                    responsible for the collection of delinquent gas taxes 
                    and the refund of excise taxes on gasoline not used on 
                    Ýthe] highway.      
                     
              c)   So, what's the problem?  :  As noted above, E-85 is a 
               product of blending two components - ethanol fuel and 
               gasoline.  Where the blending occurs, however, impacts the 
               fuel's taxation.  If the E-85 is obtained pre-blended at 
               the "rack," then the product is considered a use fuel and 
               the vendor is responsible for reporting and paying the tax. 
                However, if the E-85 is blended below the rack (i.e., the 
               two component fuels are purchased separately and blended 
               elsewhere in the distribution chain), the gasoline tax has 
               already been paid and passed on by the supplier at the 
               "rack" and, when the gasoline is blended with ethanol, the 
               resulting E-85 fuel is then subject to the UFT on the full 
               volume.

               In October 2011, the BOE issued a special notice for 
               producers of E-85 fuel, which explained that below-the-rack 
               blenders are not entitled to a refund of the MVF tax paid 
               on the gasoline component of the E-85. 

              d)   What would this bill do?  :  This bill would authorize a 
               person who uses tax-paid MVF (i.e., gasoline) as a blending 
               component of a fuel taxed under the UFT Law (e.g., E-85) to 
               receive a refund of the excise tax paid on that gasoline.  
               This bill further provides that, to be eligible for a 
               refund, "a person must show that the applicable California 
               fuel has Ýsic] been paid and submitted the refund 
               application request on or after January 1, 2011."  The 
               author may wish to amend this language for clarity and to 
               replace the reference to "California fuel" with "California 
               fuel tax."  

           REGISTERED SUPPORT / OPPOSITION  :

           Support 
           
          California Independent Oil Marketers Association (sponsor) 
           








                                                                 SB 1485
                                                                  Page  6

            Opposition 
           
          None on file

           Analysis Prepared by  :  M. David Ruff / REV. & TAX. / (916) 
          319-2098