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