BILL ANALYSIS Ó AB 1032 Page 1 Date of Hearing: April 27, 2015 ASSEMBLY COMMITTEE ON REVENUE AND TAXATION Philip Ting, Chair AB 1032 (Salas) - As Introduced February 26, 2015 SUSPENSE Majority vote. Fiscal committee. SUBJECT: Diesel Fuel Tax Law: reimbursements SUMMARY: Provides that, where tax is not imposed on dyed 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. Specifically, this bill: 1)Provides that the claim for refund shall only be allowed to AB 1032 Page 2 the extent a supplier can show that the tax on that biodiesel fuel has been paid by the same supplier. 2)Makes other technical and conforming changes to the Diesel Fuel Tax Law. EXISTING LAW: 1)Imposes a tax, under the Diesel Fuel Tax Law, upon the removal, entry, sale, delivery, or specified use of diesel fuel, at a specified rate per gallon. 2)Provides for a reimbursement of the amount of the tax to persons who have used tax-paid fuel for specified nontaxable uses, which is allowed through a claim for refund. FISCAL EFFECT: The State Board of Equalization (BOE) estimates that this bill would have resulted in roughly $779,000 in refunds in fiscal year (FY) 2012-13, and roughly $2.83 million in FY 2013-14. COMMENTS: 1)The author has provided the following statement in support of this bill: The Diesel Fuel Tax Law imposes a per gallon tax upon the removal, entry, sale, or delivery of diesel fuel. The law allows for an exemption (via tax refund) when diesel is dyed and intended for off-highway use such as for machinery and equipment used for farming, mining, logging, and construction. Biodiesel, often sold when blended with traditional petroleum diesel, is considered to be a diesel fuel and subject to the same taxes. Therefore, biodiesel is taxed AB 1032 Page 3 upon its entry into California or its removal from a refinery or distribution facility. However, when the tax-paid biodiesel is blended with tax-exempt diesel fuel, the biodiesel portion is not provided the same tax exempt status for off-highway uses. [. . .] While current law allows reimbursement for tax paid on diesel fuel intended for off-highway uses that has been taxed more than once, it does not account for tax-paid biodiesel blends. 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 Board of Equalization. AB 1032 seeks to remedy this by creating a refund mechanism for amounts of tax paid on the biodiesel fuel portion of dyed blended biodiesel fuel removed from an approved refinery or distribution facility if a supplier can show that the tax on that biodiesel fuel has been paid by the same supplier. 2)Proponents of this bill note the following: 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 terminal. We believe that allowing 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 AB 1032 Page 4 problem. 3)The BOE notes the following in its staff analysis of this bill: 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. 4)Committee Staff Comments: a) The Diesel Fuel Tax Law : Under the Diesel Fuel Tax Law, a per-gallon excise tax is imposed on the removal of diesel fuel at the refinery or terminal rack, upon entry into California, or upon sale to an unlicensed person. Existing law defines a "terminal" as a distribution facility supplied by pipeline or vessel, from which the diesel fuel may be removed at the rack. The term also includes a diesel fuel production facility (i.e., a refinery) with storage facilities not supplied by pipeline or vessel. These diesel fuel production facilities have the same licensing and reporting requirements as those terminals supplied by pipeline or vessel. Generally, a "supplier" of diesel fuel owes the excise tax at the time the fuel is removed from the terminal rack. However, if the diesel fuel enters California outside of the bulk transfer/terminal system (i.e., "below the rack" AB 1032 Page 5 by train or truck), the excise tax is due upon entry into California. The term "supplier" includes, among others, a person owning fuel in a terminal (i.e., a "position holder"), a refiner, an importer, a blender, and a terminal operator. The BOE requires suppliers to be licensed and to file monthly returns or information reports detailing the amount of fuel entered, received, removed, and stored. b) Exemptions and refunds : Certain sales by diesel fuel suppliers are exempt from the excise tax, including sales for use outside California, and sales of dyed diesel fuel. Thus, certain parties may claim a credit or refund for tax paid on fuel that is subsequently used in a nontaxable manner. c) Biodiesel : Under California law, biodiesel is considered to be a diesel fuel and is subject to the excise tax on diesel fuel. The fuel industry generally describes biodiesel according to the applicable percentage of biodiesel blended with petroleum diesel. For example, "B5" would represent a blend comprised of 95% petroleum diesel and 5% biodiesel. Most domestically produced biodiesel comes from the Midwest. Because distribution of this biodiesel occurs outside of the normal bulk transfer/terminal system, the excise tax applies upon the fuel's entry into California. As such, the "enterer" is responsible for the diesel fuel tax when the fuel enters California. Biodiesel that is produced in California, on the other hand, is generally taxed upon removal from the fuel production facility. In either case, when another supplier makes a subsequent purchase of this tax-paid biodiesel to create a blended AB 1032 Page 6 diesel fuel, the tax-paid biodiesel fuel is blended with "ex-tax" diesel fuel. When this blended fuel is subsequently removed from the terminal rack, it results in tax being assessed twice on the biodiesel portion. In such cases, the state allows the supplier to claim a credit on their return. Some suppliers, however, 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. In other words, 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). 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 BOE. 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. d) What would this bill do ? 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. e) Why does this all seem so familiar ? During the 2013-14 Legislative Session, this Committee introduced AB 2757 (Committee on Revenue and Taxation), which contained provisions substantially identical to the present bill. AB 2757 passed the Assembly Floor by a vote of 76 to 0. In AB 1032 Page 7 the Senate, however, AB 2757 was substantially amended and the tax-related provisions were removed from the bill. The diesel fuel provisions were then added to AB 2756 (Committee on Revenue and Taxation), which the Governor vetoed for unrelated provisions dealing with the administration of property taxes. REGISTERED SUPPORT / OPPOSITION: Support California Biodiesel Alliance California Independent Oil Marketers Association Opposition None on file Analysis Prepared by:M. David Ruff / REV. & TAX. / (916) 319-2098 AB 1032 Page 8