IRS CLARIFIES DEFINITIONS OF DIESEL AND AVIATION FUEL, INCLUDING SPECIAL RULES FOR KEROSENE.

Notice 89-17

The purpose of this notice is to (1) clarify the definitions of diesel and aviation fuel for purposes of the tax imposed by section 4091 of the Internal Revenue Code, and (2) describe special rules applicable to the sale and use of kerosene.

Section 10502 of the Revenue Act of 1987 (P.L. 100-203, 101 Stat. 1330) ("1987 Act") added section 4091 to the Code, which, beginning on April 1, 1988, moved the point of imposition of the tax on diesel and aviation fuel (collectively "taxable fuels") to the sale by the producer from the sale by the retailer. The 1987 Act also added section 4092, which defines the terms "taxable fuel" and "producer", and section 4093, which provides rules concerning exemptions from the tax, including the exemption for taxable fuel destined for use as heating oil. The Technical and Miscellaneous Revenue Act of 1988, P.L. 100-647 ("1988 Act"), provides additional categories of taxpayers who may buy taxable fuel tax free.

Notice 88-30, 1988-13 I.R.B. 7, as corrected by Announcement 88-64, 1988-16 I.R.B. 35, and modified by Notice 88-55, 1988-19 I.R.B. 25, and Notice 88-112, 1988-42 I.R.B. 9, provides interim rules for the administration of the tax on taxable fuels. Notice 88-132, 1988-52 I.R.B. 22, provides interim rules for the administration of the tax as amended by the 1988 Act. This notice supplements and modifies some of the rules of Notice 88-30.

I. Definition of Diesel Fuel and Aviation Fuel

Section 4092(a)(1) of the Code provides that the term "taxable fuel" means diesel fuel and aviation fuel. Section 4092(a)(2) provides that the term "diesel fuel" means any liquid (other than any product taxable under section 4081 (gasoline)) which is suitable for use as a fuel in a diesel-powered highway vehicle or a diesel-powered train. Section 4092(a)(3) provides that the term "aviation fuel" means any liquid (other than any product taxable under section 4081) which is suitable for use as a fuel in an aircraft.

The regulations will define the term "liquid . . . which is suitable for use as a fuel in a diesel-powered highway vehicle or diesel-powered train" as any liquid that is commonly or commercially known or sold as a fuel that is suitable for use in a diesel-powered highway vehicle or diesel-powered train. Similarly, the term "any liquid . . . which is suitable for use as a fuel in an aircraft" will be defined as any liquid that is commonly or commercially known or sold as a fuel that is suitable for use in an aircraft.

II. Special Rules Applicable to the Sale and Use of Kerosene

A. Background

Special rules will apply to the sale and use of kerosene. Kerosene is used widely in the aviation industry as a fuel for jet engines and used occasionally as a stand-alone fuel in diesel-powered highway vehicles or diesel-powered trains. Kerosene is used both as an additive to thin diesel fuel in cold weather and as a heating fuel.

B. Classification

As discussed in Section I above, regulations will provide that a taxable fuel will be considered suitable for use in a diesel-powered highway vehicle, a diesel-powered train, or an aircraft if the liquid is commonly or commercially known or sold as a fuel that is suitable for such use. Because kerosene is widely used in the aviation industry as a fuel for jet engines, it will therefore be classified as an aviation fuel. As described below, however, special rules will apply to kerosene sold for use as an additive to diesel fuel. Also, like other taxable fuel, kerosene destined for use as heating oil will be exempt from tax.

C. Tax Consequences of a Producer's Sale of Kerosene

A producer of aviation fuel who is registered with the Service on Form 637A, Registration for Tax-Free Sales and Purchases of Fuel Used in Aircraft Under Chapter 31 of the Internal Revenue Code, will be liable for the tax under section 4091 at the rate of 14.1 cents a gallon on its sale of kerosene unless one of the following requirements is met:

1. The producer's buyer is registered on Form 637 or Form 637A as a producer and the procedures described in section III(B)(1)(c) of Notice 88-30 for tax-free sales between producers are followed.

2. The producer's buyer intends to use the kerosene in an aircraft not in noncommercial aviation. The buyer must evidence such intent by following the registration/certification procedures described in section III(B)(2) of Notice 88-30. (Notice 88-112, however, extended until February 1, 1989, the date by which such buyers must be registered.) The producer is nonetheless liable for tax at the rate of 0.1 cent a gallon on its sale of kerosene to these buyers.

3. The producer's buyer is a heating oil retailer (that is, a person other than a producer or importer who buys taxable fuel for resale as fuel destined for use as heating oil) and the registration/certification procedures described in section III (B)(2) of Notice 88-30 and section II(D) of this notice are followed. (Notice 88-112, however, extended until February 1, 1989, the date by which heating oil retailers must be registered.)

4. The producer's buyer purchases the kerosene for its own use as heating oil.

5. The producer's buyer, when the buyer is not also a producer, certifies to the seller that the kerosene will be used by the buyer as a fuel additive rather than as a stand-alone fuel. Such certification should take the form prescribed for nontaxable uses described in section IV(B) of Notice 88-132. If the producer's buyer purchases the kerosene for resale for use as a fuel additive, tax of 14.1 cents a gallon will be imposed on the producer's sale.

D. Elimination of Registration Requirements for Certain Heating Oil Retailers

In order to reduce the paperwork burden for many small businesses, the regulations will provide, and Notice 88-30 is modified to provide, that heating oil retailers who would be classified as such because they resell kerosene, and not any other taxable fuel destined for use as heating oil, will not be required to register with the Service. These persons may continue to buy kerosene tax free by using the certification procedures of section III(B)(2)(a) of Notice 88-30. However, heating oil retailers who resell not only kerosene, but also other taxable fuel for use as heating oil, will be required to be registered by February 1, 1989, in order to continue to make tax-free purchases of taxable fuel other than kerosene on and after that date.

The following examples illustrate the rules of this section II(D).

EXAMPLE 1. A, a convenience store operator, buys kerosene from a producer and resells it to home owners for use in space heaters. A does not sell any other type of taxable fuel for use as heating oil. A is not registered with the Service on Form 637 or Form 637A, but has given its producer an exemption certificate stating that all of the kerosene will be resold for use as heating oil. A may buy the kerosene from the producer tax free and sell the kerosene to the home owners tax free.

EXAMPLE 2. B, a convenience store operator, maintains a diesel fuel pump where diesel fuel is sold at retail to various users including heating oil users. B also buys kerosene from a producer and resells it to home owners for use in space heaters. B is not registered with the Service on Form 637 or Form 637A, but has given its producer an exemption certificate stating that all of the kerosene will be resold for use as heating oil. B may buy the kerosene from the producer tax free and resell the kerosene to the home owners tax free. The fact that B sells diesel fuel at retail does not affect this result. After January 31, 1989, B may not buy diesel fuel tax free for resale for use as heating oil if B has not registered on Form 637 as a heating oil retailer.

E. Tax Consequences of Using Kerosene Mixtures as Fuel

If any person produces a mixture of kerosene on which no tax has been paid and diesel fuel on which no tax has been paid and then uses such mixture as a fuel in a diesel-powered highway vehicle or a diesel-powered train, such person shall be liable for the tax imposed by section 4041 of the Code on the total volume of the blended product. The rate of tax is 15.1 cents a gallon for fuel used in a diesel-powered highway vehicle and 0.1 cent a gallon for fuel used in a diesel-powered train. The tax is reported on Form 720, Quarterly Federal Excise Tax Return. See the form and its instructions for information concerning filing and deposit requirements.

If any person produces a mixture of kerosene on which tax of 14.1 cents a gallon has been paid and diesel fuel on which tax of 15.1 cents a gallon has been paid and then uses such mixture as a fuel in diesel-powered highway vehicle, such person shall be liable for an additional tax of 1 cent a gallon on the total volume of the kerosene so used. The tax is reported on Form 720, Quarterly Federal Excise Tax Return. See the form and its instructions for information concerning filing and deposit requirements.

If any person either --

(a) produces a mixture of kerosene on which no tax has been paid and diesel fuel on which tax of 15.1 cents a gallon has been paid, or

(b) places or has placed kerosene directly into the fuel supply tank of its diesel-powered highway vehicle,

such person shall be liable for tax of 15.1 cents a gallon on the total volume of kerosene so used. The tax is reported on Form 720, Quarterly Federal Excise Tax Return. See the form and its instructions for information concerning filing and deposit requirements.

EFFECT ON OTHER DOCUMENTS

Notice 88-30 is modified.

ADMINISTRATIVE PRONOUNCEMENT

This document serves as an "administrative pronouncement" as that term is described in section 1.6661-3(b)(2) of the Income Tax Regulations and may be relied upon to the same extent as a revenue ruling or revenue procedure.

DRAFTING INFORMATION

The principal author of this notice is Frank Boland of the Office of Assistant Chief Counsel (Passthroughs and Special Industries). For further information, contact Mr. Boland on (202) 566-4077 (not a toll-free call).