American Jobs Creation Act of 2004 (P.L. 108-357) (Title VI--Fair and Equitable Tobacco Reform Act of 2004)

I. RESTRUCTURING OF INCENTIVES FOR ALCOHOL FUELS AND TRUST FUND RECEIPTS

The House bill and the Senate amendment each repeal the extraterritorial income exclusion provisions of present law, provide provisions to reduce the effective income tax imposed on income earned from certain domestic production activities, and make numerous other changes to the Internal Revenue Code. This document,² prepared by the staff of the Joint Committee on Taxation, compares those provisions that restructure incentives for alcohol fuels and that prevent fuels' tax fraud.

In previous publications,³ staff of the Joint Committee on Taxation compared provisions of H.R. 4520 as passed by the House of Representatives and as amended by the Senate relating to the repeal of the extraterritorial income exclusion, domestic production provisions, provisions relating to the corporate income tax rates applicable to small corporations, provisions relating to tax incentives for manufacturers, small businesses, and agriculture, certain revenue raising provisions, and expiring provisions. In subsequent publications, the staff of the Joint Committee on Taxation will compare other provisions of H.R. 4520 as passed by the House of Representatives and as amended by the Senate.

Section 40 provides a per-gallon income tax credit for alcohol used as a motor fuel (the "alcohol credit") or used to produce a qualified alcohol fuel mixture (the "alcohol fuel mixture credit"). The credit is 52 cents per gallon in 2004 and declines to 51 cents per gallon for 2005-2007. In the case of ethanol, section 40 provides a separate 10-cents-per-gallon credit for small producers for up to 15 million gallons for any taxable year. These section 40 credits generally terminate after December 31, 2007.

Same as the House bill.

Effective date

Generally for fuel sold or used after September 30, 2004. The repeal of the General Fund retention requirement is effective for taxes imposed after September 30, 2003.

Extends the section 40 income tax credit through 2010.

Importers and producers of alcohol to be registered with the Secretary.

Effective date

Same as the House bill.

4.8 cents per gallon of the total 18.4 cents per gallon imposed on fuel used in motorboats and small engines is retained in the General Fund. 0.1 cent per gallon is transferred to the LUST Trust Fund. The balance of 13.5 cents per gallon is initially transferred to the Highway Trust Fund, and then retransferred to the Aquatic Resources Trust Fund.

The General Fund retention of a portion of the motorboat and small engine fuel taxes is scheduled to expire after September 30, 2005.

Effective date

Effective for taxes imposed after September 30, 2006.

Effective date

Fuel produced and sold or used after September 30, 2004 in taxable years ending after such date and before January 1, 2007.

Provides per-gallon excise tax credits for qualified biodiesel fuel mixtures.

The credit is generally 50 cents and $1.00 per gallon of biodiesel and agri-biodiesel, respectively.

Provides outlay payments to producers of biodiesel fuel mixtures and users of neat biodiesel.

Credit and payment provisions related to biodiesel terminate after 2006.

Importers and producers of biodiesel must be registered with the Secretary.

Effective date

Fuel produced and sold, used or removed after September 30, 2004. Registration requirements are effective April 1, 2005.

Effective date

Date of enactment.

The mobile machinery exception applies if three tests are met: (1) the vehicle consists of a chassis to which jobsite machinery (unrelated to transportation) has been permanently mounted; (2) the chassis has been specially designed to serve only as a mobile carriage and mount for the particular machinery; and (3) by reason of such special design, the chassis could not, without substantial structural modification, be used to transport a load other than the particular machinery.

On June 6, 2002, the Treasury Department put forth proposed regulations that would eliminate the mobile machinery exception.

Fuel taxes for mobile machinery vehicles must be paid and then a refund sought if a mileage requirement is met. Specifically, in addition to the three-part design test, the vehicle must not have traveled more than 7,500 miles on public highways during the owner's taxable year. Refunds of fuel taxes are permitted on an annual basis only. For purposes of this rule, a person's taxable year is their taxable year for income tax purposes.

Effective date

Generally effective after the date of enactment. As to the fuel taxes, the provision is effective for taxable years beginning after the date of enactment.

Provides for the recovery of taxes paid (other than fuel taxes) over a two-year period if such vehicle travels less than 5,000 miles per year.

Fuel taxes for mobile machinery vehicles must be paid and then a refund sought if the mileage requirement is met. Refunds of fuel taxes are permitted on an annual basis only. For purposes of this rule, a person's taxable year is his taxable year for income tax purposes.

Vehicles owned by an organization described in section 501(c), exempt from tax under section 501(a), need only satisfy the three-part design test to recover taxes paid with respect to such vehicles.

Effective date

Same as the House bill.

(sec. 652 of the House bill and sec. 871 of the Senate amendment)

In general, aviation fuel sold for use or used in commercial aviation is taxed at a reduced rate of 4.4 cents per gallon. In order to qualify for the 4.4 cents per gallon rate, the person engaged in commercial aviation must be registered with the Secretary and provide the seller with a written exemption certificate. Aviation fuel sold by a producer or importer for use by the buyer in a nontaxable use is exempt from the excise tax on sales of aviation fuel. A producer that is registered with the Secretary may sell aviation fuel tax-free to another registered producer. Producers include refiners, blenders, wholesale distributors of aviation fuel, dealers selling aviation fuel exclusively to producers of aviation fuel, the actual producer of the aviation fuel, and with respect to fuel purchased at a reduced rate, the purchaser of such fuel.

A claim for refund of taxed aviation fuel held by a registered aviation fuel producer is allowed (without interest) if: (1) the aviation fuel tax was paid by an importer or producer (the "first producer") and the tax has not otherwise been credited or refunded; (2) the aviation fuel was acquired by a registered aviation fuel producer (the "second producer") after the tax was paid; (3) the second producer files a timely refund claim with the proper information; and (4) the first producer and any other person that owns the fuel after its sale by the first producer and before its purchase by the second producer have met certain reporting requirements. A payment is allowable to the ultimate purchaser of taxed aviation fuel if the aviation fuel is used in a nontaxable use. A claim made on Form 720, Schedule C, may be netted against the claimant's excise tax liability. Claims for payment not so taken may be allowable as income tax credits.

Under a special rule, the provision treats certain refueler trucks, tankers, and tank wagons as a terminal if certain requirements are met. For the special rule to apply, a qualifying truck, tanker, or tank wagon must be loaded with aviation fuel from a terminal: (1) that is located within an airport, and (2) from which no vehicle licensed for highway use is loaded with aviation fuel, except in exigent circumstances identified by the Secretary in regulations. In order to qualify for the special rule, a refueler truck, tanker, or tank wagon must: (1) deliver the aviation fuel directly into the wing of the aircraft at the airport where the terminal is located; (2) have storage tanks, hose, and coupling equipment designed and used for the purposes of fueling aircraft; (3) not be licensed for highway use; and (4) be operated by the terminal operator (who operates the terminal rack from which the fuel is unloaded) or by a person that makes a daily accounting to such terminal operator of each delivery of fuel from such truck, tanker, or tank wagon.

Also imposes liability for the tax on aviation fuel removed from a refinery or terminal directly into the wing of an aircraft for use in commercial aviation on the person receiving the fuel, in which case, such person self-assesses the tax on a return.

A refund (without interest) is allowable to the ultimate vendor of aviation fuel if such ultimate vendor purchases fuel tax paid and subsequently sells the fuel to a person qualified to purchase at a reduced rate and who waives the right to a refund. In such a case, the provision permits an ultimate vendor to net refund claims against any excise tax liability of the ultimate vendor, in a manner similar to the present law treatment of ultimate purchaser payment claims.

Also, a floor stocks tax applies to aviation fuel held by a person on October 1, 2004. The tax is equal to the amount of tax that would have been imposed before October 1, 2004, if the provision was in effect at all times before such date, reduced by the tax imposed by section 4091, as in effect on the day before the date of enactment. The Secretary shall determine the time and manner for payment of the tax, including the nonapplication of the tax on de minimis amounts of aviation fuel.

Also, a 0.1 cents per gallon of such tax is transferred to the LUST Trust Fund. The remainder is transferred to the Airport and Airway Trust Fund.

Effective date

Effective for aviation fuel removed, entered, or sold after September 30, 2004.

Effective date

Effective for aviation fuel removed, entered, or sold after September 30, 2004.

2. Provide for transfer from Airport and Airway Trust Fund to Highway Trust Fund to adjust for continued highway use of aviation fuel

(sec. 872 of the Senate amendment)

Taxes received for aviation fuel, except for the LUST Trust Fund financing rate, are appropriated to the Airport and Airway Trust Fund. Such appropriation occurs even if aviation fuel is used for non aviation purposes.

Taxes received on taxable fuel for transportation purposes generally are appropriated to the Highway Trust Fund.

Effective date

Effective on October 1, 2004.

(sec. 653 of the House bill and secs. 873, 874 and 875 of the Senate amendment)

A person who sells dyed fuel (or holds dyed fuel for sale) for any use that such person knows (or has reason to know) is a taxable use, or who willfully alters or attempts to alter the dye in any dyed fuel, is subject to a penalty. The penalty also applies to any person who uses dyed fuel for a taxable use (or holds dyed fuel for such a use) and who knows (or has reason to know) that the fuel is dyed. The penalty is the greater of $1,000 per act or $10 per gallon of dyed fuel involved. In determining the amount of the penalty, the $1,000 is increased by the product of $1,000 and the number of prior penalties imposed upon such person (or a related person or predecessor of such person or related person). The penalty may be imposed jointly and severally on any business entity, and each officer, employee, or agent of such entity who willfully participated in any act giving rise to such penalty.

Additional assessable penalties are imposed:

• for tampering with the mechanical system, equal to the greater of $25,000 or $10 per gallon per act. The person tampering is responsible for any additional tax.

• upon the system operator for failure to maintain security standards, a penalty of $1,000. An additional penalty is imposed of $1,000 per day for each day a violation remains uncorrected.

• joint and several liability for willful participants and affiliated business entities.

180 days after the regulations are issued.

Denies administrative appeal or review for repeat offenders (more than two violations) of present law after a chemical analysis of the fuel, except in the case of a claim regarding fraud or mistake in the chemical analysis or error in the mathematical calculation of the amount of penalty.

Extends present-law penalties to any person who knows that the strength or composition of any dye or marking in any dyed fuel has been altered, chemically or otherwise, and who sells (or holds for sale) such fuel for any use that the person knows or has reason to know is a taxable use of such fuel.

Effective date

Penalties relating to mechanical dyeing systems are effective 180 days after the regulations are issued. The prohibition of certain administrative review is effective for penalties assessed after date of enactment. The extension of present law penalties is effective on date of enactment.

2. Terminate dyed diesel use by intercity buses

(sec. 876 of the Senate amendment)

Under present law, intercity bus operators also may buy fully taxed undyed diesel and seek a refund of the difference between the 24.4 cents per gallon rate and the 7.4 cents per gallon rate.

Effective date

Fuel sold after September 30, 2004.

(sec. 654 of the House bill and sec. 877 of the Senate amendment)

Effective date

Date of enactment.

2. Assessable penalty for refusal of entry

(sec. 878 of the Senate amendment)

Effective date

October 1, 2004.

(sec. 655 of the House bill and sec. 879 of the Senate amendment)

Effective date

Effective on October 1, 2004, except that the Secretary is required to publish the list of registered persons beginning on July 1, 2004.

Effective date

Effective on October 1, 2004, except that the Secretary is required to publish the list of persons required to register by June 30, 2004.

2. Display of registration and penalties for failure to display registration and to register

(secs. 656 and 657 of the House bill and secs. 880, 881, 882 of the Senate amendment)

The provision imposes a new assessable penalty for failure to register of $10,000 for each initial failure, plus $1,000 per day that the failure continues. No penalty is imposed upon a showing by the taxpayer of reasonable cause. In addition, the provision increases the present-law non-assessable penalty for failure to register from $50 to $10,000 and the present law criminal penalty for failure to register from $5,000 to $10,000. The provision authorizes amounts equivalent to any of such penalties received to be appropriated to the Highway Trust Fund.

Effective date

The provision requiring display of registration is effective on October 1, 2004. The provisions relating to penalties is effective for penalties imposed after September 30, 2004.

Effective date

Effective on October 1, 2004, except that the penalties for failure to register are effective for failures pending or occurring after September 30, 2004.

3. Modification of information reporting and penalties for failure to report

(sec. 657 of the House bill and secs. 882 and 895 of the Senate amendment)

Effective date

Effective for penalties imposed after September 30, 2004.

Effective date

Effective for failures pending or occurring after September 30, 2004. The electronic reporting provision is effective on October 1, 2004.

4. Information reporting for persons claiming alcohol fuel or biodiesel tax benefits

(sec. 883 of the Senate amendment)

Effective date

October 1, 2004.

(sec. 658 of the House bill and sec. 884 of the Senate amendment)

Effective date

Fuel entered after September 30, 2004.

Effective date

Date of enactment.

2. Reconciliation of on-loaded cargo to entered cargo

(sec. 885 of the Senate amendment)

Effective date

Date of enactment.

Eliminates the reduced rates for Canadian and Mexican vehicles.

Requires taxpayers with 25 or more vehicles for any taxable period to file their returns electronically.

Permits proration of tax for vehicles sold during the taxable period.

Effective date

Taxable periods beginning after the date of enactment.

In addition, under regulations to be prescribed by the Secretary, every taxpayer that pays the heavy highway vehicle use tax to receive and display on the vehicle an electronic identification device as prescribed by the Secretary. The device is to be received and displayed not later than one month after the due date of the return of tax with respect to each taxable period.

Eliminates the present-law ability to prorate tax when the first use of the vehicle occurs after the first month of the taxable period.

Effective date

Generally effective for taxable periods beginning after the date of enactment. Requires the Secretary to issue regulations regarding electronic identification devices no later than October 1, 2005.

Effective date

Fuels sold for nontaxable use after the date of enactment.

Effective date

Same as the House bill.

Effective date

Penalties assessed after October 1, 2004.

Effective date

Penalties assessed after October 1, 2004.

In general, refunds are paid without interest. In the case of overpayments of tax on gasoline, diesel fuel, or kerosene that is used to produce a qualified alcohol mixture and for refunds due ultimate vendors of diesel fuel or kerosene used on a farm for farming purposes or by a State or local government, the Secretary is required to pay interest on refunds of $200 or more ($100 or more in the case of kerosene) due to the taxpayer arising from sales over any period of a week or more, if the Secretary does not make payment of the refund within 20 days.

Also modifies the payment of interest on refunds. For overpayments of tax on gasoline, diesel fuel, or kerosene that is used to produce a qualified alcohol mixture and for refunds due ultimate vendors of diesel fuel or kerosene used for farming purposes or by a State or local government, all refunds unpaid after 45 days must be paid with interest. If the taxpayer has filed for refund by electronic means, refunds unpaid after 20 days must be paid with interest.

For claims for refund of tax paid on diesel fuel or kerosene sold to State and local governments and for claims for refund of tax paid on gasoline sold to State and local governments or to a nonprofit educational organization and for which the ultimate purchaser utilized a credit card, the provision deems the person extending the credit to the ultimate purchaser to be the ultimate vendor. That is, the credit card company administers claims for refund and is responsible for supplying documentation required from ultimate vendors.

Effective date

October 1, 2004.

Effective date

Same as the House bill.

It is common industry practice for oil companies to serve customers of other oil companies under exchange agreements, e.g., where Company A's terminal is more conveniently located for wholesale or retail customers of Company B. In such cases, the exchange agreement party (Company B in the example) owns the fuel when the motor fuel is removed from the terminal and sold to B's customer.

Date of enactment.

Modifies the definition of a tire to conform to certain regulations of the Department of Transportation. The provision also exempts from tax any tire sold for the exclusive use of the Department of Defense or the Coast Guard.

Effective date

Sales in calendar years beginning more than 30 days after the date of enactment.

(sec. 886 of the Senate amendment)

Effective date

Date of enactment.

2. Nonapplication of export exemption to the delivery of fuel into the fuel tank of motor vehicles removed from United States

(sec. 892 of the Senate amendment).

Effective date

Sales or deliveries made after the date of enactment.

If certain conditions are met, the removal, entry, or sale of gasoline blendstocks is not taxable. Diesel fuel and kerosene that is to be used for a nontaxable purpose will not be taxed upon removal from the terminal if it is dyed to indicate its nontaxable purpose. Undyed aviation-grade kerosene also is exempt from tax at the rack if it destined for use as a fuel in an aircraft. Feedstock kerosene that a registered industrial user receives by pipeline or vessel also is exempt from the dyeing requirement.

The IRS collects data under the ExSTARS reporting system that tracks all removals across the terminal rack regardless of whether or not the product is technically excluded from the definition of gasoline, diesel or blendstocks. ExSTARS reporting identifies the position holder at the time of removal. Below the rack, no information is gathered for exempt or excluded products or uses.

Taxpayers file quarterly excise tax returns showing only net taxable gallons. Taxpayers do not account for gallons they claim to be exempt on such returns. Although the return is a quarterly return, the excise taxes are paid in semimonthly deposits. If deposits are not made as required, a taxpayer may be required to file returns on a monthly or semimonthly basis instead of quarterly.

Authorizes the Secretary to pay (without interest) an amount equal to the tax imposed, if a person establishes that the ultimate use of a gasoline blendstock, or additive, was not to produce gasoline. Similarly, if tax is imposed on a reportable liquid and the person establishes that the liquid was not used to produce a taxable fuel, the Secretary is authorized to pay (without interest) an amount equal to the tax imposed on such person with respect to the reportable liquid.

Provides that dyed diesel (a taxable fuel) also is taxable unless removed by a person registered with the Secretary under section 4101.

The Secretary is to require that all persons removing refined product, whether a taxable product or an untaxed product, over the terminal rack to report such products on a monthly excise tax return.

Effective date

Fuel sold or used after September 30, 2004.

Requires information reporting with respect to taxable fuels removed, entered or transferred from any refinery, pipeline or vessel which is registered with the Secretary.

Effective date

October 1, 2004.

² This document may be cited as follows: Joint Committee on Taxation, Comparison of Certain Provisions of H.R. 4520 as Passed by the House of Representatives and as Amended by the Senate: Alcohol Fuels and Fuel Fraud Provisions (JCX-XX-04), September XX, 2004.

³ Joint Committee on Taxation, Comparison of Certain Provisions of H.R. 4520 as Passed by the House of Representatives and as Amended by the Senate: Provisions Relating to the Repeal of the Exclusion for Extraterritorial Income, Domestic Production Provisions, and the Corporate Income Tax Rates Applicable to Small Corporations (JCX-XX-04), September XX, 2004, Joint Committee on Taxation, Comparison of Certain Provisions of H.R. 4520 as Passed by the House of Representatives and as Amended by the Senate: Job Creation Tax Incentive for Manufacturing, Small Business, and Farming (JCX-XX-04), September XX, 2004, Joint Committee on Taxation, Comparison of Certain Provisions of H.R. 4520 as Passed by the House of Representatives and as Amended by the Senate: Certain Revenue Provisions (JCX-XX-04), September XX, 2004, and Joint Committee on Taxation, Comparison of Certain Provisions of H.R. 4520 as Passed by the House of Representatives and as Amended by the Senate: Expiring Provisions (JCX-XX-04), September XX, 2004.