The What, When and Where of State Fuel Excise License Requirements
- Sales and Use Tax
- July 22, 2016 | Avalara
Any company that buys and sells motor fuels knows that excise licenses are a critical component of tax compliance. Understanding fuel licensing requirements in every jurisdiction where you do business is a must.
That’s why it can be so frustrating to navigate state government websites, where identifying the correct licenses and regulations can sometimes seem as daunting as finding a needle in a haystack. If you’re wrestling with state-by-state fuel excise licensing—even established companies have missed important licensing steps—the following post is for you. Here are the three W’s all fuel companies should become familiar with to maintain compliance and avoid expensive audit liabilities:
The What of Fuel Excise Licenses
To recap: Excise licenses are registration numbers issued by local, state and federal governments as proof a company is licensed to conduct fuel transactions within a specific jurisdiction. Most states store these numbers in searchable, public online databases.
Holding the proper licenses can lower the excise tax rates that need to be applied, and in many circumstances will exempt companies from paying excise tax at certain points in the supply chain. On the other hand, a lack of licensing can put your company at increased audit risk.
The When of Fuel Excise Licenses
Even if you provide your employees with a basic understanding of what fuel licenses are, that doesn’t necessarily mean they all understand when to ask for (or provide) them.
The bottom line is this:
Any time you do business with a new vendor, or cross another state line, excise license registration numbers should be collected before the transaction takes place. Not after. Failing to confirm a supplier’s licensing status ahead of time can lead to big problems in the future.
Case in point: One major fuel supplier sold to an unlicensed distributor for an entire year. They never asked for a registration number; the vendor never told them the company wasn’t licensed. Then the vendor went out of business, and the supplier inherited $3 million in tax liabilities when the oversight was discovered under audit.
The Where of Fuel Excise Licenses
The “where” is simple: Every time you prepare to do business in a new state, it’s time to become familiar with the licensing requirements in that specific jurisdiction. And any parties operating above the rack or working with biofuels should also be licensed with the IRS through the 637 Registration Program—a factor that even some of America’s most established fuel companies have overlooked to the tune of millions in back taxes and penalties.
In some states, you’ll have just two or three licenses to look for. In others, there could be as many as two or three dozen returns that necessitate different registrations. For example, due to county tax returns, the number of licenses you’ll have to sort through is 16 in Illinois, 25 in North Carolina and a whopping 37 in Alabama. By comparison, the District of Columbia, Idaho and Utah each have just two. Equally important is verifying the statuses of these licenses each year: while many do not expire, they can be revoked.
And then there’s the biggest “where” of all: the place your company stores all of those numbers. Because, as we described above, the ability to quickly confirm licensing status just might be the thing that saves your company from major tax liabilities under audit.
Looking for more fuel excise compliance document tips and solutions? Visit us at certcapture.avalara.com.