When Taxes Affect Profitability on the Energy Trading Floor
- August 25, 2017 | Avalara
If you want a sure way to increase the profitability of your energy trades, look to your tax team. There’s a good chance they’ll have some valuable intel you can immediately take to the trading floor.
While indirect taxes are largely considered an issue for back office processing, they can have a significant impact on profit margins.
I know what you may be thinking: Everyone knows to anticipate some tax liabilities. It’s just a cost of doing business.
But the common assumption that taxes will be the same regardless of the parameters of a trade couldn’t be more wrong, and habitually anticipating taxes and fees as a set percentage regardless of a trade’s parameters can have a significant impact on profit margins over time. Here’s why:
The Complexities of Energy Trade Taxation
You probably know to expect that state and federal excise taxes—and perhaps a few fees here and there—will play a role in a typical commodities trading scenario involving the purchase or sale of bulk refined fuel.
But do you know how big that role will be? The typical trade might incur any number of liabilities, including:
- Federal excise tax
- Sales and use tax
- Federal oil spill liability tax
- VAT tax
- State oil transfer fee
- Environmental fees
- Regulatory fees
- Inspection fees
- Handling fees
- Container fees
- Quality testing and certification fees
- Demurrage charges
- Detention and per diem fees
- Lightering costs …
… and the list goes on. What's more, as these fees and duties are assessed, a host of factors will enter the equation such as the origin and destination of the bulk fuel, whether the trade is occurring at or below the rack, the method used to transport it, and licenses and exemptions.
It doesn’t take long for these and other variables to begin chipping away at profit margins, and even put otherwise strong customer relationships at risk of souring as higher-than-anticipated taxes are added to invoices.
When it comes to lower-than-anticipated profit margins, many of them can be traced back to a lack of tax perspective.
Indirect Taxes and Energy Trade Profit Margins
If you’re not calculating indirect tax as part of trade evaluations, it may be time for a change.
For example, consider the trading company that’s accustomed to transporting an energy commodity one way, such as via pipeline. What will happen when different arrangements are made to transport by truck instead? That one move alone could make an otherwise tax-exempt product liable for federal excise tax—information that would be valuable to have on the trading floor. Without it, the unprepared trading company might end up increasing tax liabilities of the trade by 20 cents a gallon or more. It’s a steep price to pay when you’re dealing with millions of gallons.
If the trading company were to identify that tax liability during the trade evaluation and sales order, alternate arrangements could be made well in advance to ensure the tax exemption remains intact.
For these reasons, and many others, it’s imperative to use a tax engine capable of identifying accurate taxes, monitoring changes to tax code, and—most importantly—making every last rate, rule, regulation, requirement, and fee visible on the trading floor.
We address this subject in detail in our white paper: Profitable Deal or Losing Trade? It All Depends on Excise Taxes. Download it now to learn more about the impact of indirect taxes on energy trading profit margins.