[4830-01-u]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 48
[TD 8693]
RIN 1545-AU52
Diesel Fuel Excise Tax; Special Rules for Alaska
AGENCY:  Internal Revenue Service (IRS), Treasury.
ACTION:  Temporary regulations.
SUMMARY:  This document contains temporary regulations relating
to the application of the diesel fuel excise tax to fuel used in
Alaska.  The regulations implement certain changes made by the
Small Business Job Protection Act of 1996.  They affect certain
enterers, refiners, retailers, terminal operators,
throughputters, wholesale distributors, and users.  The text of
these regulations also serves as the text of the proposed
regulations set forth in the notice of proposed rulemaking on
this subject in the Proposed Rules section of this issue of the
Federal Register.
DATES:  These regulations are effective December 17, 1996.  For
dates of applicability of these regulations, see 48.4082-5T(g)
and 48.6715-2T(b).
FOR FURTHER INFORMATION CONTACT:  Frank Boland (202) 622-3130
(not a toll-free call).
SUPPLEMENTARY INFORMATION:
Background
     Section 4081 imposes a tax on certain removals, entries, and
sales of diesel fuel.  However, under section 4082, tax is not
imposed if, among other conditions, the diesel fuel is indelibly
dyed in accordance with Treasury regulations.  Dyed diesel fuel
can be used legally in nontaxable uses such as for heating oil,
as fuel in stationary engines, or as fuel in nonhighway vehicles.
A substantial penalty under section 6715 applies if dyed diesel
fuel is used for a taxable purpose such as in a registered
highway vehicle.
     A similar dyeing regime for diesel fuel is required by
regulations issued under the Clean Air Act.  That Act prohibits
the use on highways of diesel fuel with a sulfur content
exceeding prescribed levels.  The Environmental Protection Agency
(EPA) requires this "high sulfur" diesel fuel to be dyed.
     Section 1801 of the Small Business Job Protection Act of
1996 amends section 4082 to create an exception to the IRS dyeing
requirement.  Under this amendment, which is effective October 1,
1996, the IRS dyeing requirement does not apply to diesel fuel
that is removed, entered, or sold in a state for ultimate sale or
use in an area of such state during the period such area is
exempted from EPA's sulfur content and fuel dyeing requirements
if the use of the fuel is certified pursuant to Treasury
regulations.
     Section 211(i)(4) of the Clean Air Act allows EPA to exempt
the states of Alaska and Hawaii from the Clean Air Act's sulfur
content requirements.  In response to a petition from Alaska, the
EPA granted a permanent exemption for remote areas of Alaska
(that is, areas that are not served by the Federal Aid Highway
System).  In addition, a temporary exemption was granted for
urban areas.  This temporary exemption, which was originally
scheduled to expire after September 30, 1996, has been extended
by the EPA (61 FR 42812 (August 19, 1996)) for 24 months, or
until a decision is made on Alaska's petition for a permanent
exemption, whichever period is shorter.
     Thus, under current EPA rules, the entire state of Alaska is
exempt from the Clean Air Act's sulfur content requirements and,
consequently, from the EPA's dyeing requirements.  No part of
Hawaii or any other state is similarly exempt.
Explanation of Provisions
     These temporary regulations generally establish a system for
collecting the federal diesel fuel tax at the wholesale level in
Alaska.  This system is similar to the pre-1994 federal system
under section 4091 and the present system used by the state of
Alaska for state fuel tax.  The person liable for tax under the
temporary regulations generally will be a person who is licensed
by Alaska as a qualified dealer.
     Under the temporary regulations, a qualified dealer may buy
undyed diesel fuel tax free at a terminal rack and sell the fuel
tax free to another qualified dealer or to a buyer for the
buyer's own nontaxable use.  However, a qualified dealer is
liable for tax when it sells to a buyer for the buyer's taxable
use or to a reseller that is not a qualified dealer.
     A qualified dealer must keep adequate records to document
the exempt nature of its nontaxable sales.  Although the
temporary regulations do not prescribe any specific
documentation, taxpayers may consider using a format similar to
the notification certificate in 48.4081-5 as proof of tax-free
sales between qualified dealers.  As proof of tax-free sales for
nontaxable uses, taxpayers may consider using Alaska's exemption
certificate, when appropriate, or an adaptation of the
certificate presently used to support tax-free sales of aviation
fuel that is found in Notice 88-132, 1988-2 C.B. 552, 555.  The
IRS will consider whether the final regulations should specify
model certificates to be used for documenting nontaxable
transactions in the future.
     Taxpayers are cautioned that the uses that are exempt from
Alaska's state tax are not identical to the uses that are exempt
from the federal tax.  For example, Alaska exempts sales to all
nonprofit organizations described in section 501(c)(3); the
comparable federal rule exempts only sales to nonprofit
educational organizations.
     Taxpayers should also note that diesel fuel that is dyed in
accordance with existing IRS regulations will continue to be
exempt from the section 4081 tax in Alaska.
Special Analyses
      It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 12866.  Therefore,
a regulatory assessment is not required.  It also has been
determined that section 553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply to these regulations and,
because these regulations do not impose on small entities a
collection of information requirement, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.  Therefore, a Regulatory
Flexibility Analysis is not required.  Pursuant to section
7805(f) of the Internal Revenue Code, this temporary regulation
will be submitted to the Chief Counsel for Advocacy of the Small
Business Administration for comment on its impact on small
business.
Drafting Information
     The principal author of these regulations is Frank Boland,
Office of Assistant Chief Counsel (Passthroughs and Special
Industries).  However, other personnel from the IRS and Treasury
Department participated in their development.
List of Subjects in 26 CFR Part 48
     Excise taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
     Accordingly, 26 CFR part 48 is amended as follows:
PART 48--MANUFACTURERS AND RETAILERS EXCISE TAXES
     Paragraph 1.  The authority citation for part 48 is amended
by adding an entry in numerical order to read in part as follows:
     Authority: 26 U.S.C. 7805 * * *
     Section 48.4082-5T also issued under 26 U.S.C. 4082. * * *
     Par. 2.  Section 48.4082-5T is added to read as follows:
48.4082-5T Diesel fuel; Alaska (temporary).
     (a) Application.  This section applies to diesel fuel
removed, entered, or sold in Alaska for ultimate sale or use in
an exempt area of Alaska.
     (b) Definitions.
     Exempt area of Alaska means the area of Alaska in which the
sulfur content requirements for diesel fuel (see section 211(i)
of the Clear Air Act (42 U.S.C. 7545(i))) do not apply because
the Administrator of the Environmental Protection Agency has
granted an exemption under section 211(i)(4) of that Act.
     Nontaxable use means a use described in section 4082(b).
     Qualified dealer means any person that holds a qualified
dealer license from the state of Alaska.
     (c) Tax-free removals and entries.  Notwithstanding
48.4082-1, tax is not imposed by section 4081 on the removal or
entry of any diesel fuel in an exempt area of Alaska if--
     (1) The person that would be liable for tax under 48.4081-2
or 48.4081-3 is a taxable fuel registrant and satisfies the
requirements of paragraph (e) of this section;
     (2) In the case of a removal from a terminal, the terminal
is an approved terminal; and
     (3) The owner of the diesel fuel immediately after the
removal or entry holds the fuel for its own use in a nontaxable
use or is a qualified dealer.
     (d) Sales after removals and entries--(1) In general.
Paragraph (c) of this section does not apply with respect to
diesel fuel that is subsequently sold by a qualified dealer
unless--
     (i) The fuel is sold in an exempt area of Alaska;
     (ii) The buyer purchases the fuel for its own use in a
nontaxable use or is a qualified dealer; and
     (iii) The seller satisfies the requirements of paragraph (e)
of this section.
     (2) Tax imposed at time of sale; liability for tax.
Notwithstanding 48.4081-2 and 48.4081-3, in any case in which
paragraph (c) of this section does not apply with respect to
diesel fuel because of a subsequent sale by a qualified dealer,
the tax with respect to that fuel is imposed at the time of the
subsequent sale and the qualified dealer is liable for the tax.
     (3) Rate of tax.  For the rate of tax, see section 4081.
     (e) Evidence of tax-free transactions.  The requirements of
section 4082(c)(2) (relating to certification) and this paragraph
(e) are satisfied if the person otherwise liable for tax is able
to show the district director satisfactory evidence of the exempt
nature of the transaction and has no reason to believe that the
evidence is false.  Satisfactory evidence may include copies of
qualified dealer licenses or exemption certificates obtained for
state tax purposes.
     (f) Cross reference.  For the tax on previously untaxed
diesel fuel that is used for a taxable purpose, see 48.4082-4.
     (g) Effective date.  This section is applicable with respect
to diesel fuel removed or entered after December 31, 1996.
     Par. 3.  Section 48.6715-2T is added to read as follows:
48.6715-2T Application of section 6715(a)(3) to Alaska
(temporary).
     (a) In general.  The penalty provided by section 6715(a)(3)
for willful alteration of dyed fuel will not be assessed if the
alteration occurs in an exempt area of Alaska.
     (b) Effective date.  This section is applicable October 1,
1996.
                             Commissioner of Internal Revenue
                              Margaret Milner Richardson
Approved:  November 27, 1996
           Acting Assistant Secretary of the Treasury
                       Donald C. Lubick