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REPORT TO THE CONGRESS ON EVASION 

OF THE FEDERAL GASOLINE EXCISE TAX 

Office of Tax Policy 

U.S. Department of the Treasury 

December 1987 

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• -:r-11 THE SECRETARY OF THE TREASURY 

WASHINGTON 

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January 6, 1988 

LI hr\\ • Lll:>RAKY e;r,o 1 �o· 

�00�.1 503Ujp V'-} '1997 

Jt.:1vl.J1997

Dear Mr. Chairman: - ......... �\, r-ri· ,.,,T,

Section 1703(g) of Public Law 99-514�,•the Tax�Riform Act of 1986,

provides that the Secretary of the Treasury "shall conduct a 

study of the incidence of the evasion of the gasoline tax." 

Pursuant to that Section, I hereby submit the "Report to the

Congress on Evasion of the Federal Gasoline Excise Tax." 

I am sending a similar letter to Congressman Dan Rostenkowski, Chairman of the Committee on Ways and Means. 

Sincerely, 

�::-:. Bak;r, III 

The Honorable Lloyd Bentsen

Chairman

Committee on Finance 

United States Senate 

Washington, D.C. 20510 

Enclosure 

.. 
• THE SECRETARY OF THE TREASURY 

WASHINGTON 

January 6, 1988 

Dear Mr. Chairman: 

Section 1703(g) of Public Law 99-514, the Tax Reform Act of 1986,

provides that the Secretary of the Treasury "shall conduct a 

study of the incidence of the evasion of the gasoline tax." 

Pursuant to that Section, I hereby submit the "Report to the

Congress on Evasion of the Federal Gasoline Excise Tax." 

I am sending a similar letter to Senator Lloyd Bentsen, Chairman

of the Committee on Finance. 

Sincerely, 

� �tfL ��Bak�r, III 

The Honorable Dan Rostenkowski

Chairman

Committee on Ways and Means 

House of Representatives 

Washington, o.c. 20515

Enclosure 

.. 
4 

6 

CONTENTS 

1. Introduction and Summary

l. Background of the Study

II. Principal Findings

III. Organization of the Report 2 

2. Law and Administrative Practices 3 

I. Administration of the Gasoline Excise Tax 3 

A. Background and Law Prior to January 1988 3 

B. Changes in the Tax Refonn Act of l 986

C. Changes Included in H.R. 3545 5 

II. Enforcement of the Gasoline Excise Tax 6 

A. Identifying Taxpayers for IRS Examination

B. Results of I RS Examinations 6 

3. Recent Disclosures Involving Criminal Tax Evasion of the

Gasoline Excise Tax 8 

l. Evasion Schemes 8 

II. Impact of Tax Evasion 9 

Ill. Diesel Fuel Tax Evasion 10 

4. State Efforts to Deal with Gasoline Excise Tax Evasion 12 

5. Estimate of the Federal Revenue Loss from Noncompliance 15 

I. Current Levels of Noncompliance 15 

II. Federal Revenue Gain from Changed Collection

Procedures 16 

111. Federal Revenue Loss from H.R. 3545 17 
6. Conclusion 18 

Footnotes 20 

LIST OF TABLES 

Table 1 : Changes in Point of Collection and Revenue Increases 

of Motor Fuel Taxes, by State 13 

Table 2: Estimated Revenue Increase in the Federal Excise Tax 

on Gasoline from the January J 988 Change in the Point 

of Collection 16 

◄ 

ii 
1. INTRODUCTION AND SUMMARY

I. BACKGROUND OF THE STUDY

This report has been prepared in response to section I 703(g) of the Ta

x 

Reform Act a of 1986 (P.L. 99-514). which requires the Secretary of the Tresury 

to conduct a study of the eva

sion of the Federal gasoline excise tax. Section 

I 703(a) of the Act amended the law to provide for the collection of the 

Federal gasoline excise tax at the refinery or terminal level rather than at 

the wholesale or retail level. Congress altered tax collection procedures and 

mandated this study because of concerns with the failure to comply with the 

Federa

l excise tax on gasoline. particularly organized. willful tax evasion. 

Since the change in the point of tax collection becomes effective on 

January 1. 1988. this report ca

nnot compare the tax collection experience 

under the amendment with experience under current law. Instead. the report 

uses data from a number of sources that. reasonably interpreted. permit an 

estimate of the annual revenue loss to the Federal government from the evasion 

of the gasoline excise tax under current co_llection procedures. 

II. PRINCIPAL FINDINGS

The report finds that the Federal government is currently losing excise tax 

revenue of about $250 million a year from noncompliance with the Federal 

excise tax on gasoline. Approximately $100 million a year of the revenue loss 

is estimated to be attributable to willful. organized evasion of gasoline 

excise taxes. which is described in Chapter 3 of this report. Ordinary tax 

audit procedures usually ca

nnot detect these types of evasion schemes. 

Without a change in tax collection procedures, recouping these losses through 

tax enforcement would be very costly. would be intrusive and burdensome for 

law-abiding taxpayers, and still· would not be fully effective. Moreover. 

competitive pressures produced by such schemes themselves engender further 

evasion. Thus. changes in tax collection procedures designed to end organized 

evasion are needed to prevent ever-increasing losses. 

The report concludes that the best means of eliminating organized evasion 

of the Federal gasoline tax is to move the point at which taxes are collected 

upstream. in the manner enacted by section 1703 of the Tax Reform Act of 1986. 

Such a change has been estimated to increase excise tax receipts by $300 million in fiscal year 1988 and $200 million a year thereafter. for a total of 
$1.1 billion over the five fiscal year period. 1988 through 1992. Thus. the 

change will eliminate about 80 percent of the estimated noncompliance with the 

Federal gasoline excise tax. 

111. ORGANIZATION OF THE REPORT

Chapter 2 of the report describes the current gasoline excise collection 

system and administrative practices. Chapter 3 cites recent disclosures 

involving criminal schemes designed to evade the gasoline excise tax. 

Chapter 4 discusses actions taken by State governments to reduce gasoline tax 

evasion and the extent to which such actions have improved tax compliance. 

Chapter 5 summarizes the Federal revenue loss from noncompliance with the 

excise tax and the amount that will be recouped under the statutorily mandated 

changes in tax collection procedures. Finally. Chapter 6 discusses why the 

opportunity for tax evasion will continue until there is a change in the point 

at which the tax is imposed, such as collecting the tax at the refinery or 

terminal level as provided by section I 703(a) of the Tax Reform Act of 1986. 

2 
2. LAW AND ADMINISTRATIVE PRACTICES

Under section 4081 (a) of the Internal Revenue Code as currently in effect. 

an excise tax of 9.1 cents per gallon is imposed on gasoline sold (or used) by 1 producers and importers of gasoline. In fiscal year 1986. Federal gasoline 

excise tax receipts totaled $9.0 billion. 

The legal incidence of the gasoline excise tax is on the producer or 

importer. who is required to file a quarterly excise tax return. Taxpayers 

must make monthly deposits of tax in any month if they are liable for more 

than $100 of taxes. Monthly deposits are due by the last day of the month 

following the month in which liability is incurred. If a taxpayer is liable 

for over $2.000 of taxes for any month of a calendar quarter. the taxpayer 

must make semi-monthly deposits in the following quarter. Generally. these 

deposits are payable by check and are due by the 9th day following the close 

of each semi-monthly period. Independent refiners, however. may pay the tax 

by the 14th day following the close of the semi-monthly period if the payment 

is made by wire transfer. 

I. ADMINISTRATION OF THE GASOLINE EXCISE TAX

A. Background and Law Prior to January 1988

Prior to 1959. the term "producer" generally meant a refiner or importer of 

gasoline. The excise tax was imposed upon the refiner or importer at the time 

gasoline was sold to a wholesaler or distributor. The tax was not imposed on 

sales to other producers. In lhe case of vertically integrated companies. the 

sale by the producer. and hence the payment of tax. did not occur until the 

gasoline was sold· to a dealer for sale to an ultimate consumer. If a 

wholesaler. distributor, or jobber purchased gasoline from a producer. 

however. the wholesaler, distributor. or jobber was required to reimburse the 

producer for the tax upon purchase, although the wholesaler, distributor. or 

jobber could not recoup that cost until it sold the gasoline to a subsequent 

purchaser. 

In the Federal Highway Act of 1959 (P.L. 86-342). Congress amended the 

statute to provide that the term "producer" includes a wholesale distributor. 

A wholesale distributor is generally an entity which sells gasoline to 

producers. dealers. or to users who purchase in bulk quantities and deliver 

into bulk storage tanks. The 1959 change. by delaying the time at which the 

tax was paid. reduced the competitive advantage of integrated companies over 

independent gasoline wholesalers. distributors. and jobbers. In 1984. 

3 
Congress further amended the law to provide that the term "wholesale 

distributor" includes "chain retailers" having IO or more gasoline stations 

under common management. 

In orcter to qualify as a "producer." a wholesaler must register with the 

Internal Revenue Service (IRS) by filing Form 637 with the District Director 

requesting a registration number. Once a wholesaler obtains a registration 

number. it may purchase gasoline from a refiner or imponer tax free (since 

the refiner or importer is treated as having sold the gasoline to another 

producer) and may sell gasoline tax free to any other wholesaler holding an 

I RS registration number. 

Certain types of consumers of gasoline are statutorily exempt from payment 

of the tax. For example. State and locaJ governments (including governmental 

entities such as school districts) are exempt from the tax. and they are 

permitted to purchase gasoline tax free. These exemptions have been 

interpreted to extend to organizations. such as volunteer fire departments and 

rescue squads. fulfilling a governmental function. In addition. the Energy 

Tax Act of 1978 (P. L. 95-6 J 8} established an exemption from the gasoline 

excise tax (then 4 cents per gallon) for gasoline that is blended in a mixture 

which contains at least IO percent qualified alcohol (ethanol or methanol). 

Such a mixture is commonly called "gasohol" and often is marketed as o�tane 

enriched unleaded gasoline. Currently. gasohol qualifies for a 6.05 cents per 

gallon exemption from the 9. l cent excise tax. 

IRS has several responsibilities in connection with the gasoline excise 

tax. In addition to registering producers and wholesalers. IRS processes 

applications for exemption (Form 637) from the tax. IRS is also responsible 

for collecting and accounting for tax payments and for receiving the quarterly 

excise tax returns (Fonn 720). 

B. Changes in the Tax Reform Act of 1986

Section 1703 of the Tax Reform Act of 1986 (the "Act") changed the point at 

which the Federal gasoline excise tax will be imposed. Tax collection was 

moved to a point earlier in the distribution chain. The Act amended sections 

4081 and 4082 of the Internal Revenue Code so that. effective January I. 1988. 

the excise tax will be imposed upon removal from the refinery or. if earlier. 

upon sale of gasoline. gasoline blend stocks. and products commonly used as 

additives in gasoline. For imported gasoline. the tax is imposed upon removal 

from the custody of customs. The new law provides an exception which permits 

tax-free bulk transfers of gasoline. gasoline blend stocks. and gasoline 

additives to registered and bonded terminals. In such cases. the terminal 

operators are liable for collection and payment of the tax upon removal 

4 
from the terminal. The Act permits the Secretary of the Treasury to prescribe 

regulations for the registering and bonding of such terminal operators. 

Collection upon removal from the terminal will help assure that all 

distributors and dealers that remove gasoline from the terminal will be 

purchasing tax-paid gasoline. In addition to assuring collection of the 

Federal tax, this change will help to give the honest dealer a fair chance to 

compete against those evading excise taxes. As explained in Chapter 3, under 

the current system a dealer may have to choose between purchasing gasoline 

from a suspect source or leaving the business. 

C. Change Included in H.R. 3545

H.R. 3545. as approved by the House on October 26, 1987, included a 

provision to permit registered wholesale dealers who post a bond, or other 

proof of financial responsibility, to purchase gasoline from either a refinery 

or a bonded terminal without payment of tax. The point at which the tax is 

actually imposed (removal from the refinery or bonded terminal) would have 

remained unchanged. The bill would have provided that the Secretary of the 

Treasury would set the standards for the posting of a bond or providing proof 

of financial responsibility. H.R. 3545 would have required that the standards 

be sufficiently strict to prevent recurrence of the tax evasion that prompted 

the changes in the Tax Reform Act of 1986. However, the standards would have 

had to reflect the Treasury's tax exposure from particular wholesale dealers 

and would further have required flexibility in how financial responsibility 

was demonstrated including, but not limited to. demonstration of assets. 

bonds, and letters of credit. 

The Treasury Department does not believe that requiring proof of financial 

responsibility is adequate to prevent a recurrence of significant amounts of 

organized tax evasion. That is especially true if financial responsibility 

can be shown without reference to an independent third party. Showing 

financial responsibility only helps in collecting unpaid taxes once they are 

assessed. It does not prevent use of the daisy-chain type schemes which have 

been so troublesome. Unless audit coverage is expanded very significantly, 

even with bonding it wilt be difficult to identify and collect evaded taxes. 

Moreover. by increasing the number of entities which may hold and purchase 

gasoline without paying the excise tax, the change would exacerbate the 

difficulties of providing adequate audit coverage. 

5 
II. ENFORCEMENT OF THE GASOLINE EXCISE TAX

A. Identifying Taxpayers for IRS Examination

Each year IRS prepares a list of excise taxpayers from its file of all 

business taxpayers. Appropriate portions of this list are distributed to each 

I RS District. Excise tax specialists in each District then review their 

portion of the list to identify potential noncompliance. lnfonnation from 

these reports currently provides significant leads for the IRS Tax Examination 

Program. 

The exchange of information with the States provides another source of 

compliance leads. IRS often obtains copies of State examination reports, 

lists of registrants or licenses. and other State data that can be used to 

identify noncompliance. Referrals from other IRS activities such as 

collection. criminal investigation. or income tax examination are also sources 

of leads for excise tax examiners. 

"Information gathering projects" provide a further method of identifying 

potentiaJ evasion of the gasoline tax. An information gathering project is a 

project authorized to collect tax-related information on taxpayers not 

currently under IRS examination. Its purpose is to identify taxpayers with 

the greatest potential for examination. Such projects may be authorized by 

IRS district directors. assistant regional commissioners, and assistant 

comm1ss1oners. This approach may be used when information indicating 

potential noncompliance is obtained from informants, governmental agencies. 

or other sources. One such project used information from the Department of 

Energy to identify the importers of gasoline from 1981 through 1984.

Much of the recent IRS activity in the gasoline excise tax area has 

centered on criminal investigation of tax evasion. Investigations have been 

focused in the Brooklyn District, where IRS personnel have participated in a 

task force of approximately 40 people, representing 12 State and Federal 

investigative or prosecutorial organizations. This two-year effort has 

identified major evasion schemes throughout the entire New York City and Long 

Island metropolitan areas. The investigation has also uncovered evidence of 

widespread organized crime involvement. In addition to these areas. IRS has 

other criminal cases pending against individuals. not identified with 

organized crime, in six of its seven national regions. 

8. Results of IRS Examinations

IRS examinations of gasoline excise tax returns have identified various 

forms of noncompliance. Noncompliance may result from use of incorrect tax 

6 
rates or failure to file. In addition, taxpayers may make errors in 

characterizing certain sales as tax exempt. However. the noncompliance which 

is most difficult to control has resulted from the criminal tax evasion 

mentioned above. 

IRS examined 7.1 percent of the 33. 792 excise tax returns filed for fiscal 

year 1986 which showed gasoline excise tax liability. Civil examinations of 

gasoline excise tax returns yielded a total of $36 million in proposed tax 

adjustments and penalties. or an average of $14,9 l l per return for the 2.4 l 1 

returns examined. In addition. interest from the due date of the return would 

generally be charged on tax adjustments. 

Despite the success of these efforts, the current (i.e. pre-1988) 

collection method has hindered enforcement against willful, organized evasion. 

Agents must identify taxpayers from among numerous entities that have held 

title to the gasoline. A common practice in evasion schemes, however, is to 

sell and resell the gasoline many times (even if the gasoline itself has not 

moved physically) in an attempt to make it difficult to determine that eva

sion 

has occurred. In addition. because IRS has not been able to require the 

producers and wholesalers who collect the gasoline excise tax to post bonds 

guaranteeing payments of the taxes collected and because attempts to track 

ownership and transfers are of necessity undertaken long after the product has 

been consumed, even if delinquent taxpayers are located unpaid taxes may not 

be collectible. 

7 
3.e RECENT DISCLOSURES INVOLVING CRIMINALe

TAX EVASION OF THE GASOLINE EXCISE TAXe

In 1959. the Congress deferred payment of the gasoline excise tax until a 

sale is made to the retailer or. in some cases. to the ultimate consumer as an 

accommodation to independent marketers and jobbers. Such a deferral departs 

from the usual practice of collecting excise taxes at the point of initial 

sale by a producer. as is done, for example, in the case of the other 

manufacturers excise taxes �. on tires. coal. and recreational equipment). 

the tobacco and alcoholic beverage excise taxes, and the crude oil windfall 

profit tax. The change, as provided by the Tax Refonn Act of 1986. to impose 

the tax beginning in 1988 upon removal from the refinery or from a 

distribution terminal, generally conforms the gasoline excise tax to other 

excises. with the exception of the option that pennits tax free storage in 

certain bulk terminals. 

In recent years. the weakness in the current (pre-I 988) collection system 

has been exploited to divert for private gain the excise taxes, both Federal 

and State, that are due upon the sale of gasoline. During fiscal years 1983. 

1984. 1985. there were criminal convictions in cases involving nearly 

$2 million in gasoline excise tax deficiencies. In fiscal year 1986 alone, 

gasoline tax deficiencies in cases of criminal convictions increased to over 

$ I I million. From the second half of fiscal 1986 through fiscal 1987. the 

IRS Criminal Investigation Division initiated more than 100 investigations 

involving gasoline excise tax. Many of these investigations were conducted 

jointly with the FBI and State and local law enforcement agencies. The 

criminal convictions obtained in these investigations revealed more than $35 

million in gasoline excise tax deficiencies. In addition to the cases under 

investigation, IRS uncovered a number of potential high-dollar cases on which 

it has not yet been able to begin work because its existing resources are 

already being fully utilized. 

I. EVASION SCHEMES

A gasoline excise tax evasion scheme typically involves "paper" sales of 

gasoline by a refiner or wholesaler through a chain of tax-free distributors. 

each of which qualifies as a distributor because. it has obtained an IRS 

registration number. Some of these tax-exempt distributors may be nothing 

more than post office boxes. with no assets and with officers who are foreign 

domiciliaries. Others may conduct some bona fide sales while using or 

8 
permitting the use of their exemption certificates for other sales involving 

evasion of excise taxes. A taxable sale is ultimately made to a nonexempt 

entity. such as a gasoline distributor that has not registered as a producer 

or a retailer. The nonexempt distributor·s payment to the last entity in the 

chain o_stensibly includes the Federal excise tax. The tax collected. if any. 

is retained by the participants in the sales chain and is not paid to the 

Federal government as is required by law. In the meantime. the gasoline 

itself has been shipped directly to the nonexempt distributor for further 

distribution or for sale to consumers. As the result of the tax evasion, the 

retailer may be able to purchase the gasoline at a reduced price and. thereby. 

to undercut gasoline prices charged by retailers who purchase gasoline taxpaid. Alternatively. the retailer may not lower his sales price to reflect 

his reduced cost and may pocket the additional profit. In other evasion 

schemes. the distributor may not share any of the benefit of the unpaid excise 

tax with the retailer. 

An audit of these paper transactions would reveal that the nonexempt 

distributor or retailer bought tax-paid gasoline. The final "producer" in the 

paper chain that sold the gasoline. and thus the party that is liable for the 

tax. might ultimately be discovered by tracing the transfers of title to the 

gasoline. either back from the point of retail sale or forward from the 

refinery or point of importation. These "daisy chain" evasion schemes are 

designed, however. to make tracing difficult. time-consuming, and costly. 

Moreover, the IRS auditor would often discover that, once located, the 

"producer" that sold the gasoline to the distributor would have no assets or 

would not have officers from whom the tax could actually be collected. 

There are recent indications that the daisy-chain evasion techniques 

are now being used earlier in the distribution chain at layers at larger 

terminals. Information available to IRS and FBI agents indicates that in some 

areas of the country organized crime leaders have significant influence in. or 

direct control of. such tenninals. 

II. IMPACT OF TAX EVASION

The "daisy-chain" type of tax evasion scheme described above results in 

loss of tax revenues to the Federal and State governments and a concomitant 

loss of respect for tax administration. Moreover. these criminal activities 

have a perverse influence on the marketplace. Dishonest distributors who 

evade the gasoline excise tax may undersell their competitors. thereby driving 

law-abiding distributors out of the marketplace. Thus. dishonest distributors 

place great pressure on competing dealers to engage in similar purchases of 

untaxed gasoline from criminal elements in order to survive. The continued 

9 
existence of these schemes has a corrupting effect on the entire gasoline 

distribution system. 

On July 15. 1986. the Ways and Means Subcommittee on Oversight held a 

hearing to investigate the extent of gasoline excise tax evasion. 2 Testimony 

was presented by representatives of the Treasury Department. the Internal 

Revenue Service. the Federal Highway Administration. the Department of 

Justice. and the Federal Bureau of Investigation. Representatives of the Tax 

Commissions of California. New York. and Florida and the Executive Secretary 

of the National Association of Tax Administrators also testified. The thrust 

of the testimony was that the States and the Federal government were losing 

minions of dollars annually through the evasion of gasoline excise taxes. 

The Subcommittee also heard from a "mystery witness" who is in the 

Department of Justice witness protection program and who had operated a 

gasoline distribution business in four States in conjunction with an organized 

crime family. He testified that his profits on evaded Federal. State. and 

local taxes were $8 million a week. He also testified that he would not have 

been able to conduct such a scheme had the law required payment of tax upon 

removal from a refinery. 

There was unanimous agreement by the officials testifying that the only 

effective means of substantially preventing criminal elements from evading the 

tax was to change the point of collection of the tax. as several State 

governments have done and as the Federal government was considering doing 

(and subsequently did in the Tax Reform Act of 1986). 

III. DIESEL FUEL TAX EVASION

For some years, there has been concern among State and Federal taxing 

authorities about possible noncompliance with the diesel excise taxes which 

are imposed at the retail level. Various problems. some of which are similar 

to those cited above for the gasoline excise tax, make it difficult to 

determine whether there is a serious compliance problem for the diesel excise 

taxes. Nevertheless, the possibilities for organized tax evasion do exist. 

These problems could be compounded by the difficulty of distinguishing between 

diesel fuel and similar products that have other uses. For example. number 2 

fuel oil sold as heating oil is tax exempt: however. it can also be used as 

fuel for motor vehicles. Moreover. a significant proportion of diesel fuel is 

used for off-highway purposes and. hence. is nontaxable. The variety of 

tax-exempt uses for diesel-type fuels and the quantitative significance of 

such uses provide administrative difficulties for IRS. complexity and 

confusion for taxpayers. substantial opportunities for noncompliance including 

10 
evasion. revenue loss for the Treasury. and competitive dilemmas for honest 

taxpayers faced with unfair competition from untaxed. lower-priced fuel. 

The Administration has concluded that there is a need to change the point 

at which the Federal excise tax on diesel fuel is levied. The potential for 

tax. evasion and other forms of noncompliance can be minimized only if the 

point at which the tax is imposed is moved closer to the beginning of the 

distribution stream. 

H 
4. STATE EFFORTS TO DEAL WITH GASOLINE EXCISE

TAX EVASION

Data reported at the Ways and Means Committee hearing by California and 

New York authorities make it clear (a) that there have been major evasion 

schemes involving gasoline excise taxes and (b) that the current (pre-1988) 

Federal tax collection system may encourage people who intend to evade 

gasoline excise taxes to enter the business. California. New York. and other 

States have recently amended their laws in order to shift the collection of 

gasoline excise taxes to points earlier in the distribution chain and, thus. 

to prevent the evasion schemes currently employed to evade both State and 

Federal taxes. 

As reported in the statement of Roderick G. W. Chu. Commissioner of the 

New York State Department of Taxation and Finance, before the House Ways 

and Means Committee's Subcommittee on Oversight. a study by the State of 

New York estimated an annual loss of between $173 and $254 million in State 

3 and local taxes from gasoline tax evasion. Using the lower figure. it 

appears that the State of New York lost the tax revenue on about 20 percent 

of the gasoline consumed in the State. This figure is consistent with the 

drop in quantity of gasoline for the State of New York as reported by the 

Federal Highway Administration and is also consistent with the increase in tax 

receipts reported since the State of New York changed its tax collection 

system in 198.5. 

Rohen Nunes from the California State Board of Equalization stated that 

$30 million to $50 million of tax had been evaded. or the excise tax on about 

4 5 percent of the gasoline sold in California. 

Testimony by the representative of the State of Florida indicated that 

evasion by organized crime accounted for a relatively small loss of revenue 

for the State. The figures presented for Florida suggest a tax loss on less 

than one percent of the volume of gasoline sold in Florida. 

The fuel tax collection changes recently adopted by six States in order to 

minimize organized tax evasion are summarized in Table I. The revenue 

increase figures represent the increase for the first full year following the 

change. No adjustments have been made for changes in prices or quantities of 

fuel taxed. Except for Florida (where there had been little evidence of 

organized gasoline tax evasion). the States· expectation of substantial 

revenue gains from changes in the point of collection were generally 5 realized.e

12 
Prior Year1 I 

5.4 

Table I 

Changes in Point or Collection and Revenue Increases of Motor Fuel Taxes. by Slate 

Date of I Revenue Gain over 1986 Audit I Estimate Change in Point of I I or 

I Assessment I Tax Evasion S1a1e I Fuel/Tax I Tax Colleclion I Change 

frome I Prior 10 Change : lo : I I l I 

($ millions) : (%) ($ millions) ($ millions) 

California gnsoline/sales retail first sale July 1986 NA NA 19.4 JO - 50 

in s1a1e 

New York (gasoline/sales} 

(gasoline/excise} 

distributor import into 

slate 

June 1985 72.0 

88.0 

21.Se

24.5e

NA 

NA 

173-2542 

Florida gasoline/excise retail first sale January 1985 9.8 8.8 NA 

in slate 

4 

Maine diesel/excise retail wholesale October 1983 4.0 38.0 NA 

Maryland diesel/excise end user wholesale July 1985 6.23 20.0 NA NA 

Michigan gasoline/sales retail import into January 1984 NA 20.0 NA NA 

state 

Depar1ii1en1 of the Treasury 

Office of Tax Analysis 

NA: Nol Available 

1

Prior year was determined as the 12 months proceeding the first full year in which lhe tax change came in lo effect. 

2

Sourcc: National Economic Research Associated Inc., Report to the New York Petroleum Council on Gasoline Taxe

Evasion in New York S1a1e. February 25, 1985. 

w 3 Soun:c: Highway S1a1is1ics 1985, Federal Highway Administration. 

4 Less 1han $50 1housand. 

Source: Dara compiled by IRS from reports of slate revenue authorities. 
To combat fraudulent tax-exempt sales and elaborate "daisy chain" schemes 

designed to avoid payment of tax. five of the States listed in Table I have 

significantly restricted tax-exempt sales of motor fuel. California allows 

tax-free sales between distributors only in limited situations. To qualify 

for tax-exempt purchases. the distributor must meet certain financial 

requirements. Only 27 distributors have thus far qualified for tax-exempt 

purchase: all operate refineries. New York aJlows tax-exempt purchases only 

by governmental entities and hospitaJs and for purchases of gasoline for 

immediate export out of the State. Florida allows tax-exempt sales only 

between refineries. Maine allows tax-exempt sales only to tanks that are 

specifically marked as tax exempt for special fuels. Maryland requires the 

posting of a bond by the tax-exempt purchaser. 

Some of the States have imposed tougher licensing requirements and have 

reinforced them with larger penalties for noncompliance. In Florida, the new 

licensing of refiners. importers. wholesalers, jobbers. retail vendors. 

terminal facilities. and carriers. together with enhanced reporting 

provisions. are believed to have made evasion of motor fuel taxes more 

difficult. Each licensee must report on product bought. sold. stored. or 

transported in that State. Provisions of the New York law require 

re-registration of a distributor in the event of a significant transfer of 

ownership. Seizure of fuel and equipment may result from failure to 

re-register as well as from operating without a li�ense. 

14 
----

5. ESTIMATE OF THE FEDERAL REVENUE LOSS

FROM NONCOl\lIPLIANCE

This chapter includes estimates of the revenue currently being lost due 

to failure to comply with the Federal excise tax on gasoline. The chapter 

also includes estimates of the effect of changing the point at which the 

excise tax is imposed, as provided in the Tax Reform Act of 1986. Finally, 

estimates are given for a partial reversal of the Tax Reform Act changes as 

provided in H.R. 3545, as approved by the U.S. House of Representatives on 

October 26, 1987. 

I. CURRENT LEVELS OF NONCOMPLIANCE

Noncompliance with the Federal excise tax on gasoline follows three basic 

patterns. One is the criminal evasion scheme of the type described in 

Chapter 3. Normal audit procedures are unlikely to detect this type of 

evasion. A second type of evasion occurs when a taxpayer operating alone 

fails to report some or all of his taxable transactions either erroneously or 

in the hope that he will not be audited. Normal audit procedures. however, 

are likely to detect this type of evasion, but only for _those returns which 

are actually audited. The third type of noncompliance occurs when taxpayers 

report correctly but fail to pay their liabilities and, instead. use those 

funds to meet other obligations in the hope of avoiding financial failure. 

Normal accounts receivable monitoring and enforcement--and even normal 

processing of excise tax returns--will usually detect such noncompliance, but 

with less than complete assurance of financial recovery. Moreover, IRS does 

not have an effective compliance program to detect. as swiftly as necessary. 

entities which have never filed the required excise tax return. 

The estimate of noncompliance given below is the result of piecing together 

evidence from Federal and State experience and the use of plausible 

assumptions. It is assumed, for example. that when a gasoline purchaser is 

not in compliance with State tax laws. the purchaser is generally not in 

compliance with the Federal tax law. Thus. reports of State tax noncompliance 

provide clues about the extent of Federal noncompliance. Conversely. gasoline 

may be taxed at the State. but not the Federal level. usually where States 

such as California and New York collect the tax earlier in the distribution 

chain than the Federal government does currently. 

15 
The total nationwide Federal excise tax revenue loss from noncompliance 

with Federal gasoline excise tax. as it is administered under pre-1988 

collection procedures. is estimated to be about $250 million per year. About 

40 percent of the total noncompliance. or about $100 million is estimated to 

be attributable to organized tax evasion efforts. 

II. FEDERAL REVENUE GAIN FROM CHANGED COLLECTION

PROCEDURES

The Treasury Department estimates that the change in the point of 

collection of the Federal gasoline excise tax on January I, 1988 to the 

refiner. importer. or terminal operator, as mandated by section 1703 of 

the Tax Reform Act of 1986. will increase excise tax receipts by about 

Table 2

Estimated Increase in the Federal Excise Tax on Gasoline 

from the January 1988 Change in the Point of Collection• 

Gross Excise Tax 

Fiscal Year Revenue Increase 

($ in millions) 

1988 JQ0b 

1989 200 

1990 200 

1991 200 

1992 200 

Total, 1988-1992 $1,100 

Department of the Treasury 

Office of Tax Analysis 

• As mandated by Section 1703 of the Tax Reform Act of 1986,

b The tax increase for fiscal year 1988 is larger than for other years bec:iuse

lhe change in the point of collection occurs in 19RR. Thu�. 1.1, receipt�

received during 1988 will cover more than one full year·s gasoline 1>roduction.

16 
$200 million per year compared to the current base. This estimate assumes 

that some evasion wil1 occur under any system but that the change in law will 

eliminate about 80 percent of the Federal gasoline excise tax evasion. As 

shown in Table 2. the January 1988 change in the point of tax collection is 

estimated to increase Federal gasoline excise tax collections by $300 million 

in fiscal year 1988 and about $200 million a year thereafter. Thus. by the 

end of 1992, $ l. I billion of additional excise tax will be collected. 6 

III. FEDERAL REVENUE LOSS FROM H.R. 3545

As discussed in Chapter 2, H.R. 3545 as approved by the House on 

October 26. 1987 would have partially reversed the changes in gasoline excise 

taxes made by the Tax Reform Act of l 986. Under H. R. 3545. gasoline wholesale 

dealers who provided proof of financial responsibility would have been able to 

purchase gasoline from a refinery or bonded terminal without payment of the 

federal gasoline excise tax. The Treasury Department believes that such a 

change would produce a significant and continuing revenue loss which would be 

attributable to increased noncompliance, primarily tax evasion schemes. If 

the H. R. 3545 changes had become effective on January I • 1988. the Treasury 

Department estimates that revenue would have declined by at least $39 million 

in fiscal year 1988. Revenue would have declined by at least $60 million each 

subsequent year through fiscal year 1992. Thus, between fiscal years 1988 and 

1992, the total revenue loss would have been at least $279 million. In fact, 

it is likely that as potential tax evaders became more familiar with the 

provision, revenue losses would have become significantly greater and would 

have continued to expand each year. 

17 
6. CONCLUSION

Testimony taken by the House Ways and Means Committee's Subcommittee 

on Oversight. the experience of State tax administrators. increases in State 

gasoline tax collections following changes in the point at which such taxes 

are collected. and Federal enforcement experience all strongly support the 

conclusion that the annual excise tax loss being sustained by the Federal 

government from noncompliance with the gasoline excise tax has been at least 

$250 million per year in the recent past. Recent disclosures have also led to 

an appreciation of the ease with which gasoline excise taxes can be evaded 

when such taxes are collected near the end of the distribution chain. Without 

a change in the point of collection, as provided in section 1703 of the 1986 

Act. this loss would continue and would probably grow very significantly even 

with increased IRS enforcement efforts. 

The Treasury Department has considered other options to improve the 

operation of the existing tax collection system. These include imposing a 

requirement that distributors post a bond to guarantee tax payments, having 

the Internal Revenue Service exercise greater scrutiny of applicants for tax 

exemption. and using more strenuous administrative enforcement measures. We 

have concluded, however. that while these options may provide some assistance 

in obtaining additional compliance. they would not be effective enough. We 

believe that they would significantly increase administrative costs for both 

IRS and taxpayers. while failing to deal effectively with the cause of the 

problem--the ability to arrange for the serial transfer of title among many 

entities and thereby make auditing prohibitively expensive. Bonding by 

itself. for example. as a condition of registering as a producer is of little 

benefit if time-consuming auditing of multiple transactions is required in 

order to locate the entity where the tax evasion has taken place or if bonding 

is abandoned after an exemption certificate has been obtained. However. 

bonding in conjunction with other enforcement measures may be useful in 

assuring payment when evaded t�es are discovered. 

Although IRS is attacking this compliance problem administratively on many 

fronts. such measures cannot be completely effective because they cannot 

assure continuous supervision of the exempt producers. Nonqualified entities 

can obtain certificates through the use of "fronts" involving independent 

dealers who may be coerced or bribed into obtaining exemptions. Criminal 

groups can also (as has been reponed) purchase exemption certificates from 

legitimate distributors. Accordingly. we do not helieve that such administrative options alone can or will stem the revenue loss from the evasion 

18 
schemes summarized in Chapter 3. Imposition of changes which mitigate tax 

evasion and other noncompliance will reduce the resources that IRS needs to 

devote to gasoline tax enforcement. Diminishing the number of tax-free sales 

of gasoline wilJ also reduce the administrative compliance burdens of refiners 

and terminal operators. Moreover. such changes will free IRS resources to 

continue their efforts to uncover past noncompliance and to recover 

uncollected excise taxes. 

The Treasury Department is convinced that the only practical solution to 

the gasoline excise tax evasion problem lies in changing the imposition of the 

tax from the point of sale to a nonexempt distributor or retailer to the point 

at which the gasoline is first removed from the refinery. As a general rule. 

tax compliance can be best assured if the audit trail is short and attention 

can be focused on a relatively small number of taxpayers. Collection at the 

refinery or terminal will reduce the number of taxpayers to be audited (and 

burdened with return requirements) from approximately 8.200 under the current 

law to between 200 and 300 (starting in l 988) under the Tax Reform Act of 

1986. In addition, because the time of tax payment wilt not depend upon 

whether the gasoline is distributed directly by refiners or through 

independent marketers, integrated companies will not have the tax deferral 

advantage over independent marketers that existed prior to 1959 and which 

prompted the 1959 amendment to the Internal Revenue Code. 

The Treasury Department opposed the provision of H. R. 3545 which would 

have permitted tax-free sales to wholesale dealers who demonstrate financial 

responsibility. The Treasury Department believes that such a change would 

have been counterproductive and would have opened the way to significant 

revenue losses from tax evasion and other noncompliance. 

We are confident that the Tax Reform Act will help to stem the tide of tax 

evasion schemes, assure the availability of funds for the Nation's highway 

construction program, and maintain public respect for our tax system. 

19 
FOOTNOTES 

1 Generally. the revenue from 0.1 cents per gallon of this tait Is transferred to the Leakinge

Underground Storage Tank Trust Fund: the remaining 9.0 cents per gallon is transferred 10 

the Highway Trust Fund from which a small portion representing taited gasoline used as motor 

boat fuel is subsequently transferred to the Aquatic Resources Trust Fund. However. 

revenue attributable to the Federal eitcise taxes on fuel for noncommercial aviation is 

transferred to the Airport and Airway Trust Fund. The Federal eitcise tait on gasoline 

increased from 9.0 cents per gallon to 9.1 cents per gallon on January I. 1987. 

2 United States Congress. House Committee on Ways and Means. Compliance ivitlr Federal Gaso/i11e 

Excise Jax Provisions: Hearing Before the Subcommittee on Oversight of tire Committee 011 

Ways and Means. House of Representatives. 99th Congress. Secottd Session, July 15. I 986. 

U.S. Government Printing Office. I 987. 

3 Op cit .• p. 130. 

4 Op cit .• p. 121. 

5 Subsequently. New York made additional changes in tait collection procedures. However. 

these changes involve interstate shipment of gasoline and are not relevant for Federal 

excise tax consideration. 

6 As indicated in footnote b to Table 3. the larger tu increase for fiscal year 1988 than 

for other years results from the fact that the change in the point of tax collection occurs 

during that year. Thus. tax receipts during 1988 will cover more than one full year's 

gasoline production. Such a one-time increase in tait revenue occurs whenever tait 

collections are accelerated. 

This study was prepared by Allen H. Lennan and Sonia Conly of the Office of Tax 

Analysis and Moshe Schuldinger of the Office of Tax Legislative Counsel under the 

direction of James R. Nunns. Secretarial assistance was provided by Eunice Taylor. 

20 
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