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Report to The Congress on 

The Taxation of Diesel Fuel Used in 

Noncommercial Motorboats 

Department of the Treasury 

June 1997 
Report to The Congress on 

The Taxation of Diesel Fuel Used in 

Noncommercial Motorboats 

Department of the Treasury 

June 1997 
DEPARTMENT OF THE TREASURY 

WASHINGTON, D .C . 

JUN 1 7 1997 

Honorable William V. Roth, Jr. 

irman vVJ~ ... ttee on Finance 

ited States Senate 

ashington, D.C. 20510 

r Chairman Roth: 

ection 1208 of Public Law 104-188, the Small Business Job 

tection Act of 1996, provides that no tax is imposed on diesel 

uel used in noncommercial motorboats during the period beginning 

n August 20, 1996, and ending on December 31, 1997. In 

companying committee reports, Congress requested that the 

rtment of the Treasury study possible alternatives to the 

rrent collection regime for motorboat diesel fuel that will 

vide comparable compliance with the law, and report its 

indings to the House Committee on Ways and Means and the Senate 

ittee on Finance. Pursuant to that request, I hereby submit 

report on the taxation of diesel fuel used in noncommercial 

torboats. 

am sending a similar letter 

losure 

Donald C. Lubick 

Acting Assistant Secretary 

(Tax Policy) 
DEPARTMENT OF THE TREASURY 

WASH INGTON, D .C . 

JUN 1 7 1997 

Archer 

irman 

ommittee on Ways and Means 

.S. House of Representatives 

ashington, D.C. 2051 5 

ear Chairman Archer: 

ection 1208 of Public Law 104-188, the Small Business Job 

otection Act of 1996, provides that no tax is imposed on diesel 

uel used in noncommercial motorboats during the period beginning 

August 20, 1996, and ending on December 31, 1997. In 

companying committee reports, Congress requested that the 

tment of the Treasury study possible alternatives to the 

urrent collecti on regime for motorboat diesel fuel that will 

rovide comparable compliance with the law, and report its 

indings to the House Committee on Ways and Means and the Senate L~Hlllllittee on Finance. Pursuant to that request, I hereby submit 

report on the taxation of diesel fuel used in noncommercial 

torboats. 

am sending a similar letter to Mr. Ra el. 

Sincere£ 

closure 

{;/ A 4 //, O~w~tr~< Donald C. Lubick 

Acting Assistant Secretary 

(Tax Poli cy) 
.

- -

TABLE OF CONTENTS 

INTRODUCTION AND SUMMARY ... ..... ......... .. .. . .... . ....... . . . . 1 

BACKGROUND . . ....... . .. . ..................... . . . ..... . ........... 3 

CONCERNS RELATING TO DYED FUEL REQUIREMENT ........ . .. . ...... 6 

OTiffiR CONCERNS RELATING TOT AX ON MOTORBOAT DIESEL FUEL . . .. 9 

ESTIMATED RECEIPTS UNDER CURRENT SYSTEM .............. . .. . . . . 11 

ALTERNATIVES TO CURRENT SYSTEM .. .. .. .................. .. ..... 12 

-IV-
ThiTRODUCTIONANDSUMMARY 

The InternaJ Revenue Code has imposed a tax on diesel fuel used in noncommercial 

motorboats since 1994. Section 1208 ofthe Small Business Job Protection Act of 1996 (Pub. 

L. No. 104-188) provides, however, that this tax is not imposed during the period beginning 

on August 20, 1996, and ending on December 31, 1997. In accompanying committee reports, 

Congress requested that the Department of the Treasury study possible alternatives to the 

current collection regime for motorboat diesel fuel that will provide comparable compliance 

with the law, and report its findings to the House Committee on Ways and Means and the 

Senate Committee on Finance. 

This report describes the current regime for collecting the tax on motorboat diesel fuel (i.e, 

the rules that applied before the enactment of the moratorium and that will apply after its 

expiration). Under these rules, the tax on diesel fuel used in recreational motorboats is 

collected at the terminal rack. Tax-free fuel is dyed at the terminal rack, and owners of 

recreational motorboats are penalized if they are found using dyed fuel. 

The report also describes the concern that led to the imposition of the moratorium. This is 

the failure of some marinas to offer clear fuel, leading to shortages of diesel fuel for 

recreational motorboat use in some areas. Although the Department of the Treasury 

questioned this concern in the past and argued that the availability of clear fuel for 

recreational boaters was improving, the report recognizes that there is likely to be little further 

improvement. This is because marinas are unlikely to install the additional tankage necessary 

to provide clear fuel when, as described in the report, there is now substantial uncertainty 

over the permanence of current law. 

The report concludes that the current collection regime is ineffective. In part, this is because 

tax is not imposed on diesel fuel sold for use in commercial vessels, and the decision to supply 

clear taxed fuel or dyed untaxed fuel is made by the retailer, generally based on the 

boatowner's representation. In addition, the potential revenue from the tax is very small. 

Thus, Internal Revenue Service (IRS) enforcement activities that might check the natural 

tendency of boatowners to claim that fuel is being purchased for commercial use and of 

retailers to accept those claims would not be cost effective. The report notes that, as a result 

of concerns over noncompliance under the current regime, the Department of the Treasury 

has reduced its estimate of receipts from the tax on motorboat diesel fuel from approximately 

$50 million per year to approximately $7 million per year. 

The report also concludes that no other collection regime would be any more effective. The 

alternative collection regimes involve downstream collection of the tax, which has been tried 

before for both gasoline and diesel fuel. The Department of the Treasury's experience has 

been that collection at the terminal rack is more efficient and results in better compliance than 

any downstream collection regime. 

- I -
The report offers two suggestions. As background for the first of these suggestions, the 

report describes the genesis of the tax on diesel fuel used in recreational motorboats to show 

that the tax is a replacement for the luxury tax on boats. The report then suggests that, in 

view of recent Congressional actions phasing down and repealing the luxury taxes, Congress 

may want to consider whether there is any continuing policy justification for a tax on 

motorboat diesel fuel. Finally, the report suggests a possible revenue offset for a repeal of 

the tax on motorboat diesel fuel: the restoration, at reduced levels and only for larger boats, 

of the Coast Guard user fee repealed in 1994. 

-2-
BACKGROUND 

Before the enactment of the Omnibus Budget Reconciliation Act of I993 (OBRA ' 93), diesel 

fuel used in motorboats was not subject to tax. OBRA ' 93 imposed a tax on noncommercial 

motorboat diesel fuel at a rate of24.4 cents per gallon during the period beginning on January 

I, I994, and ending on December 31, 1999, and at a rate of 4.3 cents per gallon after 

December 3I, I999.

1 The tax did not apply, however, to fuel used in commercial fishing or 

transportation for compensation or hire, or (except in the case of boats used predominantly 

for entertainment, amusement, or recreation) to fuel used in any other business. 

The reason given for the change was to eliminate the discrepancy between the treatment of 

gasoline used by motorboats, which has been taxable since I965, and the treatment of diesel 

fuel used by similar motorboats. It should be noted, however, that there are many other 

discrepancies, which were not addressed by OBRA ' 93, between the treatment of gasoline 

and the treatment of diesel fuel. 2 

1 A 24.3-cents-per-gallon tax is currently applicable to both highway and motorboat diesel 

fuel, but the tax is scheduled to fall to 4.3 cents per gallon after September 30, I999 (for 

highway fuel) and after December 3I, I999 (for motorboat fuel). In addition, a O.I-cent-pergallon Leaking Underground Storage Tank (LUST) tax is imposed on motorboat diesel fuel 

until December 3I, 1999 (the LUST tax on all other fuels expired on December 31, 1995). 

If these taxes were extended beyond December 31, I999, without any further modification, 

the full24.4-cents-per-gallon tax on motorboat diesel fuel would remain in effect during the 

period of the extension. The Administration is proposing in the National Economic 

Crossroads Transportation Efficiency Act of I997 to extend the 24.3-cents-per-gallon tax on 

highway diesel fuel through September 30, 2005, but does not propose to apply this tax to 

motorboat diesel fuel after December 3I, I999. The Administration has also proposed in its 

FY 1998 budget to reinstate the LUST tax. Under the Administration's proposal, this tax 

would apply to motorboat diesel fuel during the reinstatement period. Thus, if the 

Administration's proposals were adopted, a 4.4-cents-per-gallon tax would be imposed on 

motorboat diesel fuel after December 3 I, I999. 

2 In general, all gasoline, whether used on or off the highway, is subject to tax unless a 

specific exemption (such as for State and local government use, off-highway business use, or 

fann use) applies. Diesel fue~ however, is taxed only if it is used as fuel in a diesel-powered 

highway vehicle, a diesel-powered train, or a diesel-powered boat. Thus, gasoline used in an 

off-highway nonbusiness use is taxed, but diesel fuel (other than motorboat diesel fuel) is not 

taxed in similar circumstances. In addition, although the same specific exemptions from tax 

generally apply to both gasoline and diesel fuel, there are significant differences in the 

motorboat fuel exemptions: most business use of diesel fuel in motorboats is exempt, but 

motorboat gasoline is exempt only if used in commercial fishing or whaling. Receipts from 

the tax on motorboat gasoline and the tax on motorboat diesel fuel are also treated differently. 

Estimated receipts from the tax on motorboat gasoline, to the extent attributable to a rate of 

- 3-
Another consideration Congress apparently had in mind was the need to find an appropriate 

offset to the repeal of the luxury tax on boats. The Omnibus Budget Reconciliation Act of 

1990 (OBRA '90) imposed an excise tax on the retail sale of passenger vehicles, boats, 

aircraft, jewelry, and furs.

3 The tax was equal to 10 percent of the amount by which the sale 

price exceeded a specified threshold {$100,000 in the case of boats). The taxes went into 

effect on 1 anuary 1, 1991, and were scheduled to expire on December 31, 1999. 

Almost immediately after the taxes went into effect, Congress began having second thoughts 

about the luxury tax on boats. On February 19, 1991, Mr. Shaw (R.-Fla.) introduced a bill 

to repeal the luxury tax on boats (H.R. 951, the Boating Industry Jobs Preservation Act of 

1991). Before the end of 1991, the bill had 166 co-sponsors. Senator Breaux (D.-La.) 

introduced a corresponding bill in the Senate also with broad support. In 1992, provisions 

repealing the taxes on boats, airplanes, jewelry, and furs were included in H.R. 4210 and H.R. 

11, as passed by Congress, but both bills were vetoed for unrelated reasons. However, in 

OBRA '93, the luxury taxes (other than the tax on automobiles) were successfully repealed, 

retroactively to January 1, 1993. 

Support for repeal of the tax on boats was attributable to concerns that the tax was damaging 

the boat-building industry. Senator Chafee (R.-R.I.) expressed these concerns as follows: 

[T]he boatbuilding industry has been devastated since the imposition of the 

luxury tax beginning in 1991. Certainly the recession has had an impact on 

the industry, but the ill-conceived luxury tax has also played a big role. Sales 

of boats subject to the excise tax ... have dropped by 75 percent compared 

to 1990. This is far greater than the drop in sales that has occurred during 

similar economic downturns. • 

The legislative history ofOBRA '93 also cited job losses and increased unemployment in the 

boat, aircraft, jewelry, and fur industries during the 1990-91 recession and concluded that it 

was "appropriate to eliminate the burden these taxes impose in the interests of fostering 

economic recovery in those and related industries."s 

14 cents per gallon, are transferred to the Aquatic Resources Trust fund. All receipts from 

the tax on motorboat diesel fuel are retained in the general fund. 

3 Business use exceptions were provided for taxicabs, aircraft, and boats. The exception for 

boats exempted the same uses as are currently exempt from the tax on motorboat diesel fuel. 

4 138 CONG REc. S 13,259 (1992). 

s STAFF OF HOUSE COMMITIEE ON WAYS AND MEANS, 1030 CONG., 1ST SESS., FISCAL YEAR 

1994 BUDGET REcONCll..IATION REcOMMENDATIONS OF 1HE COMMITIEE ON WAYS AND 

MEANs 188 (Comm. Print 1993). 

-4-
Although the legislative history does not explicitly link the imposition of the tax on motorboat 

diesel fuel with the repeal of the luxury tax, the simultaneous enactment of the two provisions 

does not appear to have been coincidental. The tax on motorboat diesel fuel was included in 

the luxury tax provisions (part V, subchapter A of the revenue provisions) of OBRA c 93 and 

had been similarly linked to luxury tax repeal in H.R. 4210 and H.R. 11 . Moreover, 

advocates of repeal had suggested as early as October 1991 that a tax on diesel fuel used by 

large pleasure boats had significant advantages over the luxury boat tax and would raise more 

than enough revenue to offset the revenue lost by repeal of the tax on boats. 

6 Press reports 

at the time similarly suggested that Congressional sponsors of repeal legislation were 

interested in using a tax on motorboat diesel fuel as a revenue offset for the repeal of the 

luxury tax on boats. 7 

6 Letter from Jim Burnley of Shaw, Pittman, Potts & Trowbridge to Kenneth W. Gideon, 

Assistant Secretary {Tax Policy) (October 18, 1991). The letter noted the following 

advantages: 

Broadening of the diesel fuel tax will not distort the new and used boat 

markets as the boat excise tax has. 

Thousands ofU.S. boatbuildingjobs lost by imposition of the boat excise tax 

may be restored. 

The same class of taxpayers Congress intended to tax (i.e., large pleasure boat 

users) would be taxed by broadening the diesel fuel tax in this way. 

Because Congress has imposed excise taxes on fuels for decades, the system 

to administer the broadening of this tax is currently in place. 

The net revenues generated by broadening the diesel fuel tax will be more 

predictable and steady than the net revenues raised, if any, by the boat excise 

tax. 

Broadening of the diesel fuel tax to include large pleasure boats increases 

fairness by requiring the boats' owners to pay the same tax as struggling 

truckers. 

7 Shaw Interested in Expanding Diesel Tax To Offset Cost of Luxury Boat Tax Repeal, Daily 

Tax Report, Nov. 7, 1991, at G-8, col. 1. 

- 5-
CONCERNS RELATING TO DYED FUEL REQUIREMENT 

The diesel fuel tax is imposed on removal of the fuel from a registered terminal facility (i.e., 

at the "terminal rack"). Tax is imposed on all diesel fuel removed from terminal facilities 

unless the fuel is destined for a nontaxable use and is indelibly dyed pursuant to Department 

of the Treasury regulations. If fuel on which tax is paid at the terminal rack (i.e., undyed 

diesel fuel) is ultimately used in a nontaxable use, a refund is allowed. Depending on the 

aggregate amount of tax to be refunded, this refund may be claimed either by filing a claim 

for excise tax refund with the Internal Revenue Service or as a credit against income tax. 

Dyed diesel fuel (fuel on which no tax is paid) may not be used in a taxable use. A penalty 

equal to the greater of $10 per gallon or $1,000 is imposed on persons found to be using or 

selling dyed diesel fuel for a taxable use. 

Under this statutory framework, noncommercial motorboats are not permitted to use dyed 

diesel fuel during periods in which the tax on motorboat diesel fuel is in effect. While many 

marinas carried only clear diesel fuel and others carried both dyed and clear fuel, some 

marinas carried only dyed fuel for their commercial customers due to limited tankage. This 

was reported to have resulted in shortages of diesel fuel for recreational boat use in some 

areas.• 

Although it is generally possible for marinas to install an additional fuel tank so that both dyed 

and clear fuel can be offered, they are often reluctant to do so. This is primarily a function 

of the costs (including the regulatory costs) of installing an additional tank. In the early 

1990's, the estimated costs of an additional 1, 000 gallon tank varied from approximately 

$5,000 for above-ground tanks to approximately $15,000 for underground tanks.

9 

Other factors no doubt contributed to the reluctance of marinas to install additional tanks. 

The first is the possibility that the prohibition on the use of dyed fuel in recreational 

motorboats will not apply for periods after 1999. Under current statutory provisions, the tax 

on diesel fuel used in recreational motorboats will be reduced from 24.4 cents per gallon to 

4.3 cents per gallon beginning on January 1, 2000. If the prohibition against the use of dyed 

fuel in those boats remains in effect (as current law provides), post-1999 recreational boaters 

will, nevertheless, be required to use clear fuel that has been taxed at a rate of 24.4 cents per 

gallon (assuming the taxes on fuel used in highway vehicles are extended beyond 1999). This 

would be an anomalous result because current law does not provide a procedure for refunding 

• Hearing on Deficit Reduction Fuel Taxes and Diesel Dyeing Requirements Before the 

Senate Comm. on Finance, 104th Cong., 1st Sess. (July 18, 1995) (statement of :Michael 

Sciulla, Vice President, Boat Owners Association of the United States). 

9 B. Lively-Diebold, W. Driscoll, P. Arneer, and S. Watson, Storage of Oil Aboveground or 

Underground: Regulations, Costs, and Risks 19 (paper 270 presented at the 1993 

International Oil Spill Conference). 

-6-
the 20 .1-cents-per-gallon difference between the rate at which tax will be imposed at the 

terminal rack and the reduced tax rate that will apply to motorboat diesel fuel. Congress 

could be expected to address this anomaly when it extends the taxes on fuel used in highway 

vehicles either by providing a procedure for refunding the excess tax on diesel fuel used in 

motorboats or by allowing recreational motorboats to use dyed fuel and imposing the 4.3-

cents-per-gallon tax on motorboat diesel fuel at the retaillevel. 10 When confronted with a 

similar choice in OBRA ' 93 with respect to diesel fuel used in trains and intercity buses, 

11 

Congress pennitted the use of dyed fuel and provided for collection of tax at the retail level. 

In light of this background, marina operators may well have concluded that the prohibition 

on the use of dyed diesel fuel in recreational motorboats will likely be repealed for periods 

after 1999. 

In addition, uncertainty over whether the prohibition on the use of dyed fuel would continue 

even through 1999 may have contributed to the reluctance of marina operators to incur the 

additional costs of installing the new fuel tanks to serve their pleasure boat customers. This 

uncertainty was the result of various initiatives to curtail the dyeing requirement for 

motorboat diesel fuel. For example, S. 2029, introduced on April 19, 1994 (less than four 

months after the dyeing requirements went into effect), would have allowed all motorboats 

to use dyed diesel fuel. Later that year, H.R. 4539, the Treasury/Postal appropriations bill, 

was amended on the Senate floor to prohibit the IRS from using any funds to enforce the 

dyeing requirement. 12 The following year, Congress passed H.R. 2491, which would have 

exempted motorboat diesel fuel from tax for an 18-month period, but the bill was vetoed for 

unrelated reasons. Subsequently, as noted above, the Small Business Job Protection Act 

imposed a somewhat shorter moratorium. 

During the period in which Congress considered these various relief measures, the 

Department of the Treasury questioned the need for relief and opposed proposals to modify 

10 Alternatively, Congress could, of course, extend the 24.4-cents-per-gallon tax on diesel 

fuel used in motorboats or simply let the anomaly stand (which, for all practical purposes, 

would have the same effect as an extension). 

11 Under OBRA ' 93, diesel fuel used in trains was taxed at the following rates: 6.3 cents per 

gallon from October I, 1993, through September 30, 1995; 5.55 cents per gallon from 

October 1, 1995, through September 30, 1999; and 4.3 cents per gallon after September 30, 

1999. Diesel fuel used in intercity buses was taxed at a rate of7.3 cents per gallon through 

September 30, 1999, and 4.3 cents per gallon thereafter. The LUST tax (0.1 cent per gallon) 

was also imposed through December 31, 1995. 

12 The Senate amendment was not enacted. The House concluded that the amendment 

infiinged the privileges of the House with respect to tax legislation and returned the bill to the 

Senate. House Resolution 479 (140 CoNG. REC. H5,740 (1994)). 

-7-
the tax on motorboat diesel fuel. 13 The Department of the Treasury questioned whether 

shortages of undyed motorboat diesel fuel were widespread and affected a substantial 

percentage of recreational boaters. Anecdotal evidence, which was all that was available on 

either side of this issue, suggested that many marinas had incurred the expense of adding a 

separate tank for clear taxed fuel in order to serve both recreational and commercial boaters. 

In addition, during 1994 and 1995, the Department of the Treasury conducted telephone 

surveys of marinas in various areas. In general, the surveys found that clear diesel fuel was 

readily available in areas where recreational boating is popular, and that availability improved 

significantly between 1994 and 1995. Moreover, clear fuel availability had improved even in 

areas, such as the Gulf Coast of Louisiana, where commercial boating predominates and 

retailers are least likely to accommodate recreational users. Based on these surveys, the 

Department of the Treasury concluded that the availability of clear diesel fuel was likely to 

continue improving as the market adjusted to the new tax rules. 

The Department of the Treasury is, however, concerned about the effect the moratorium has 

had. It is unlikely that marinas will install additional tankage for clear diesel fuel during the 

period the moratorium is in effect. Moreover, even after the expiration of the moratorium, 

the tax on motorboat diesel fuel will remain in effect at the 24.4-cents-per-gallon rate for only 

two more years. The limited duration of the full tax, coupled with the fact that Congress has 

clearly indicated, in the legislative history accompanying the enactment of the moratorium, 

its desire to change the system of taxing motorboat diesel fuel, provides very little incentive 

to incur any significant expense to accommodate the needs of recreational boaters under the 

current system. Accordingly, the Department of the Treasury now expects little additional 

improvement in the availability of clear diesel fuel for recreational boaters. 

13 See, e.g., Hearing on Miscellaneous Tax Proposals Before the House Comm. on Ways and 

Means, 104th Cong., 1st Sess. (July 11-13, 1995) (written statement ofLeslie B. Samuels, 

Assistant Secretary (Tax Policy)). 

- 8-
OTHER CONCERNS RELATING TO TAX ON MOTORBOAT DIESEL FUEL 

The Department of the Treasury is also concerned that the difficulty of ensuring compliance 

with the tax on motorboat diesel fuel will encourage widespread evasion. 

It is very difficult to devise a system that will ensure a reasonable degree of compliance with 

a tax as narrowly focused as the current tax on motorboat diesel fuel. The diesel dyeing 

requirement has been very effective in improving compliance with the tax on diesel fuel used 

in highway vehicles. The Department of the Treasury estimates that in calendar year 1994, 

the first year in which tax was collected at the terminal rack and the diesel dyeing requirement 

was in effect, improved compliance resulted in a $600-$700 million increase in diesel fuel tax 

receipts (net of refunds) over the preceding calendar year. The tax on diesel fuel used in 

highway vehicles is, however, much broader than the tax on motorboat diesel fuel. The tax 

generally applies to aJJ diesel fuel used on the highway, with very limited exceptions such as 

for State and local government use. The key to the effectiveness of the diesel dyeing 

requirement is that the tax applies to both business and nonbusiness use on the highway. 

Because diesel fuel delivered into a highway vehicle is almost always taxable, retailers can 

easily determine when it is inappropriate to sell dyed fuel to a customer. Similarly, roadside 

inspections can easily establish when dyed fuel is being used for taxable purposes. 

The situation is very different for motorboat diesel fuel because motorboat diesel fuel used 

in commercial fishing or in other businesses is generally not subject to tax. Thus, a retailer 

of motorboat diesel fuel must determine whether the boat into which the fuel is delivered is 

a commercial vessel or a pleasure craft. This is often not readily apparent, particularly since 

the same vessel can be used alternately in the owner's business as a tour boat or chartered 

fishing vessel and for the owner's personal recreation. If it is not readily apparent whether 

a boat is commercial or recreational, marina operators are likely to accept the boatowner' s 

representation that the boat is a commercial vessel. Even if the marina operator requires 

substantiation, it is often easy to satisfy the requirement because commercial fishing and other 

business licenses are readily available and can be obtained at a nominal cost in many 

jurisdictions. While the situation might be alleviated by a comprehensive registration and 

certification program for business users, even this would not satisfactorily address the 

problem of dual-use vessels. In any event, the relatively small amount of potential revenue 

from the tax on motorboat diesel fuel would not justify the cost of administering such a 

program. 

The small amount of potential receipts from the tax on motorboat diesel fuel (approximately 

$50 million per year assuming full compliance) effectively limits the resources that can be 

dedicated to enforcement of the tax. By way of comparison, total receipts from taxes on 

highway motor fuel were approximately $25 billion in fiscal year 1996, and the IRS devoted 

approximately 300 staff years to enforcement of those taxes (i.e., one staff year for each $83 

million of receipts). At the same ratio of staff years to receipts, the resources available to 

enforce the tax on motorboat diesel fuel would be limited to one part-time IRS employee. 

-9-
The tax will become even more difficult to administer after 1999 when the tax rate drops to 

4.3 cents per gallon. The rate reduction will not alleviate the compliance problems described 

above (other than by reducing the revenue loss attributable to noncompliance). It is, 

however, likely to result in large numbers of refund claims from boatowners who, assuming 

Congress extends the taxes on fuel used in highway vehicles and provides a refund procedure 

for boatowners, will be eligible for a 20.1-cents-per-gallon refund when they purchase clear 

fuel on which tax has been imposed at a 24.4-cents-per-gallon rate. 

Finally, the Department of the Treasury is concerned that taxes targeted at boat owners may 

not serve any continuing Congressional purpose. It is difficult to determine whether this is 

the case, in large part because Congress has never clearly explained why boat owners have 

been targeted. As noted above, the reason given for imposing the tax on motorboat diesel 

fuel was the discrepancy between the treatment of gasoline and diesel fuel. This, of course, 

does not explain why taxes should be targeted at boat owners in the first instance.

14 The 

legislative history of the luxury tax might be expected to provide some guidance on this issue. 

To the ex:tent the tax on motorboat diesel fuel is a substitute for the luxury tax on boats, the 

same purposes may underlie both taxes. Thus, any reasons given for targeting boat owners 

under the luxury tax might also explain the purpose of the tax on motorboat diesel fuel. 

However, the legislative history of OBRA '90 says only that "it is appropriate to impose an 

excise tax on certain luxury goods."ts 

Whatever the reasons for targeting boatowners and other owners of luxury goods, it is 

apparent that Congress no longer finds those reasons as compelling as in 1990 or even in 

1993. In 1993, the luxury taxes on boats, airplanes, jewelry, and furs were all repealed. In 

addition, the Small Business Job Protection Act of 1996 provided for a phasedown, beginning 

in 1996, of the only remaining luxury tax (that on automobiles), with complete repeal of that 

tax after 2002. Thus, it may be appropriate for Congress to consider whether there is a 

continuing policy justification for retaining the tax on motorboat diesel fuel as a last vestige 

of the OBRA '90 luxury taxes. 

14 In fact, the Energy Tax Act of 1978 eliminated the provision allowing refunds of tax on 

gasoline used in motorboats and in other nonbusiness, off-highway uses in part because the 

refund procedures resulted in additional complexity and because relatively few taxpayers 

found it worthwhile to take advantage of those procedures. S. REP. No. 529, 95th Cong., 1st 

Sess. 49 {1977). Paradoxically, extending the tax to motorboat fuel, which ameliorated 

administrative concerns in the context of the gasoline tax, has had the opposite effect in the 

case of diesel fuel. 

ts H.R. REP. No. 881, IOlst Cong., 2d Sess. 289 (1990). 

- 10-
ESTIMATED RECEIPTS UNDER CURRENT SYSTEM 

The compliance problems discovered in the course of this study have caused the Department 

of the Treasury to revise substantially its estimate of the expected receipts from the tax on 

motorboat diesel fuel. Before the study, the Department of the Treasury estimated that, at 

a rate of24.4 cents per gallon, current services baseline receipts from the tax on motorboat 

diesel fuel would be approximately $50 million per year. The following table shows the 

Department of the Treasury's most recent (March 1997) estimate of current services baseline 

receipts from the tax: 16 

1998- 1998-

Fiscal year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2002 2007 

Receipts 

($millions) 7 7 3 19 26 

The amounts in the table represent gross receipts from the tax. If the tax were repealed, 

revenue losses would be approximately 25 percent lower to reflect the effects of the income 

tax offset. 17 

16 The table reflects the scheduled reduction of the tax to 4.3 cents per gallon for periods 

after December 31, 1999. 

17 The income tax offset is the result of the revenue estimating assumption of a constant gross 

national product (GNP). The assumption of a constant GNP means that income in the 

economy must decline by the amount of the excise tax. This reduction in income will lower 

income-related tax receipts by approximately 25 percent. 

- 11 -
ALTERNATIVES TO CURRENT SYSTEM 

While, as noted above, the current system for taxing motorboat diesel fuel leaves much to be 

desired, the current regime for collecting the tax is the most efficient of the available 

alternatives. The principal alternative to the current regime is a retail level tax on dyed diesel 

fuel sold to recreational boaters. Adoption of this alternative would ignore the lessons of our 

experience in administering taxes on motor fuel. 

Before 1988, the tax on diesel fuel was generally imposed and collected at the retail level. 

In the Omnibus Budget Reconciliation Act of 1987 the point of imposition was moved 

upstream to the wholesale level. The legislative history includes the following reasons for 

change: 

Imposing these taxes at an earlier stage in the marketing of these fuels would 

reduce opportunities for evading payment of the fuels taxes. Collection of 

excise taxes at the point in the distribution chain with a smaller number of 

taxpayers provides for more efficient administration of the tax since there are 

fewer taxpayers for the Internal Revenue Service to monitor.

11 

OBRA '93 moved the point of imposition further upstream to the terminal rack. The reasons 

for change in the legislative history indicate Congressional concern that there might be 

substantial levels of diesel fuel tax evasion under the rules enacted in 1987. The legislative 

history adds: 

Advancing the coUection point of the diesel fuel taxes reduces the number of 

times the fuel changes ownership prior to tax, and reduces the number of 

taxpayers. As a result, the diesel fuel taxes should be easier to collect and 

payments of tax should be easier to monitor. 

19 

The coUection point for the tax on gasoline had previously been moved to the terminal rack 

by the Tax Reform Act of 1986 for similar reasons. 

Experience with the enforcement of motor fuels excise taxes coUected at various levels (retail, 

wholesale, and terminal rack) clearly establishes that coUection at the terminal rack is the most 

effective and efficient method. As noted above, in the first year after the collection point was 

moved to the terminal rack and the dyeing requirement was imposed, improved compliance 

resuhed in a $600-$700 million increase in diesel fuel tax receipts. Based on this experience, 

11 H.R REP. No. 391, 100th Cong., 1st Sess. 1121 (1987). 

19 STAFF OF HOUSE COMMITTEE ON WAYS AND MEANS, 1030 CONG., 1ST SESS., FISCAL 

YEAR 1994 BUDGET REcONCll..IATION RECOMMENDATIONS OF TilE COMMITTEE ON WAYS 

ANDMEANS311 (Comm. Print 1993). 

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the Department of the Treasury concludes that any collection regime for motorboat diesel fuel 

in which the tax is collected at the wholesale or retail level would not provide comparable 

compliance with the law unless substantial additional resources were diverted to collection 

of the tax. The additional enforcement activities necessary to provide comparable compliance 

would result in an inefficient allocation of limited IRS resources and lead to far greater 

revenue losses in other areas. 

A possible alternative to the tax on motorboat diesel fuel is restoration of the boat user fee 

previously deposited in the general fund of the Treasury as offsetting receipts for Coast Guard 

activities. The boat user fee was imposed under Coast Guard regulations implementing an 

OBRA '90 provision directing the Secretary of Transportation to establish a fee schedule for 

recreational vessels. The fee applied, beginning in August 1991, to any recreational vessel 

greater than 16 feet in length. The amount of the fee ranged from $25 per year for vessels 

ofless than 20 feet to $100 per year for vessels of 40 feet or more. The fee was repealed by 

the Driftnet Enforcement Act {P.L. 102-582) for periods after September 30, 1994. 

The Department of the Treasury understands that the boat user fee was repealed not because 

of difficulties in administering the fee system but because boatowners considered the fee levels 

onerous. The fee structure necessary to replace the revenue loss from repeal of the 

motorboat diesel fuel tax would, however, be significantly less burdensome than the fees 

imposed under OBRA '90. Fees could be set at lower levels than the $25-to-$100 range 

authorized by OBRA '90, and exemptions could be provided for larger boats than under the 

Coast Guard regulations and for boats without diesel engines. For fiscal years after FY 2000, 

exemptions could be provided for all but the very largest boats. It is likely that boatowners 

would consider such a fee structure, when coupled with relief from the motorboat diesel fuel 

tax, much less onerous than the boat user fees imposed under OBRA '90. 

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