Thursday, June 5, 2008

Fuel tax and management

Photo by Marc Ashwell

A few days ago I wrote about filling Odyssey's enormous 350-gallon diesel tank, to the tune of $1,300, and having some technical difficulties with such a large transaction (in this post). I also mentioned that we apply for a refund each year of the road taxes we've paid on fuel that we end up burning in either the generator or the heater. As a result, we've had quite a few questions come in about fuel usage and taxes, and I thought I would just dedicate a (long) post to the topic.

Road tax and dyed fuel

If the only thing you've ever put diesel fuel into is a motor vehicle, and the only place you've ever bought diesel fuel is at a gas station, then you might not even be aware that there are two ways that conventional #2 diesel fuel is sold: "clear" diesel, the kind you buy at the gas station and which has, as part of its per-gallon price, federal (and usually also state) highway or "road" tax included, and "dyed" diesel, which is sold for tax-exempt use, and thus the price does not include the road tax. "Dyed" diesel has a staining red dye added to it at the time it's loaded into the tanker truck to be taken to the fueling station, to distinguish it from taxed motor vehicle fuel.

Dyed diesel is sold for use in, for example, farm tractors, construction equipment, generators, and other diesel-powered machinery that is not operated on public roadways as a motor vehicle. Certain motor vehicles which are exempt from road tax, such as school buses, may also use dyed diesel. Commercial marine diesels may use dyed fuel. Finally, home heating oil (where still used) is often simply dyed #2 diesel (although heating oil may also be lower grade and/or not as finely filtered). Some states allow gas stations to sell dyed diesel at a separate dispenser at the station, so long as the dispenser is properly labeled for "off-road use only" and has a nozzle which does not fit into "automotive" filler necks.

The federal highway tax assessed on diesel fuel is currently $0.244 per gallon; state tax varies widely by state (this PDF document lists the current motor vehicle fuel tax rates in cents per gallon federally and by state for various fuels). This tax is included in the posted pump price for clear diesel.

The landscape of state fuel taxes is far too complex for me to cover here (for a taste, read all the way through the PDF referenced above) -- different states have different ideas about what constitutes on road versus off road and who is eligible for what. Also, some states levy sales tax on top of road tax, while some levy sales tax only on dyed fuel. Some states tax fuel differently based on size or usage of vehicle -- Arizona, for instance, charges an extra 8 cents per gallon on diesel used in commercial trucks or RVs that weigh more than 26,000 lbs or have more than two axles, whereas Oregon and Indiana discount the tax on fuel sold to holders of DOT or PUC license numbers.

Photo by Aaron Landry

Non-road use of fuel in RVs

Fuel used to propel an RV on the public roadways is clearly motor vehicle fuel subject to road tax. But diesel fuel (or kerosene) used for other purposes, such as running the generator, is technically not subject to this tax. (Gasoline, unfortunately, is subject to the tax for all personal use -- although certain businesses and organizations can claim credit for gasoline tax on non-road fuel.) A generator in an RV is not any different than a generator at a home, business, or construction site. A problem arises, however, when both the propulsion engine and the generator or other appliances draw their fuel from the same tank.

For this very reason, many people designing or building their own diesel RVs add in a completely separate tank for the non-road usage. (There's not much point to this for gasoline-powered generators, since there is really no way to purchase untaxed gasoline, nor is there any exemption from gasoline tax when for personal use.) This allows for filling the non-road tank with untaxed, dyed diesel when it's available. The problem with this arrangement is that the two separate tanks can never be intermixed. Also, one needs to be very careful to make sure the right nozzle goes into the right tank. Any dye at all in your on-road tank, should it be discovered, can subject you to heavy penalties (anywhere from $30 per gallon on board, up to $10,000 or more) as well as possible criminal prosecution for tax evasion. One of the purposes of dyeing untaxed fuel, of course, is to facilitate detection by law enforcement.

This was a consideration when we designed Odyssey, and we might have opted for a separate tank had it not been for the fact that the bus came to us with a single 350-gallon tank. Replacing the tank was prohibitively expensive, and adding, say, another 30 or 40 gallon tank somewhere else seemed excessive.

Photo by Wahig

Road tax credit

Fortunately, there is an alternative, at least with respect to the federal portion of the road tax. IRS form 4136, Credit for Federal Tax Paid on Fuels, allows you to claim an annual credit for the federal tax you paid on clear diesel that you used for something other than highway propulsion. In order to do this, you will need two things:
  1. A way to measure the amount of clear diesel that you used for purposes other than propulsion.
  2. Documentation of who sold you the fuel and on what date(s).
The way we handle the first item aboard Odyssey is with electric hour meters on both the generator and the diesel-fired heater. Once each year, on January 1st, I record the hour meter readings for both systems. At tax time, I subtract last year's readings from this year's readings, and multiply the differences by the average fuel usage rate for each device. We use the manufacturers' published fuel consumption ratings, and, in the case of the generator, we use the "half load" figure.

Adding these two numbers gives us the total number of gallons of diesel consumed for the year for "off road" use. In 2007, we used 330 gallons, whereas in 2006 we used 635 gallons. We've averaged about 400 gallons per year in "off-road" use.

The second item is easily covered simply by keeping all our dated sales receipts for diesel fuel, showing the name of the dispensing station, the date, and the number of gallons sold. This requirement, incidentally, is clearly shown at the top of Form 4136 as well as in the instructions. (We have never been asked to produce these receipts, even when audited, but the requirement is there in black and white.)

Here is a link to last year's form 4136.

The gallons used for non-road purposes are entered on Line 3(a), with the "Type of Use" entered, according to the table included in the instructions, as type "8" ("diesel fuel ... used other than as a fuel in the propulsion engine of a ... diesel-powered highway vehicle").

State tax credits

Some states may also allow for credit of road tax paid on non-road fuel. Check with your own state tax board to find out. For us, we simply do not want to do the work involved in
  • Finding out every state's policy
  • Filing forms in dozens of states each year
  • Keeping track of how much fuel was purchased in each state
  • Keeping track of how much non-road fuel was consumed in each state
We are content with getting back nearly a quarter per gallon from the IRS, or about $100 a year, on average.

Photo by J.W. Green

Fuel management aboard Odyssey

Several of the questions concerned the sheer size of our fuel tank. The number tends to surprise gas station attendants and other RVers, and even some bus drivers, whereas truckers just shrug.

For the record, the 350-gallon tank was in the bus when we got it, and, yes, it is a "stock" size, although Neoplan Spaceliners are essentially all custom-ordered and so this tank was one choice among several sizes; ~200 gallon tanks are more common.

Of the 350-gallon full capacity, only about 225 gallons are routinely usable. That's because we don't ever fill above 7/8 or so (~310 gallons) and we try not to draw down below 1/4 (~85 gallons). If we fill the tank above 7/8, then we tend to drip fuel out the tank relief vents if the coach leans a little to one side for any reason, and just driving down the road sloshes enough fuel out that we get diesel fumes in the living space. When we want to "fill up," I try to calculate how much will fit in the tank without raising the level past this point (I don't always succeed -- we leaked probably a pint or so at Flying-J today while we ate lunch -- we were parked at a slight lean angle).

The supply dip tube for the generator only goes down to about the quarter-tank level, and the one for the diesel heater goes another inch or two lower. So after we are down to about 85 gallons or so, the generator will no longer run, and below perhaps 75 gallons neither will the heater. (The main engine dip tube doesn't go all the way to the bottom, either -- probably the last 10 gallons in the tank is completely unusable.) The idea here is that we can't, while out in the boonies someplace, accidentally run the tank down to a point where there is not enough fuel to get back to civilization and more fuel -- there's a 350+ mile safety margin after the heater quits working. In an emergency, the main engine can generate 6.5 kilowatts of electricity with its alternator, (and lots of heat and hot water just from running) which is plenty for any conceivable purpose should we be stuck someplace after the generator and heater have quit.

Since, unlike commercial truckers, we are not compelled to buy a percentage of our fuel in each state, we use the extra capacity of our fuel tank to arbitrage fuel prices. When we are driving from a more expensive state to a less expensive state, I try to add as little fuel as possible to make it to a less expensive fueling station. We've been known to buy fuel 30 or so gallons at a time, just enough to make it to the next state line, until we've gotten to a low-price state.

By contrast, when we are moving from a less expensive state to a more expensive one, we put extra fuel in so we will not have to buy in the more expensive place. Similarly, if fuel prices are falling (hah!), we try to put less in, and if they are rising, we put more in. Lastly, as one reader observed, 300 gallons of fuel weighs over a ton. So if there is a big hill climb in our future, I try not to put extra fuel in the tank if the price on the other side of the hill is nearly as low as on this side. Getting over those hills, or reaching another state where the price is lower, are times when we'll let the tank level drop below that magic quarter-tank mark, if we're certain we'll fuel again before we need either the generator or the heater.

Like all arbitrage, it's a game of educated guesses. Trying to optimize all factors (changing price over time, changing price by location, cost of hauling the extra fuel around, and cost of going so many extra miles to reach an inexpensive station) is a complex problem coupled with uncertainty. Generally, it has worked in our favor, and I would not trade my 350-gallon tank for a smaller one.


  1. Thank you for the informative article on this topic. I'm fascinated....but our use of the non road diesel is pretty low. I'm guessing the time and postage wouldn't make sense for us. Again, I thank you for putting together such an informative blog.

  2. @susan: There is no additional postage required for form 4136 -- it's two sheets (four pages) that you simply attach to your federal Form 1040 each year.

    As for time, it takes perhaps two minutes to fill out the form and transfer the credit amount to Form 1040. It takes me perhaps a minute to record the hour meter readings once a year. Not a bad return for three minutes' work.

    Of course, if you do not already have hour meters on your equipment, there is some up front time to install them, and there might be some time to research or measure their hourly fuel consumption, but you only need to do those things once.

    Moreover, since routine maintenance on things like generators and diesel heaters is based on hours of usage, it pays to install the hour meters anyway, if you don't already have them.



  3. Great post. Even though I don't use diesel it was still informative for me. It takes a lot of "thought" to make things a economical as possible.

  4. Truckers have to buy fuel in each state they travel through? I didn't know that.

  5. regarding the fuel tax and truckers, All of the larger companies play a much more intense version of arbitage. Since they have units operating in all of the states they travel in, and not all of them will hit every state they buy 'enough' fuel in every state to pay their way. They also have to report how many miles a unit runs in each state, so they have tracking software which calculates that and in the end pay their taxes based on that. Plus most states are part of IFTA, so every year or two (hey it's been over a year since I got out of the business) they're issued new stickers which certify that the carrier has paid/will pay its share of tax.

    On a further note, most carriers have gone to regional fleets, which further reduces the likelihood that a particular tractor will visit more than a handful of states on a regular basis. Especially Northeast regional, where the guys and gals really earn their slightly higher pay rates.


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