An excise tax is a tax levied on the purchase of a specific good. The most common excise tax that a direct farm business may encounter is the motor fuel excise tax.
Under federal and Illinois statute, certain uses of fuel, such as a farm use, are nontaxable. The user, therefore, may be able to seek a credit or refund of the excise tax paid for fuel. Credits or refunds are available for many types of fuel.
Federal Fuel Excise Taxes
The Internal Revenue Code (see 26 U.S.C. § 4081 (gasoline, diesel, and kerosene) and § 4041 (special fuels)) and regulations (26 C.F.R. § 48.6420-1 (gasoline) and § 48.4041-9 (diesel and other special fuel) govern federal fuel taxation. IRS Publication 510 explains fuel excise taxes for 2007, including fuel tax credits and refunds (pages 13-25). Federal excise taxes on fuels range from 18.3 to 24.3 cents per gallon. Non-taxable uses include fuel used on a farm for farming purposes, and off-highway business uses.
The term "farm" includes operations such as livestock, dairy, fish, poultry, fruit, fur-bearing animals, and truck farms, orchards, plantations, ranches, nurseries, ranges, and feed yards, as well as greenhouses used primarily for the raising of agricultural or horticultural commodities. "Farming purposes" include:
- cultivating soil or raising or harvesting any agricultural or horticultural commodity;
- raising, shearing, feeding, caring for, training, or managing livestock, bees, poultry, fur-bearing animals or wildlife;
- operating, managing, conserving, improving or maintaining the farm and its equipment;
- handling, drying, packing, grading, or storing any raw agricultural or horticultural commodity;
- planting, cultivating, caring for, or cutting trees or preparing trees for market (other than sawing logs into lumber, chipping or other milling), but only if the planting, etc. is incidental to the farming operation (e.g., minor in nature)
Publication 510 provides examples of what non-farm taxable uses would be, including fuel used off the farm such as: on the highway (including transportation of livestock, feed, crops or equipment); for personal use; in processing, packaging, freezing, or canning operations; and in processing crude gum into turpentine spirits or gum resin, or in processing maple sap for syrup or sugar.
Off-highway business use is also nontaxable. Off-highway business use means fuel used in a trade or business other than as fuel in a highway vehicle that is registered or required to be registered. Nontaxable uses in this category include: fuels used in stationary machines such as generators, compressors, power saws and similar equipment; for cleaning purposes; and, for forklift trucks, bulldozers, and earthmovers. Direct farm businesses may use this type of equipment in their operations. Publication 510 provides examples of nontaxable off-highway business uses.
Form 8849 and Schedule 1 (non-taxable use of fuels) are used to seek a refund of excise taxes, including nontaxable use of fuel (e.g., fuel used for an agricultural purpose). The federal excise tax rates are detailed in Schedule 1. Form 4136 is used to claim a credit. Farm purchases of gasoline qualify as a credit only. Certain records must be kept to substantiate claims.
Illinois Fuel Excise Taxes
Fuel taxation in Illinois is governed by the Motor Fuel Tax Law and regulations. Any person who uses motor fuel for purposes other than operating a motor vehicle on a public highway can seek a refund of the state excise tax on fuel (see 35 ILCS 505/13). Refunds are available to farmers for gasoline (taxed at 19 cents/gallon) and undyed diesel fuel (taxed at 21 1/2 cents/gallon). Form RMTF-11-A is the form used to make an Illinois motor fuel tax refund claim. Proof of tax-paid purchases must be retained by the purchaser.