Fuel Tax Evasion via the Fuel Tax Refund Process

Abstract

Despite data that estimate the amount of fuel tax evasion, few papers have examined fuel tax evasion through the fuel tax refund process. This paper presents data analysis indicating that the fuel tax refund process, though susceptible to errors, is not a common means of evasion. Motor fuel taxes are excise taxes meant to benefit transportation infrastructure. However, some fuel use occurs off the roadway. For example, a farm tractor expends fuel while plowing a field; well-drilling trucks expend fuel while drilling a well; and truck refrigeration units with separate fuel tanks expend fuel powering the refrigerator pump. Arguably, users should not have to pay an excise tax for fuel used for off-road purposes. For diesel, at least, the federal government created tax-exempt, dyed diesel. However, some users are not able to purchase dyed diesel, or they require another type of fuel. The federal government and some state governments provide processes for these off-road users to obtain tax credits or refunds when tax-exempt fuel is unavailable, but these processes are susceptible to errors, omissions, and evasion. This paper examines data from 3 years for three types of refunds in Montana, but the results have implications for all states. The data indicate that mathematical errors and errors relating to the forms required to file for refunds most commonly plague the refund process. The data do not indicate that much evasion is occurring within the fuel tax refund process.