On April 2, 2001, the 21^st Steering Committee Meeting of the Joint Federal/State Motor Fuel Tax Compliance Project met in Washington, DC. Forty-one people attended. Linda Morris, Manager of the Tax Evasion Program, began by welcoming everyone to the meeting and having each person introduce him/herself and state the organization represented. The Attendees List is Attachment 1. The meeting agenda is Attachment 2.

FHWA Update

Secretary of Transportation - Ms. Morris began the FHWA update by announcing that Norman Mineta is the new Secretary of Transportation. Mr. Mineta was the Secretary of Commerce under the Clinton Administration and prior to that was a vice president at Lockheed Martin. Mr. Mineta was approve by the Senate 100 to 0 and was sworn in January 24.

Fiscal Year (FY) 2002 Transportation Budget - Ms. Morris told the group that the Presidents budget for FY 2002 was recently sent to the House. The release of the detailed budget is expected sometime in early April. Expectations are that the transportation budget will be fully funded.

Current Funding Status - In FY 2001, $5 million was allotted to the Tax Compliance Program. The Internal Revenue Service (IRS) initially received $4.479 million. However, a funding rescission of .22 percent that affected all Federal government agencies reduced the IRS amount by $11,000. This FY, states received either $25,414, if a lead task force state, or $12,707 if a task force member state. In FY 2002, states are projected to get either $15,640 or $7,820, and in FY 2003 either $9,850 or $4,925, depending on lead or member state status and the number of states needing funds. See Attachment 3.

To date, 17 states have obligated a portion of the one-quarter of 1 percent Surface Transportation Program (STP) funds. Total STP funds available for motor fuel tax compliance projects are $65.5 million. Total dollars obligated as of March 28 is approximately $6 million. Ed King from the California Board of Equalization (BOE) noted that BOE did not receive the obligated amount of $2.125 million as shown on the STP Table (Attachment 4), but will get $682,000 each year including this year plus two more. The BOE had asked for a total of $2.125 million.

Reauthorization - Ms. Morris explained that the reauthorization process is getting started and that she has prepared two proposals for consideration. The first proposal would maintain the same level of funding as in the current legislation, $5 million in tax compliance funds each FY with $3 million divided among the states, and IRS receiving the remaining $2 million for updates and maintenance of the automated fuel tracking system, examinations and criminal investigations. The one-quarter of 1 percent in STP funds would remain an optional funding source. The advantages of this proposal are that the states would receive either $100,000 or $50,000, depending on task force lead or member status which is an increase from the funding levels received under the current legislation. The use of STP funds would still be an option. This would give the states the opportunity to fund addition pieces of their motor fuel tax compliance projects.

The second proposal would increase tax compliance funds to $9 million with $4.5 million going to each the IRS and to the states. Each state would receive either $150,000 or $75,000, again depending on the task force status. The STP funds would remain an option. Advantages to this proposal are: IRS would be able to update and maintain the tracking system as well as fund criminal investigations and examinations, and states could grow their tax compliance programs without having to depend on getting STP funds.

Ms. Morris mentioned that it would be nice to get additional research funds to be used to look at the issues related to current evasion rates as well as at fuel imports and the potential for evasion in this area. She then said that FHWA is willing to listen to suggestions on ways to shape the program for the upcoming legislation and has asked at past task force meetings for suggestions. A list of questions passed out at the California/Texas Task Force meeting in Denver in February is included (Attachment 5).

Motor Fuel Reporting Update - Ralph Erickson, from the Office of Highway Policy Information, Highway Funding and Motor Fuel Section, at FHWA, provided an update on the motor fuel reporting re-assessment. Mr. Erickson started by saying that the re-assessment is proceeding on several fronts including: outreach, FHWA oversight of state data, state review and verification of motor fuel data, and design of smart-form reporting and of a database for input, storage and retrieval of motor fuel data. In the area of outreach, he explained that they are trying to create a more open Highway Revenues to Each State " (Attachment 6). The brochure dprocess. He handed out a brochure his office produced entitled " Your State's Share: Attributing Federal escribes the process FHWA uses to attribute funds to the states using data from the U.S. Department of Treasury and from state motor fuel reports of gallons. He also informed the group that they would provide briefings for interested parties.

Mr. Erickson noted that on August 20, 2000, a Federal Register Notice was published requesting comments on suggested changes to the reporting process. A draft final Federal Register Notice has been written, but has been placed on hold until the new administration can review it. The Office is considering developing interim guidance to assist the states in the development of their work plans.

With regard to FHWA oversight of state data, the General Accounting Office and the Office of the Inspector General emphasize data quality. FHWA, in its re-assessment, is considering using techniques such as: providing stronger, more in-depth reviews; increasing FHWA Division Office oversight responsibility; developing oversight techniques and training for the Division Offices; and, using the Excise Summary Terminal Activity Reporting System (ExSTARS) to provide additional verification of the state data.

Mr. Erickson stated that further oversight should take place with the each state reviewing the FHWA data. He also said that the Division Offices need to know the importance of having accurate data and that this should be emphasized at that level.

Mr. Erickson informed the group that they are in the early stages of designing "smart-forms." The goals of smart form reporting are to allow for direct electronic input of state data; to provide for FHWA checking of the data; and, to reduce the number of errors that can occur with manual input. The target date for implementation is January 2002. In addition, they are in the preliminary phases of database design. The design will consider storage, calculation and retrieval aspects of motor fuel data.

Mr. Erickson completed his report by stating that the ultimate goal of revising the motor fuel reporting process is to improve the data quality process from top to bottom. Mr. Erickson's slide presentation is Attachment 7. Ms. Morris noted that a brief summary of highway user taxes from the Surface Transportation Assistance Act of 1982 to the present was included as a handout (Attachment 8).

Alternative Revenue Sources - Ms. Morris mentioned a 2½-year study conducted by jointly by the Universities of Iowa and Minnesota. The study, which began last summer, is looking at using a global positioning system (GPS) to assess road user fees. The research prospectus states that the "new approach applies intelligent transportation system technology to the problem of assessing road user charges, enabling these charges to be fairer, more stable, and more flexible." There are numerous technological and institutional issues that have been identified and will be looked at in the research. It is a pooled fund study with FHWA, California, Iowa, Kansas, Michigan, Minnesota, North Carolina, Texas, Washington and Wisconsin contributing funds.

RoadCheck 2001 - June 5 through 7 are the dates for the Federal Motor Carrier Safety Administration's (FMCSA) annual motor carrier safety blitz. The objectives of the program are: to remove unsafe trucks from the highway; to improve driver safety awareness; and, to reduce commercial motor vehicle crashes. The FMSCA will be printing a brochure called "Professional Drivers:Share the Road Safely" for distribution during RoadCheck 2001.

Task Force Reports

California Task Force - Allan Stuckey, from the California Board of Equalization, began the report stating that the task force held a joint meeting with the Texas Task Force in Denver. The meeting was held February 22 with 50 representatives from Arizona, Arkansas, California, Colorado, Missouri, Nevada, New Mexico, Oklahoma, Oregon, Texas, FHWA, IRS, Federation of Tax Administrators (FTA) and the Navajo Tax Commission. Utah and Louisiana did not attend. Mr. Stuckey said the next full meeting of the California Task Force has not been scheduled, however, the Audit and Enforcement Subcommittee will meet on April 22 in Santa Fe, just prior to the FTA Pacific Region Meeting.

Before giving the state reports, Mr. Stuckey noted that there was an FHWA update as well as a presentation by Mr. Michel Monconduit on the final regulations adopted by IRS concerning kerosene. He also noted that Ms. Cindy Anders-Robb gave a presentation on ExSTARS, Excise Tax On-line Exchange (ExTOLE), and the FTA training programs.

Arizona - There have been three personnel changes of note. Robert Gillespie was appointed as Director of Revenue Audit and Michael Spector was appointed Chief Auditor, at the Department of Transportation (DOT). Carl Goin was appointed to lead efforts in establishing programs to stem evasion, including new emphasis on audits and a dyed fuel program.

In the area of legislation, Arizona has proposed three bills that would have an effect on highway use taxes. If passed, SB 1271 would: combine motor fuel tax and use fuel tax into the same law; establish new penalties for criminal evasion; increase bonding requirements to two times the estimated monthly tax, not to exceed $1 million; require distributors to obtain a license and report number of gallons sold; and, authorize Arizona DOT to require returns/reports to be filed electronically. SB 1233 would: reduce vehicle license taxes for new and used vehicles by 45 percent by January 2004; and increase motor vehicle fuel taxes by 9 cents incrementally over a three year period beginning in January of 2002 with the first increase of 3 cents. The last bill proposed, SB 2449, would require that diesel fuel sold or offered for sale in Air Quality Area A conform to California Air Resource Board (ARB) standards beginning May 1, 2003.

California - The BOE entered into a contract with CalTrans to expend approximately $626,000 per year for three years in STP funding. The funds will be used for automation that will allow BOE to utilize ExSTARS data and to provide training to the staff. The Governor did not allow for any new positions to be funded.

Concerning legislation, AB 2114 passed during the 2000 legislative session. It moves the point of taxation for gasoline to the terminal rack effective January 2002. This conforms to the diesel point of taxation, which was moved to the rack in 1995.

New diesel fuel regulations are being drafted that will provide guidance to industry on sales to the Federal government. The guidance will clarify who is entitled to claim a refund when the government purchases fuel using a credit card.

The dyed fuel program continues with ARB inspecting vehicles on behalf of BOE. During calendar year 2000, 21,550 vehicles were inspected, 31 potential violations were identified, with a total of 56 samples taken. Of the samples taken, 14 tested to be less than 1 part per million (ppm), 8 remained under investigation, and $16,504 in tax, interest and penalties were assessed.

Colorado - Colorado is ready to implement a new fuel tracking/electronic filing system with the first return that was due on February 25, 2001. Distributors can file by a variety of means including web-based, flat file submitted on disk or tape, or personal computer based filing using Excel-based templates.

Nevada - One personnel issue was announced. Karen Winchell was appointed as supervisor of the audit section at Department of Motor Vehicles and Public Safety.

In the area of administration, the gasoline motor fuel tax responsibilities will shift from the Department of Taxation to the Department of Motor Vehicles (DMV) and will be consolidated with the diesel fuel tax effective January 2002. The tax is imposed at the distributor level. The DMV staff is currently working on developing new combined tax returns.

Nevada's dyed fuel program has both criminal and civil penalties for use of dyed fuel on the highway. The program is co-administered by the DMV and the Nevada Highway Patrol (NHP). Vehicle inspections and sampling are done by NHP. Violations result in a citation from the NHP officer at the time the sample is taken and the violator is subsequently assessed a penalty by the DMV. The NHP citation results in a $1000 fine, and the DMV assess a $1000 civil penalty.

As of March 2001, Nevada has placed in service the Lockheed Fuel Tracking System.

Oregon - Covered in the Northwest Task Force Report.

Additional Reports - Mr. Stuckey announced that Ms. Dottie McLane has been appointed as the Territory Manager for Excise Taxes, Territory 5 of the IRS, which covers the 13 western states. She is based in Laguna Niguel, California.

The Navajo Tax Commission has entered into memoranda of understanding with Arizona, New Mexico, and Texas and is working on agreements with Colorado and Utah.

The Audit and Enforcement Subcommittee of the California Task Force met in a confidential session on February 23, 2001. State representatives shared information on ongoing audit and enforcement activities in their respective states. Attendance was limited to representatives of member states and the IRS. Florida Task Force - David Skinner from the Florida Department of Revenue started his task force update by stating that two task force meeting were held in the past year. Sarasota, Florida was the site of the May task force meeting and Atlanta was the host city for the October meeting. Updates were given on: the Below the Rack project (BTR), ExSTARS, ExTOLE, and Excise Tax Registration Authorization System (ExTRAS). A representative of the Mississippi DOT made a presentation. State updates were also given. The next task force meeting is being planned in conjunction with the North Carolina Task Force in August. The site will be Nashville.

Arkansas - The Lockheed fuel tracking system is working well for Arkansas. They have been issuing assessments from it for approximately 7 months. Auditors using the system will give a full report at the FTA Southern Regional meeting in Hot Springs. Arkansas is at 100 percent electronic filling. They are still receiving paper returns, which are being used as a crosscheck, but paper will be eliminated by May. There are no major legislative changes to report.

Louisiana - A tax at the rack bill is before the legislature that would move the point of taxation for diesel, but would keep the point of taxation for gasoline at first import. Louisiana is looking at electronic filing systems. The state is one of the pilot states active in the Commercial Vehicle Information Systems and Networks (CVISN) program. CVISN will enhance safety for drivers and trucks and improve operating efficiencies for government agencies and motor carriers.

Mississippi - New legislation designed to clarify the information sharing provisions was enacted. The legislation specifically provides for loading information into ExTOLE and for sharing information with any agency responsible for fuel tax enforcement (such as DOT). The state Tax Commission is in the process of building an electronic filing software package for distributors. Mississippi is also active in the pilot CVISN project.

Alabama - Extreme budget problems in the state have made participation in workshops or meetings impossible if they require travel. There have been no legislative changes affecting fuels.

Georgia - Covered in the North Carolina Task Force Report.

Florida - Legislation passed allowing for refunds for motor coach idling consumption. To get the refund, an on-board computer is required that will actually measure the consumption of fuel used while the bus idles. There is some question about how to determine whether the idle time takes place in Florida or some other state. Other legislation will allow the DOR to suspend terminal operator filing requirements if the same data is filed through ExSTARS. DOR has provided free software to fuel wholesalers to support electronic filing. They are beginning mandatory electronic filing enforcement.

NETASK Task Force - Jerry Bryant, from the Nebraska Department of Revenue, began the report by saying that the last NETASK meeting was held in Overland Park, Kansas on October 12 and 13, 2000. Thirty-six people attended representing nine states, the IRS and FHWA. Representatives from Colorado, Montana and Wisconsin were unable to attend. The next meeting will be held in Denver, May 3 and 4, 2001.

Updates were provided on the IRS reorganization, ExSTARS and ExTOLE, and the group discussed the problem of getting direction on E-85 and E-75 from the IRS. Under Federal law, these blends are not considered gasoline or gasohol, but fall under alternative fuels.

Tim Turgeon of Cenex provided information on the company's smart site fuel delivery program. A PowerPoint presentation provided details on how a device inside a fuel tank determines when fuel is needed and sends a message via satellite to Cenex. Cenex then dispatched a truck to the site. The farmer is billed after the fuel is used. The presentation generated some discussion.

Bruce Hiene, Williams Energy Service, was the guest speaker. He presented a great deal of information on his company and the services they provide. Emphasis was on ethanol production and distribution. Each of the presentations was followed by a question and answer periods.

Joan Galster, North Dakota Office of State Tax Commissioner, led a discussion on dyed fuel enforcement and some of the problems they have encountered. The discussion focused on "reasonable cause" to stop a vehicle to check for dyed fuel.

Iowa - Various legislative proposals involving ways to increase the use of ethanol in the state have surfaced in the present legislative session, yet none had passed as of October. The proposals included: income tax credits to dealers who sell a certain percentage of ethanol; adjustments to the tax rates; tax credits for purchasing ethanol powered vehicles; requirements for the use of biodiesel by some state agencies; and, lowering the yearly vehicle license fees for vehicles with higher fuel economy.

Current activities include working on Native American issues, and completing an audit of a major supplier. It has been very difficult to reconcile due to numerous errors and issues of the supplier. Iowa tax was assessed after audits of to two distributors whose bills of lading showed fuel purchased in Iowa for export, but the fuel was actually delivered in state.

Iowa will not be attending the May NETASK meeting in Colorado due to lack of funds. The Federal tax compliance funds have already been used this fiscal year and the state budget is tight, particularly in the area of travel allotments.

Kansas - A long-standing restraining order against the DOR concerning sales on the Native American reservations was ordered back to the district court. The court has required the Native Americans to prove their economic burden of collecting and remitting the fuel tax. They have begun collecting tax on the Pottawatamie tribe sales on the reservation.

Minnesota - Under current law, Minnesota has eliminated the farmer's exemption on clear diesel, and has mandated the use of ethanol. They hope to change the current law, which states that natural gas cannot be a part of E-85.

Missouri - Covered in the PUBLICUS report.

Nebraska - Implementation of the electronic funds transfer (EFT) and the electronic data interchange (EDI) mandates from last year's legislation has begun. As of January 1, 2001, filers paying more than $10,000 annually are required to pay using EFT. The program has a 9-month phase in period. Beginning January 1, 2002, all filers must file EDI.

Two pieces of legislation passed this year. In the first, the DOR has been given the authority to set annual filing frequencies in certain circumstances. Propane retailers remitting less than $250 per year will be converted to annual filing frequency. Some inactive out-of-state suppliers and exporters may be allowed to file annual returns until they resume activity in the state. Any activity would prompt a status change back to monthly filing. In the second, the permit for the purchaser of non-highway use gasoline would be eliminated. Instead, the claimant would file an affidavit on the same form used to file for the credit. This will eliminate problems for both the state and the taxpayer. Current legislative proposals include calls for mandated use of ethanol in the state as well as extending the life of the ethanol producers' credit.

DOR is currently working with one of the major Native American tribes to negotiate an agreement with them concerning motor fuel.

North Dakota - In this legislative session, there is a possibility that a bill will pass to lower the tax rate on diesel fuel containing biodiesel. The bill has passed the state Senate and is in limbo in the House Finance and Tax Committee. A fuel tax increase is currently in the talking stages.

There is an interim tax study going on that is watching dyed diesel enforcement.

Oklahoma - A bill has been proposed that will increase the tax for gasoline and diesel to 21 cents per gallon.

South Dakota - No new legislation to report for the past two years.

Wisconsin - The Wisconsin DOR has entered into an agreement with the Wisconsin DOT to obtain a portion of the ¼ of 1 percent in STP funds available under TEA-21 to address motor fuel tax evasion. The funds will be used for the development and implementation of a web-based integrated system that will fully automate motor vehicle fuel tax return filing and audit functions at the DOR. DOR has signed on with a private contractor to develop the Wisconsin Excise Tax Reporting and Auditing System (WiXTRAS).

Wyoming - Effective May 1, 2000, a change in law eliminated the exempt sale of clear diesel to farmers. If farmers use clear diesel for nontaxable purposes, they can file for a refund.

There are no criminal investigations in progress however; the Department of Audit is spending a significant amount of time verifying return information.

New England Task Force - Allan Ferullo from the Massachusetts Department of Revenue began the report by saying the last task force meeting was held April 19 in Newport Rhode Island and the next meeting would be held May 2, 2001 in Boxboro, Massachusetts. (The meeting date was changed to May 9.)

Massachusetts - The state was represented at the FTA Annual Meeting held in Rochester, New York, last September. In addition, Massachusetts and five other New England states attended a meeting with the eastern Canadian Provinces, IRS, Canada Customs and Revenue Administration (CCRA) and Canadian and U.S. industry representatives. The Canadian Fuel Tax Project hosted the meeting. It was very informative and provided the Canadian prospective on how they run their fuels programs.

The DOR is discussing the possibility of putting together some in-house projects to increase revenues and is considering asking for STP funds to support these efforts.

DOR has six field auditors doing motor fuel audits throughout the states. The audits are done in conjunction with other miscellaneous excises such as alcohol, tobacco and International Fuel Tax Agreement (IFTA) audits. The DOR has performed 125 audits in the last fiscal year.

New Hampshire - The Department of Safety has started a new project that examines details of all refunds filed. Many discrepancies have been found with regard to retail stations' shrinkage allowance. Distributors are being contacted to resolve the matter. All other refunds are being examined. The department is reviewing the rules regarding refunds and tightening the verbiage on the loosely constructed ones.

The department is maintaining its barge, distributor and IFTA activities and is preparing for the IFTA peer review, which takes place April 30, 2001.

Connecticut - The Department of Revenue Services continues to participate in both the New England and New Jersey Task Forces. They have met two times with the members of the New Jersey Task Force to review recent distributor applications and problem accounts.

The department noted the continued decline in Federal tax compliance funds and said that they have not been able to secure any STP funds from the DOT. They will keep trying.

Seventy-seven motor fuel and diesel audits were completed between October 2000 and March 2001 with assessments totaling over $1.5 million. They have billed over $1.39 million for the petroleum products tax on related petroleum sales. They are continuing an active audit program, auditing both major oil companies and smaller fuel dealers.

The department's Special Investigations Section (SIS) is involved in two on-going investigations regarding distributors operating without being properly licensed. One distributor has been convicted, fined by the courts and is no longer in operation. SIS is also working with the Consumer Protection Division on reported "short fuel" deliveries to retail customers.

Connecticut's overall gasoline revenues are lower that a year ago due to the decrease in the tax rate from a high of 39 cents per gallon to the current 25 cents per gallon. The difference makes it difficult to show the same level of audit assessment.

Three staff members attended ExSTARS training in Portland, Maine, in March. The department hopes to realize some of the benefits of the system in the coming year.

Maine - A Deputy Sheriff was hired in April, 2000, specifically to handle dyed fuel inspections, collecting delinquent fuel taxes and returns (primarily IFTA accounts), and checking for other various fuel tax violations including not having a decal, and failure to display a decal. Last month the deputy along with two others issued summonses for fuel tax violations at roadside inspections. Overall, the delinquent accounts are worked on a daily basis. The dyed fuel inspections have increased with several summonses being issued. It appears that the word has gotten out about the deputy's responsibilities and leads/complaints from concerned citizens have increased substantially over the past several months.

An increased field audit presence in the supplier and distributor areas has resulted in several hundred thousand dollars being assessed. Desk audits of supplier returns continue to provide leads to field staff as well as audit assessments from within.

Vermont - Effective July 1, 2000, the point of taxation for diesel fuel is at the distributor level. The tax rate for diesel fuel was retained at 26 cents per gallon, but the surcharge was removed and all diesel fuel is now fully taxed at the distributor level. All sales of clear, low sulfur diesel must be taxed upon sale by the distributor unless the Vermont Department of Motor Vehicles has issued a valid exemption certificate. Exemption certificates are issued to the Federal, state and local governments, school districts and for farm use delivered to farm bulk storage tanks. Also effective July 1, 2000, a floor stock tax was imposed on fuel in stock at 12:01 a.m.; the bond amount for licensed motor fuel (gasoline) distributors was increased from a maximum of $100,000 to a maximum of $400,000; and collection language was added to the diesel and gasoline statutes. Vermont Department of Taxes believes the passage of this legislation will greatly increase and protect gasoline and diesel tax revenues.

In the 2002 legislative session, they plan to introduce a bill that proposes adding clear kerosene as a taxable product, and would fund a unit for dyed fuel inspections.

The Department of Taxes is receiving STP funds from the DOT to support continuation of the fuel tax evasion program. The auditor hire using these funds has been very successful in assessing individuals who have failed to file or are filing fraudulent or erroneous reports.

The department is working on a program to identify service stations and bulk storage customers who failed to report and pay tax on diesel inventory as of July 1, 2000.

Vermont is hopeful that the tax program will continue to be funded, either through the tax compliance funds or STP funds. Vermont expressed their gratitude for the financial assistance and stated that it has made a difference.

Rhode Island - The Department of Administration's Excise Tax Unit recently completed a project at the state airport where they found aviation fuel being used by airlines for off-road equipment.

Recent audits of two special distributors disclosed diesel fuel purchased tax-exempt as marine diesel and sold for use in off-road equipment. An audit of a special distributor disclosed that for a 2-year period, gasoline and diesel fuel were purchased with the Massachusetts' tax paid from a licensed distributor in Rhode Island. A special distributor at a terminal in Rhode Island picked up the fuel and sold most of the fuel in Rhode Island. The licensed distributor will be held responsible.

New Jersey Task Force - Joe O'Gorman from the New Jersey Division of Taxation reported that there had been one full meeting in the past year. The meeting was held in Newport, Rhode Island with the New England Task Force. Since that meeting, the Audit Group has met three times. Pittsburgh will be the site of the next meeting.

Maryland - The state is continuing to find commercial vehicles using dyed fuel on the highways.

The Comptroller's Office is involved in the investigation of a company that has been operating with a revoked license in Delaware. The company is importing gasoline and special fuels into Maryland.

The state is continuing to sample all grades of fuel at every level of the distribution chain.

Pennsylvania - As of January 1, 2001, the oil franchise tax increased by one-tenth of one cent.

The dyed fuel law, which passed in October 1997, allowed for a refund for refrigeration units. The provision had a 3-year window, which expired in September 2000. They are awaiting legislation to make it permanent.

Delaware - The Administrator of Motor Fuels position is open.

In the area of dyed fuel, the policies, procedures and forms for the dyed fuel program are complete. The Delaware State Police are actively working with the DOT on dyed fuel inspections. Off-road inspections continue to be performed as a part of all in-state audits.

Fuel Tax Return Accounting and Compliance Electronic Reporting (TRACER) is about 90 percent complete. The system will allow Delaware to enter all state reported tax data, run a variety of queries and reports, and track audit data.

District of Columbia - The District is continuing their audit program.

New Jersey - A field auditor and two investigators were added to work exclusively on excise tax matters.

Legislation was adopted during the year that freezes the petroleum products gross receipts tax at four cents per gallon. Legislation has been drafted to move the point of taxation on diesel fuel to the terminal rack. A meeting is planned with industry representatives to discuss the drafted dyed fuel legislation.

New York - There is pending legislation for airlines flying out of state, which would eliminate "burn off" tax. Also, the state is considering going to Federal conformity regarding dyed fuel laws in upcoming legislative session.

The last meeting of the Audit Group discussed several license holders that are active in New York, New Jersey, Pennsylvania and Connecticut.

A recent article in the New York Newsday detailed the problems of tax being paid in New Jersey and fuel being delivered into New York with fraudulent invoices being provided.

Larry Keeley, Director of the Transaction and Transfer Tax Bureau of the New York State Department of Taxation and Finance, retired May 10.

Texas Task Force - Ed Collins, from the Texas Comptroller of Public Accounts told the group that the task force had met twice since the last steering committee meeting, one on October 19, 2000, and the second on February 22 and 23 in a joint meeting with the California task force.

Arkansas - Legislation has been proposed that would allow volunteer fire departments to receive a refund on diesel fuel purchased tax paid. Only fuel used in firefighting equipment such as pumper and water trucks would qualify for the refund. There are over 900 part-time volunteer fire companies in the state. Another proposal would exempt purchases of leaded gasoline from the state tax. This would allow local racetracks to purchase fuel tax-free. There are about 10 tracks in the state, each purchasing only 7,000 to 8,000 gallons of the fuel during racing season. The revenue impacts are not expected to be significant. A third piece of legislation proposed would no longer require suppliers to list each load of dyed fuel sold to any customer.

Dyed fuel inspections are finding between 10 and 15 violations each month. state inspectors are finding more tractor-trailer rigs in violation, in addition to the many diesel pick-up trucks. Since August 1995, they have found 437 violations.

Arkansas reports 100 percent compliance in EDI reporting of motor fuel tax. The Lockheed Martin motor fuel tracking system has yielded more that $1,000,000 in assessments of gasoline and diesel taxes, including interest. They are running reviews of returns for discrepancies and expect to complete the checks sometime this year.

New Mexico - Several bills concerning audit and fuel taxes have been introduced in the legislature. One would allow the Tax Department to authorize accounting firms to conduct audits of specific taxpayers for gross receipts and compensating taxes. The Tax Department would review the finished audit, and if accepted, no penalty or interest would be imposed on any taxes due. Only tax payers not under audit by the department and not in the audit inventory would be eligible. A second bill would allow 100 percent deduction from gross receipts and compensating tax for the sale or use of jet fuel. The current deduction is 40 percent. Another bill includes a definition of certified Indian tribal supplier and would allow a deduction for special fuel sold at retail on Indian land. Currently, there is a deduction for gasoline sold at retail by a registered Indian tribal distributor. One bill that has a good chance of passing will allow quarterly refunds for clear diesel fuel used to operate off-road equipment, auxiliary equipment, or non-automotive apparatus mounted on a vehicle. This would be administered outside of IFTA.

Oklahoma - The Tax Commission has motor fuel collection compacts with 19 Native American tribes. In exchange for collecting motor fuel taxes from all sales, participating tribes receive refunds of 4 percent of gross collections, which amounts to approximately $1 million each month.

The Tax Commission is in the process of building an integrated tax system that will have all tax types and all associated systems in one place. With this system, they expect that the motor fuel section will have a system that will generate reports to use as an audit tool.

Texas - The state has a dyed fuel statute now. They have signed a memorandum of understanding with IRS for analysis of fuel samples, sharing of information, and joint fuel inspections projects. Ten criminal investigators and 25 enforcement officers completed the IRS dyed fuel inspection training and were certified in February. Over 500 inspections have been completed with 5 violations found. All inspections were conducted at state weigh stations.

Texas has a fuel tracking system in place and will be able to share information on gasoline and diesel fuel imported into Texas and exported from Texas to other states. To help with the exchange of information, Federal Employer Identification and Social Security numbers will be used for reporting and PIDX product codes will be used to identify the type of fuel. Reports on fuel imported into Texas will be sent to the origin states each calendar month and will include origin state, mode of transportation, PIDX product code, gross and net gallons imported, out-of-state sellers' names and identification numbers, and Texas buyers' names and identification numbers. Reports on fuel exported from Texas will include destination state mode of transportation, PIDX product code, gross and net gallons exported from Texas, out of state buyers' names and identification numbers, and Texas sellers' name and identification numbers. In the Texas system, the destination state only has to be reported when the mode of transport is by truck or rail. ExSTARS will provide information to states regarding fuel exported from Texas into their state within the bulk transfer system.

Common and contract carriers transporting fuel interstate will also be required to file a quarterly information report. The information will be used to crosscheck the information reported by importers and exporters. Even thought there are no plans to include common or contract carrier report information with import and export reports exchanged with other states, this information may be obtained upon request.

Access to the Texas fuels tax permits database is now available on the Internet. The address is http://www.window.state.tx.us/taxinfo/fuels/index.html.

Northwest Task Force - Quintin Hess, from the Oregon Department of Transportation began his report by saying the last task force meeting was held in Rochester, New York on September 24, 2000 and the next will be held in Santa Fe, New Mexico, April 22. He then shared the thoughts of several of the states (Idaho, Washington, Montana, and Oregon) regarding where the Federal tax compliance project is going, what the project's focus should be, what the project should push for and what situations/problems need to be addressed.

The states are concerned that the continuous reduction in FHWA funding for the project is making it very difficult to achieve the original program's desired results. Most states are only receiving 25 percent of the original FHWA allocation. The question was asked "Is FHWA trying to phase out the Northwest Task Force activities?" (This is a valid question that needs to be asked not only at the steering committee meeting but also as the new legislation is being prepared.) What are the national office's plans for the task forces for the future? I think the project is headed for the "moth balls" unless the national office comes up with more funding. We states do not have the "extra" funding to pick up fuels tax evasion efforts previously funded by the FHWA grant.

The focus of the project should be to try and get the original funding levels back and gain support of the national office. The fuel tax evasion project does not appear to be a priority at the national office any more. The lack of funding limits the Northwest states ability to combat tax evasion.

The ExSTARS system does not address the fuel load information needs of the states in the Northwest task force. The system could be improved if it was modified to report the "owner of the fuel" (distributor name) when the load leaves the terminal. Most states will still need to track below the rack imports and exports.

Oregon - In the area of Native American issues, Oregon does not have any formal motor fuel tax agreements with the tribes, although one tribe is in the process of preparing a draft agreement. Several other tribes have inquired about Oregon's motor fuel tax structure and are exploring business opportunities in this area.

There are no legislative proposals that call for major changes in Oregon's motor fuel tax program. Legislation has been introduced that would provide use fuel tax exemptions for certain governmental entities, tax relief for vehicles using alternative fuels and the establishment of a task force to look into alternatives to fuel taxes.

Oregon is exploring the use of e-commerce for tax reporting. The state currently has a limited EFT program.

Cases of evasion center primarily around the unlicensed use and sale of use fuel.

Idaho - The state reports no new developments in the area of Native American issues. There is one court case pending, Goodman versus Idaho State Tax Commission.

One piece of motor fuel legislation was introduced that would clean up some vague language in the law.

In the area of evasion, border issues continue to be a problem, particularly at the Wyoming border, due to a large difference in tax rates. Idaho is experiencing an increase in dyed fuel violations and referrals. They believe it is directly tied to the increases in fuel prices at the pump. Those caught using dyed fuel on the highway are most often farmers/ranchers, loggers and construction companies. No new schemes or issues have been found.

Idaho offers EDI, EFT and diskette filing to distributors. In 2000, the Tax Commission sponsored a bill to give fuel distributors a $2,500 credit if they filed and remitted fuel tax money electronically. It passed, and so far 85 out of 241 Idaho fuel distributors have taken advantage of this credit. Idaho provides the software free of charge to any fuel distributor who will file their fuel distribution return electronically. Some of the FHWA funds were used to develop this program.

Montana - With regard to Native American issues, Montana is dealing with the normal revenue sharing agreement negotiations. One tribe is requesting that diesel gallons be included in the calculations for revenue sharing. The state is resisting this request, partly because of the affect it would have on IFTA reporting.

Pending legislation includes: modification of dyed fuel law as it pertains to small vehicles; penalties for failure to mark dyed fuel pumps with proper notice; tax incentives for producers and retailers of gasohol; extending the due date for payment by EFT; bond minimums for importers and exporters; prorated daily interest; and, penalties for late filing and payments.

The use of dyed fuel on the highway is a major issue and will continue to be a problem as fuel prices increase. Border issues continue to be a major area of concern as surrounding states have significantly lower tax rates. The Canadian border continues to be a problem. It is difficult to get information from Customs and some of the Provinces to ensure accountability of all loads.

Montana is taking the lead on the U.S. side of the border to organize a national border project. The project will include the five most western states and their bordering Provinces. Other agencies involved include the IRS, Customs, Environmental Protection Agency (EPA), and various Canadian Provincial and Federal agencies.

Montana will be moving to the newest EDI map in the near future. They are continuing to encourage licensees to file and pay electronically. Montana believes that assistance from the Federal government in promoting electronic filing would be a major benefit, as it would help lessen tax evasion by making it possible to cross match information electronically.

Washington - There has been little change in the state regarding Native American issues. Fuel is still bootlegged into the state at the rate of between 3 million and 4 million gallons per year. Washington and Oregon are working together on a situation involving a tribe in Oregon near the Washington border.

A technical corrections bill was introduced in the legislature in 2001. It proposed changing the definition of a fuel supplier to more closely mirror the Federal definition.

Border issues continue to be the primary source of fuel tax evasion, followed by the unlawful use of dyed diesel. Washington is experiencing an increase in dyed diesel violations and is aggressively pursuing most violations by examining other company trucks and storage locations within a few days of the original violation. In appeal, there are no negotiations or settlements on dyed diesel assessments.

Washington offers EFT, but currently is not considering EDI.

Alaska - As of April 1, Alaska has adopted new regulations that clarify the point of taxation; make the timely filing credit contingent on a complete return; and, allow for the denial of a license to a person convicted of a fuel tax crime in another state.

PUBLICUS Task Force - Butch Jerrell from the Indiana Department of Revenue gave the task force report. Mr. Jerrell along with Roger Bair and Robert Muller will be taking over task force responsibilities. Suzanne (Heidenreich) Flynn has been promoted to Administrator of the Network Security and Administration Division. The last PUBLICUS Task Force meeting was held with the NETASK Task Force in Lincoln, Nebraska on June 21, 2000. The next meeting will be held in Indianapolis on July 18, 2001.

Indiana - The state is seeing an increase in dyed fuel violations. Efforts are underway to gain the assistance of the State Police Motor Carrier Inspectors in dyed fuel enforcement. Currently, the Department of Revenue has six agents and the Indiana State Police have three troopers involved in the dyed fuel inspection program. When standard operating procedures and training are agreed upon by the two agencies, an additional 100 enforcement people will be looking for dyed fuel violations.

The fuel tax evasion hotline (800) 528-3835 has been silent for some time, but in the past few months several complaints have been received. Six of the complaints have come from callers in Missouri, Minnesota, and New Mexico.

Illinois - The new dyed fuel program is going well.

Michigan - Effective April 1, 2001, Michigan has implemented a new motor fuel tax law. It requires collection of tax at the terminal for both diesel and gasoline. There is concern among surrounding states on the collection of tax on exports.

Minnesota - Covered in NETASK report.

Missouri - Missouri and the IRS have recently signed an agreement to work jointly on a dyed fuel compliance program. Their fuel automation system is scheduled to be running by the end of this year.

They are currently investigating a resident with a distributor's location in Kansas who continues to

Effective January 1, 2001, current law eliminates farmers' ability to buy clear diesel tax-free. No legislative changes are in the works this year.

Ohio - Ohio reports the only major thing going on is their disagreement with the new Michigan law.

The Department of Taxation recently purchased a truck, uniforms and equipment and is starting a dyed fuel inspection program.

West Virginia - The West Virginia legislature is considering extending a five-cent per gallon sales tax on gasoline. The legislature is studying the tax at the rack. However, the issue will not be raised in this year's session.

On-road dyed fuel inspections began in May 2000. Over 25 violations were found for calendar year 2000. This year, no violations have been found.

Wisconsin - Covered in the NETASK report.

Kentucky - House Bill 911 in the 2000 legislature passed, and effective with the August 2000 return, dyed diesel fuel is no longer subject to motor fuels tax unless it is used on-road. Also, commercial use of clear diesel fuel can be purchased from a licensed dealer tax exempt, if they are a valid refund permit holder. The legislation essentially makes refunds of non-highway fuel almost unnecessary.

Legislation for the 2001 session passed, which allows licensed dealers to sell non-highway agricultural gasoline to valid refund permit holders tax exempt. The expected start date is some time this summer.

North Carolina Task Force - Julian Fitzgerald from the North Carolina Department of Revenue reported that the last task force meeting took place in Atlanta last December.

Virginia - The state passed tax at the rack legislation last year and has been working on its implementation. In addition, they are implementing the Lockheed Martin fuel tracking system that will enable the state to track fuel on a load-by-load basis.

The enforcement section is averaging three dyed fuel inspection operations each month. Virginia has a new destination state law, which checks bills of lading of fuel carriers. First offense is $5,000 and each subsequent offense is $10,000.

Georgia - A request has been made for STP funds. Currently, Georgia is using STP funds to enhance dyed fuel inspection and enforcement programs. If the second authorization of STP funds is approved, they will be used for the motor fuel tax field audit staff, dyed fuel inspection program, and a special investigator for the motor fuel tax unit.

The IRS provided dyed fuel training to 35 DOT enforcement officers. This means that each weigh station in the state will have a uniformed officer that is certified to pull fuel samples from trucks entering the station. The officers will also be performing roadside dyed fuel inspections. The enforcement officers and IRS are teaming up to conduct a joint dyed fuel inspection sweep in southeastern Georgia.

Effective July 1, 2001, the Division of Motor Vehicles will be transferred from the Department of Revenue to the Department of Motor Vehicle Safety. IFTA will remain with DOR.

Tennessee - Legislation is being considered to sell non-highway fuel at retail outlets. There will be bonding. Currently, retailers cannot sell non-highway fuel.

In the area of audits and investigations, the DOR recently completed the first electronic data audit of a major oil company. For the first time, the special investigations unit seized a vehicle for dyed fuel violation.

Tennessee has been working with Zyquest to develop and EDI program.

South Carolina - In proposed legislation, any person liable for motor fuel tax who files a return with out providing all information required by the department could be subject to a penalty equal to five percent of the tax liability. Other proposals include: requiring a fuel vendor license for those persons who purchase taxable motor fuel for resale within the state from a licensed terminal supplier; and in the event of a tax rate increase, the Department of Health and Environmental Control will provide information from its underground storage tank registrant database to the DOR for the purpose of identifying inventories of taxable motor fuel.

Inspections of retail outlets are being conducted on a continuing basis. This year, 527 inspections were performed. To date, resolved diversions have resulted in collections of $210,720.

The dyed fuel inspection program began in April 2000, and as of February 2001, 1097 diesel fuel inspections have been performed by the Transport Police Officers. Seventy-six violations have been issued resulting in penalties of $225,320. Additional officers will be trained this year as dyed fuel inspectors.

West Virginia - Covered in the PUBLICUS report.

Kentucky - Covered in the PUBLICUS report.

North Carolina - The Motor Fuel Tax Division has relocated to: 1429 Rock Quarry Road, Suite 105, Raleigh, North Carolina 27610.

In May 2000, 28 people from North Carolina, Indiana, Kentucky, Nevada and West Virginia participated in a successful diesel compliance school. Another course will be offered later this year.

Five people have attended the ExSTARS/ExTOLE training sponsored by IRS and FTA.

On-road dyed fuel inspections are continuing with monthly Red Alert operations.

Work continues on the migration of the motor fuels programs to the DOR's mainframe.

Legislation is pending to license third party credit card companies regarding who should apply for refunds on purchases of tax exempt fuel using such credit cards.

The next task force meeting will be held in Nashville in August. It will be a joint meeting with the Florida Task Force.

IRS Update

Revenue - Larry Hecksher from the Office of Excise Taxes at IRS provided an update on the revenue increases for gasoline and diesel. Mr. Hecksher's handout (Attachment 9) showed the revenue changes from FY 1993 through FY 1999 in constant dollars. The overall growth in revenue for gasoline taxes showed an increase of 11.7 percent from FY 93 to FY 99. These figures do not include revenue numbers for the years prior or immediately following the change in the point of taxation for gasoline, which occurred in 1988. Gasoline numbers include gasoline, gasoline for gasohol, and gasohol tax revenues.

The overall change for diesel tax revenues in constant dollars between FY 93 and FY 99 is 49.1 percent. These numbers show the impact of the legislative changes that included tax or dye regulations and moving the point of taxation to the terminal rack. The largest change occurred between 1993 and 1994 when the legislation took effect. Diesel revenues increased by 19.6 percent in that 1-year time span.

Criminal Investigations - Gary James from the Criminal Investigations Division of IRS was unable to attend. He did provide a handout that summarized recent criminal investigations. The handout is included as Attachment 10.

Excise Summary Terminal Activity Reporting System - Tim Torri, ExSTARS/ExTOLE Program Manager, Office of Excise Taxes, IRS, provided an update on ExSTARS and ExTOLE systems of ExFIRS. He started with some background of the automated fuel tracking system program including a brief history of how the concept developed over time, the legislation that provided funding to turn that concept into reality, the agencies and organizations involved in the stakeholder group that worked on the development of the systems, and at what point in development the project is currently. (See Attachment 11.)

ExSTARS is designed to track bulk motor fuel movements into and out of a terminal. In the past year, the stakeholders have continued to identify state and industry needs to make the system successful. Accomplishments include: decision made for summary reporting for product codes 092 (Undefined Other Product) and 122 (Blending Components Other); development of the 720-Terminal Operator and 720-Carrier Summary reports and instructions; conversion of the EDI guide to IRS Publication 3536 Excise Tax EDI Guide; creation of the Cincinnati Help Desk; distribution of computers to state revenue offices; system tests and evaluations; and completion of the ExSTARS software version 1.1. In addition, the memoranda of understanding between the IRS and the states have been signed. The industry letters of application are being administered and as each is processed and passwords assigned, testing can begin for the applicant.

Current activities are focusing on industry notification efforts, addressing two-party exchanges, and identifying areas needing improvement in the ExSTARS software. Discussion has started regarding a second phase of the system.

Data reporting will begin with the ending inventory totals for March 2001. The IRS Regulation 48.4101 allows an automatic 6-month extension without penalty to file, so the April data will be due by November 30, 2001.

The ExTOLE system has been completed, and the turn on date is April 1, 2001. The latest addition to the ExTOLE system is the ability to transfer files from one state agency to an agency in a different state utilizing a secure method of transport. State disclosure tracking provisions allow each state to control which states and more specifically which agencies within that state can access the original state's data. Suggested improvements for the ExTOLE system include allowing the bordering Canadian Provinces and the Mexican states access to ExTOLE data.

The FTA has offered training for both ExSTARS and ExTOLE to state representatives. Eight sessions, each 2-1/2 days long, provided hands on experience using the system. The training presented ways to use the systems and also included a session that showed how the system could work in conjunction with the state laws and different points of taxation.

Other Participating Agency Reports

FTA Update on Training and Uniformity - Cindy Anders-Robb, Motor Fuel Coordinator for the Federation of Tax Administrators, began her presentation with an explanation of the make up of the Uniformity's Motor Fuel Tax Section Executive Board and the persons on the board. (See Attachment 12.)

The last Uniformity Committee meeting was held in February in Portland, Oregon. The purpose of the meeting was to determine whether or not there should be changes made in the way the Uniformity Committee operates. Two facilitators led discussions in two smaller groups. The large group agreed that it would be a good idea to develop a strategic plan with a mission statement and goals spelled out; that it would be a good idea to revise the subcommittees to get rid of some overlap in responsibilities; and that the group needed to "sing our song" by getting the word out on what this group does as well as the accomplishments and abilities of the group.

The Executive Board met and drafted a mission statement and goals, and reviewed the subcommittee's duties to see if as the subcommittees stand whether or not they fit into the mission statement and overall goals of the Uniformity Committee. A draft was sent out for comment to Uniformity Committee members.

Scheduled Uniformity Committee meetings will take place in Portland Maine, on May 18 and 19, and in Rapid City South Dakota, on September 21 and 22, in conjunction with the Motor Fuel Tax Section Annual Meeting. Ms. Anders-Robb also provided dates for the Motor Fuel Tax Sections regional and annual meetings for 2001 and 2002.

The Basic and Advanced Motor Fuel Tax Audit are scheduled for this summer. The basic training will be held in Boise, Idaho, July 8 through 11, and the advanced course will be held July 29 through August 3 in Fort Collins, Colorado. The cost of the course will be higher this year since FHWA was unable to provide any funding for training.

FTA provided training workshops to state representatives on the ExSTARS and ExTOLE systems. The objectives of the workshops were to inform the states of the programs; to help the states apply the ExSTARS and ExTOLE information to their own compliance systems; to promote uniformity and partnerships with industry; and, to promote single point filing. Forty-three states sent 150 people to training.

Canadian Fuel Tax Project - Brad Lawrance from the Motor Fuels and Tobacco Branch of the Ontario Ministry of Finance provided an update on the Canadian Fuel Tax Project. He began by clarifying the motor fuel tax rate in Canada, translating liters into gallons and multiplied the tax rate to give figures that compare to a per gallon tax rate. The combined Federal and provincial tax on diesel fuel per gallon in Canada is $0.95, and the tax on gasoline is $1.21.

The Canadian Fuel Tax Project has been extended to 2003. The project Steering Committee is looking at whether or not the project should become permanent or remain temporary as it is now. They are also looking at how the project can become more efficient and how they can address enforcement issues.

The Information Sharing Subcommittee works with the Provinces and the Federal government in the development of information sharing agreements to facilitate fuel tax administration. They have been working on ways to deal with access to information and confidentiality issues.

Meetings were held in Calgary and Montreal as part of the Phase 1 Border Enforcement Project. Attendees were from the regional Provinces and states, and Federal government agencies and industry from Canada and the U.S. Plans have been made for a major multi-agency, multi-jurisdiction enforcement project to take place along the western Canadian/northwestern U.S. border.

Enforcement Phase 2 will focus on below the rack fuel tax evasion. The focus will be on bleaching, filtering and laundering of dyed fuels; roadside checks and dyed fuel testing; and fuel fingerprinting or other fuel marking processes which will aid in recognizing fuel extenders or inappropriate sale of untaxed fuels.

Phase 2 will also look at inter-jurisdictional fuel movements from the processes of fuel movement, identification of reporting processes and accounting for fuel movement, to identifying reporting needs for e-commerce. They are discussing with IRS the possibility of using the ExTOLE system to share provincial information with states.

Several Provinces are planning modifications to their fuel tax legislation. Alberta, the Northwest Territory and Manitoba are considering new legislation as early as spring 2002. Saskatchewan has implemented new legislation that includes tax at the rack and a new model for fuel tax collection.

The Canadian fuel distribution system has been mapped. Initially, the mapping was done for general information and training purposes. The plan is to further develop and expand on the information and use it as a training tool. Definitions for fuel tax purposes have been developed and are being compared with U.S. terminology for compatibility.

In the Fuel Tax Exemption Sub-project, all jurisdictions participated with the Saskatchewan initiative to develop and implement an up-front control and reporting process for tax-exempt sales. The sub-project has defined common electronic reporting data elements that may be used by all jurisdictions and industry. Saskatchewan will be implementing the process in the summer of 2001, and Alberta is looking at adopting the system for 2002.

Alberta developed a Risk Management and Analysis paper relating to fuel tax, which was distributed and reviewed by all Canadian jurisdictions as well as some states in the U.S., and industry. It will be maintained as a generic Risk Management and Analysis document for all jurisdictions. Mr. Lawrance's slides are included as Attachment 13.

Economic Indicators Feasibility Study - Pam McGuire from the IRS gave a brief overview of a study commissioned by IRS entitled "Economic Indicators of Excise Tax Revenue Collection: A Feasibility Study." The goal of the project is to conduct a feasibility assessment to identify indicators to measure compliance in motor fuel excise tax collection. The objectives are to develop structural and statistical models that can predict revenues based on economic activity, detect unexpected trends in tax collection, and detect possible under collection of revenues.

The project will look at the existing methods and the data used for these estimates and develop a model that takes into consideration additional factors. Analysis of the modeling processes and output will be done. Recommendations will be made. A final project report will document the findings. The project may take as long as 18 months to complete if optional tasks are performed. Ms. McGuire's slides are included as Attachment 14.

This ended the morning session.

Motor Fuel Imports

The afternoon session was devoted to foreign imports of finished motor fuel products. Several presenters talked about different aspects of the import issue. Linda Morris began with a brief explanation as to how FHWA had gotten to the point of looking into this issue. She began by mentioning that Sherri Alston received a letter from Molly Benson at Marathon Ashland that talked about foreign imports and that the letter had landed on her desk. The letter prompted some questions, as did Al Howard's presentation on this topic presented at other meetings. Additionally, the ultra low sulfur ruling passed by the EPA, growth in the fleet, and increased demand led to the realization that imports are going to increase and with more imports comes the potential for new evasion opportunities.

Al Howard, of Al Howard Consultants, talked in general about why imports are a growing concern. He noted that in 1980 there were 315 domestic refineries and that in 2000 there were 150. No new refineries have been built in 30 years. The 1980 refining capacity was 15.75 million barrels per day, and the 2000 rate was 16.2 million barrels. While the number of refineries has decreased dramatically, the refining capacity has increased, but still not enough to meet the growing demand. In 1985, demand for gasoline, heating oil, diesel and jet fuel was at 15.67 million barrels per day. In 2000, demand soared to 19.52 million barrels per day. Simple math shows a difference of 3.9 million barrels per day. Mr. Howard's slides are included as Attachment 15.

Molly Benson, tax counsel from Marathon Ashland, identified imports and the potential for motor fuel tax evasion as an issue to address proactively. Industry is particularly interested in imports since they will have an impact on domestic business. Ms. Benson has identified a number of agencies that are collecting import data, the types of data being collected and the forms used by the agencies. Attachment 16 includes the list of agencies, data categories and form numbers.

Mr. Howard identified the EPA ultra-low sulfur standards that are to be implemented by 2006, as one of the driving forces behind the increase in imports. He questioned the ability of domestic refineries to produce the lower sulfur fuel. Phillips Petroleum estimates that it will lose up to one-third of its refining capacity. Mr. Howard's educated guess is that as much as 25 percent of refining capacity will be lost as a result of the new sulfur standards.

Mr. Howard talked about U.S. Customs and their processes when a shipment enters a port. He noted that Customs requires Form 3461, Entry/Immediate Delivery, be submitted before a ship is entered. The 3461 is usually filed with Customs within 24 hours of entry into the U.S. This form, in essence, states that the product is on its way and must be received before a ship can unload. It provides information on the arrival and elected entry date as well as on the carrier, broker, port, manifest number, and data regarding the cargo. Form 3461 is included as Attachment 17.

Customs Form 7501, Entry Summary, is filed within 10 days of entry. When the form is submitted, a check with the appropriate duties is included. This form essentially states that the product has arrived. It also includes a Declaration of Importer of Record or Authorizing Agent part that states the undersigned (who is either actual owner, purchaser or co-signee, or the agent thereof) declares that the statements made on the form are true "to the best of my knowledge and belief." The question was raised "Does the broker have any responsibility if what is declared is incorrect?" Form 7501 is included as Attachment 18.

Mr. Howard asked the question "How accurate is the information on the 7501?" and "If I was going to cheat, how would I do that? A source that understands the imports processes responded. His suggestion was to file papers/forms on the due dates and pay all duties. The gauger will show up and oversee the unloading of the amount of fuel listed on the 3461 from the ship into the terminal at the port. The gauger signs off on the shipment and leaves. It is at this point that additional fuel can be pumped off without being reported on the 7501.

A second scheme identified the use of containers for shipping fuel. The containers are placed directly onto a truck and moved out. The fuel can be directly unloaded into a service station tank. Since the fuel does not cross the terminal rack, it is unreported and the Federal and possibly the state taxes are not collected.

Other issues that were identified as potential problems include the lack of automation in some foreign trade zones, and using a co-signee instead of a transporter. The transporter would have more to lose if caught in illegal fuel movements.

A suggestion was made to use the Journal of Commerce Private Import/Export Reporting Service (PIERS) to identify amounts of fuel entering at the ports. However, this would not take into account truck imports from Canada.

Alice Lippert from the Department of Energy (DOE), Energy Information Administration (EIA), provided information on the petroleum data collected by her office. The Petroleum Division collects data on petroleum prices and volumes from the wellhead to the retail level. They have 26 survey forms that deal with crude and the supply and demand of petroleum products. Data is collected on production, primary stocks, imports, net receipts (product movements), refining capacity, and price and sales volumes at the end user and state levels. The data are crosschecked with other reports. Public Law 93-275 requires the data to be submitted. Forms EIA-804, Weekly Imports Report and EIA-814 Monthly Imports Report are included as Attachment 19 and 20.

The Division provides short- and long-term analyses and produces numerous ad hoc and one-time reports. They field numerous petroleum related questions that come into the agency. The Division publishes large volumes of state level data. In addition, they publish the Weekly Petroleum Status Report, the Petroleum Marketing Monthly and Annual, the Fuel Oil and Kerosene Sales Report and the Petroleum Supply Monthly and Annual. These publications as well as other data can be found on the DOE website at www.eia.doe.gov under the Petroleum section. Ms. Lippert's slides are included as Attachment 21.

Joanne Shore, Petroleum Analyst from EIA, delivered a presentation that focused on motor fuel imports, including current imports and future predictions for imports, where the imports are coming from and where they may come from in the future, and whether or not these sources will be able to keep up with our demands. Ms. Shore talked about a study being done at the request of DOE Policy Office that looks at factors that could impact product import availability from the Atlantic Basin to the U.S. in the short to mid term.

Several factors have raised interest in the future availability of imports to the U.S.

1) Demand has caught up and passed domestic refining capacity.

The U.S. is dependant on gasoline imports. Currently, in the summer, U.S. refineries run at maximum capacity, and imports help to meet demand. In 2000, on average, gasoline imports supplied about 18 percent of the demand on the East Coast, the main region using imports.

The largest amount of U.S. gasoline imports comes from Canada, the Virgin Islands, Venezuela, and Western Europe. The Middle East and Eastern Europe supply somewhere between 6 and 15 percent.

The East Coast is also dependant on distillate imports. Approximately 18 percent of the East Coast's demand was met by imports. Of this 18 percent of distillate imports, somewhere between 45 and 60 percent is of the low sulfur variety. Most distillate imports come from Venezuela, the Virgin Islands, and Canada.

2) Our need for product imports is projected to grow.

For example, if the shares of gasoline and distillate imports remain about the same, the U.S. could see a 44 percent increase in imports of these products. (The forecasted growth in total product imports is 720 million barrels per day.) Who will provide the supply?

3) Product specifications for gasoline and diesel are changing. Low sulfur gasoline (Tier II) is required by 2004, which require refinery changes. And the EPA's new ultra-low sulfur requirements that are to be implemented by 2006 will require refineries to make technological changes to address the adjustments in the refining processes to produce the lower sulfur fuels.

Designer fuels brought about by changing environmental regulations are already an issue for importers. Limited markets for these fuels can provide limited incentives for exporters to adjust their refineries to meet these types of specifications.

For the future, changing regulations raises questions of supply availability. Are the refineries in countries that supply the U.S. now willing to make the changes to meet the product specifications for U.S. use? What about intervening opportunities for sale of exported fuel?

Europe, one of our major suppliers of imported gasoline is going through similar changes as the U.S. They have a growing transportation market. They have lost some of their crude distillation capacity, and they are implementing changes in product specifications, although in the case of diesel, not as restrictive as the U.S. standards.

Regarding gasoline, tax incentives in some European countries to encourage production of lower sulfur product than in the U.S. will limit and potentially reduce the volumes of "clean" gasoline (i.e., reformulated gasoline (RFG) or its components) in the future. Although volumes of conventional gasoline could increase, keeping total imports about the same. Also, if the U.S. bans MTBE, then imports of most RFG blendstocks from Europe will be reduced, since the low vapor pressure blendstock needed for ethanol blending is not required in Europe.

Regarding diesel, Europe is a net importer of diesel and does not generally send much to the U.S. Since the European sulfur reductions are not as strict as U.S. standards, there is the question of European refineries' abilities or desires to produce the ultra-low sulfur fuel. However, some countries are providing tax incentives to produce ultra-low sulfur diesel. It is unlikely that there will be adequate capacity to help the U.S. in its transition to ultra-low sulfur diesel, should our refiners come up short. In addition, the tax incentive places a premium on the cleaner fuels making them less attractive for export.

Ms. Shore concluded by saying the study is not yet complete and that EIA will be completing their findings on Europe and will begin to look at Canada and Venezuela. Ms. Shore's slides are included as Attachment 22.

Mr. Robert Crawford, Assistant Director of the Motor Fuel Tax Division in the office of the Comptroller of Maryland, gave a presentation on how Maryland handles imports. He noted that Maryland receives 1/3 of its fuel through imports, 1/3 by truck and 1/3 via the Colonial pipeline. Maryland estimates that 2.1 billion gallons are imported into the state each year.

Maryland began tracking imports into the Port of Baltimore in 1982. The law requires that the receiving terminal notify the Comptroller's office of any fuel, except residuals, coming into the state. An inspection is done to assure quality control and that product specifications conform to requirements. Imports are checked for product type. A level of tolerance for discrepancy in volume is allowed for temperature adjustments. Checks are performed on licenses for legality. Import reports are cross-referenced with the fuel dealer reports.

Mr. Crawford mentioned that the largest ship allowed in the Port of Baltimore carries no more than 8 million gallons. Ships holding more are partially off-loaded to barges (lightered) near Annapolis and then proceed to Baltimore. Questions concerning where these barges go and what agency has oversight of the barge movements were raised.

Mr. Crawford told of a shipment of fuel from Europe that was of such poor quality that the importer had to use three times the amount of good fuel to make it usable. If the state had not implemented the law on imports, then substandard fuel could have been leaked into the distribution system. Mr. Crawford stated that once Maryland started enforcement actions, there have been few problems. Maryland's statute regarding fuel imports is included as Attachment 23.

Mr. Joe O'Gorman talked briefly about rail imports from Canada. He noted that there are two sources of information, the Customs Data Exchange and the Carrier Report from the railroad. Fuel movement is seamless between Canada and the U.S., whether it is a movement by rail or by pipeline. Crosschecks are done manually.

Mr. Brad Lawrance mentioned that Canada is moving to the same sulfur standards as the U.S., but sooner. He said that Canada Customs can tell where the off-loaded tariff is paid and that fuel movements do have to meet some inter-jurisdictional requirements. He did state that there need to be some interdiction process. Ideally, that would be to take a sample to determine what actually is on board. He also mentioned that he is not aware of any enforcement plan for sulfur standards by the Canadian Department of Environment.

Mr. Lawrance explained that in Ontario, there is a total fuel accountability framework, that all fuel, both imports and exports, must be reported and that transporters must register the fuel movements. This is a paper process.

The session ended with the realization that there is much to be done with regard to imported fuel. Identification of the agencies, the data collected and which agencies use the data and for what purpose are only beginning efforts in addressing potential to import fraud. Members of the Steering Committee were invited to a smaller meeting the following day to begin working on import-related issues.

The meeting ended with a decision to hold the next Steering Committee meeting on April 8, 2002.