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DRAFT
MINUTES OF THE MARCH 11, 1996 MEETING OF THE STEERING COMMITTEE FOR THE
JOINT FEDERAL/STATE MOTOR FUEL TAX COMPLIANCE PROJECT
AGENDA ITEM 1--FISCAL YEAR (FY) 1996 AND 1997 PROJECT FUNDS
AGENDA ITEM 2:TASK FORCE REPORTS AND MEETING SCHEDULES
AGENDA ITEM 3: DISCUSSION OF TASK FORCE REALIGNMENT AND PROJECT ORGANIZATION AFTER FY 1997
AGENDA ITEM 4: DEPARTMENT OF JUSTICE REPORT
AGENDA ITEM 5: DEFENSE CRIMINAL INVESTIGATIVE SERVICE (DCIS)/DEFENSE FUEL SUPPLY CENTER REPORT (DFSC)
AGENDA ITEM 6: RESULTS OF DYED DIESEL PROGRAM/FUNDING
AGENDA ITEM 7: IRS FINAL DYED DIESEL RULES/TREATMENT OF KEROSENE/INDUSTRY CONCERNS/EPA REPORT/ AASHTO SURVEY OF STATE TRANSPORTATION AGENCIES
AGENDA ITEM 8: FEDERATION OF TAX ADMINISTRATORS (FTA) REPORT
AGENDA ITEM 9: IRS REPORT
AGENDA ITEM 10: DYED DIESEL TESTING EQUIPMENT
AGENDA ITEM 11: DISCUSSION OF COUNCIL OF STATE GOVERNMENTS (CSG)OUTREACH SYMPOSIUMS
The thirteenth meeting of the Steering Committee for the Joint Federal/State Motor Fuel Tax Compliance Project (Joint Project) took place on March 11, 1996, at Federal Highway Administration (FHWA) Headquarters in Washington, D.C. Ms. Madeleine Bloom, Director of the FHWA Office of Policy Development, chaired the meeting. Ms. Bloom began by thanking the Steering Committee for its work in making the Joint Project a great success. She noted that while FHWA provided the financial incentives, created the forum for the interchange of ideas, and brought everyone with an interest in solving the problem of fuel tax evasion to the table, it was the work of all the participating States and other Federal agencies which resulted in over a billion dollar increase in highway trust fund (HTF) revenue and substantial increases in State transportation fund revenue. Ms. Bloom stated that the continuation of that structure created by the Joint Project is important if the recent revenue gains are to be maintained. She pointed out that Agenda Item 3 called for a discussion on the continuation of the project after fiscal year (FY) 1997 if FHWA funding is unavailable. Ms. Bloom stated that she would limit her formal remarks at this time as the agenda was quite full. She then asked the meeting participants to introduce themselves. Attachment 1 is a list of participants.
Ms. Bloom asked Mr. Stephen J. Baluch, Project Manager of the Joint Project, to review the current status of funding for the project. Mr. Baluch noted that there was some confusion as to the availability of funding for 1996 and 1997. Mr. Baluch stated that the Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA) authorized funding for fuel tax evasion projects through FY 1997 (September 30, 1997) under Section 1040 of the Act. Therefore, Mr. Baluch advised that there will be one more allocation of funds next fiscal year to the States and the Internal Revenue Service (IRS) under this program.
Mr. Baluch also noted that the FY 1996 funds had been subject to a 12.5 percent reduction under the provisions of Section 1003© of ISTEA. He reported that this provision affected almost all FHWA programs and that the fuel tax evasion program was treated in the same manner as other FHWA programs. He also stated that the funding for IRS and the States was reduced by 12.5 percent, respectively. (The "Notice of FY 1996 Funds for Highway Use Tax Evasion Projects" and Sections 1040 and 1003© of ISTEA are reproduced inAttachment 2.) Mr. Baluch also stated that the FY 1996 allocation was not made until February 1, 1996, the latest since the first year of the Joint Project. He reported that, to date, 15 States have obligated their FY 1996 funds. He urged that all States obligate their funds promptly, and asked the lead States to inform the participating States of the need to act as quickly as possible. He reminded the Committee that the deadline for the States to obligate the FY 1996 funds is June 30, 1996.
Mr. Baluch went on to state that the Section 1003© reduction does not apply to the FY 1997 funds, so the allocation next fiscal year should again be $100,000 (lead States) and $50,000 (other States and D.C.). He did point out that it was possible that other funding limitations would be included in the FY 1997 Department of Transportation (DOT) Appropriations Bill that would reduce the FY 1997 allocation. However, if Congress does not specifically limit the funding, the FY 1997 allocation will revert to the $100,000/$50,000 level.
Mr. Baluch informed the Committee that continuation of the program after FY 1997 will have to be addressed as part of the next highway authorization bill. Mr. Baluch advised the Committee that the best way for State revenue agencies to keep abreast of the progress of the highway reauthorization bill is to work with the State transportation agency. He noted that every State transportation agency will be tracking the highway program reauthorization and will be able to provide the latest information on the status and content of the bill. Mr. Baluch recommended that State revenue agencies identify the person in the State transportation agency responsible for following the highway reauthorization bill, and express a desire to be kept informed of any motor fuel tax compliance provisions in the legislation. (A list of principles governing FHWA's actions in the highway reauthorization process is included as Attachment 3.)
Mr. Baluch advised the Committee that, irrespective of whether the program continues in FY 1998 and beyond, FHWA will recommend that all active tax compliance project (TCP) agreements be terminated when the State has expended all the funds under agreement through FY 1997. He noted that reasonable extensions of time into FY 1998 and possibly FY 1999 would be approved so that remaining funds can be expended. This will also provide a transition period, either to a new funding program, or to discontinuation of FHWA funding.
AGENDA ITEM 2: TASK FORCE REPORTS AND MEETING SCHEDULES
Ms. Bloom asked the nine lead States to give a status report on the activities of the task forces since the last Steering Committee meeting in Williamsburg, Virginia, in September 1995. The schedule of all task force meetings is included as Attachment 4.
New England
Mr. Alan Ferullo of the Massachusetts Department of Revenue reported that the New England Task Force met on October 13, 1995. The agenda included presentations from the U.S. Department of Energy, U.S. Department of Defense Criminal Investigative Service (DCIS), and U.S. Environmental Protection Agency (EPA). In addition to presentations on alternative fuels, the mission of DCIS, and reports from the States, the task force observed a demonstration of fuel sample testing with equipment produced by Boston Advanced Technology. The task force also had an opportunity to examine the specially equipped van used by EPA field staff for enforcement and sampling of fuel for conformity with EPA regulations. Mr. Ferullo advised the Committee that the States of Maine and Connecticut have contracted with IRS to perform on-road inspections of diesel fuel. Mr. Ferullo reported that the IRS Diesel Compliance Officers (DCO) are also performing inspections and there is now a DCO in each of the task force States. The DCOs reported that stop checks of over-the-road motor carriers have resulted in very few violations. Trucks which typically travel on local and rural roads appear to have more violations.
Mr. Ferullo also noted that the fuel tax project has resulted in a close working relationship with the EPA. He reported that Ms. Molly Magoon of EPA organized a meeting at the EPA Regional Laboratory in Lexington, Massachusetts, for personnel from the Massachusetts State Police, Department of Revenue, Division of Standards, IRS Criminal Investigation Division (CID), and IRS Examination Division. The objective of the meeting was to share information among agencies, open lines of communication with all interested agencies, and design a coordinated targeted enforcement strategy for the region.
Mr. Ferullo advised the Committee that the next scheduled meeting of the New England Task Force will be a joint meeting with the New Jersey Task Force in Hartford, Connecticut, on May 22, 1996. The State of Connecticut will host the Northeast Regional Federation of Tax Administrators (FTA) Motor Fuels Tax Section Annual Meeting on May 19-21, 1996, in Hartford, Connecticut.
New Jersey Task Force
Mr. Joe O'Gorman of the New Jersey Division of Taxation reported on recent task force activities. Most of the participating agencies met briefly in September 1995, following the FTA motor fuel section annual meeting in Williamsburg, Virginia. The next task force meeting, a joint meeting with the New England Task Force, will be held in Hartford, Connecticut, on May 22, 1996, following the Northeast Regional Meeting of the FTA motor fuel tax section.
The major ongoing activity of the task force is the joint audit subcommittee which includes representatives from each participating State. Four joint audits are currently underway.
Prosecutions are continuing on the indictments announced last fall, which involved alleged losses of some $140 million of State and Federal motor fuel taxes, one of the largest single cases ever indicted. The IRS Newark District has completed a major civil assessment which substantially increased the IRS assessment results for the latest reporting period, as discussed later by Mr. Ron Linden.
North Carolina Task Force
Mr. Robert Beck of the North Carolina Department of Revenue reported on the activities of the North Carolina Task Force.
He noted that all of the States in the task force were very active in motor fuel tax enforcement. The next meeting of the North Carolina Task Force will be held in Morgantown, West Virginia, on June 26. Mr. Beck also noted that the State of Kentucky, currently a member of the Publicus Task Force, had indicated its desire to also join the North Carolina Task Force. However, it appears that there is some difficulty with either the IRS or the State in the signing of the memorandum of understanding or the disclosure agreement. Mr. Beck noted that it would be helpful for the other participants of the North Carolina Task Force to have Kentucky as a member and he hoped that the IRS would assist in resolving whatever concerns might be present. Mr. Washburn of the IRS agreed to follow-up on the issue.
North Carolina has formed a State interagency task force consisting of representatives of IRS in North Carolina IRS, the North Carolina Departments of Revenue and Agriculture and Motor Vehicles to plan and conduct joint on-road dyed fuel enforcement operations. This group has conducted 16 joint operations since 1994. The initial results of the on-road testing showed a violation rate of nearly 10 percent. The most current operations show a violation rate of 3.3 percent which indicates an increase in voluntary compliance. The majority of the violations are now found in dual user businesses such as construction, logging, and farming. North Carolina passed dyed fuel legislation effective January 1, 1995. Since that time, 57 assessments have been made. The North Carolina Department of Motor Vehicles and the IRS are in the process of finalizing a contract to authorize Department of Motor Vehicle enforcement personnel to perform fuel inspections on behalf of the IRS. Twenty-five officers, based in different regions of the State will be trained to pull fuel samples. The North Carolina Department of Revenue and IRS also conducted 11 joint audits. Both the audit operations and the on-road enforcement activities help identify businesses and individuals that may be involved in motor fuel fraud.
North Carolina passed legislation moving the point of taxation to the terminal rack which became effective January 1, 1996.
The interagency task force which was initially established for purposes of on-road dyed fuel testing is now looking at other areas of fuel tax evasion, particularly waste oil and other blending operations. The North Carolina Department of Revenue has been working diligently on electronic data interchange applications. The motor fuel portion of the Integrated Tax System (ITAS) went on-line on January 1, 1996.
Mr. Beck then reported on activities in each of the other States in the North Carolina task force as follows:
Virginia
The Commonwealth of Virginia enacted dyed fuel legislation effective May 1, 1995. Virginia has entered an agreement with the IRS for dyed fuel testing and has done testing throughout the State. Based on information received from the IRS on the results of the fuel samples, assessments totaling $250,000 have been sent to 72 companies. In the week ending March 1, several operations were conducted and assessments totaling $51,000 were sent to five companies. Virginia became a member of the International Fuel Tax Agreement (IFTA) on January 1, 1996.
West Virginia
The West Virginia legislature is currently considering a bill prohibiting dyed fuel on the highway. The legislation has passed the House and is awaiting action by the Senate. If passed, it would become effective July 1, 1996. The penalty would be $10/gallon or $1,000, whichever is greater, plus a $5,000 refusal penalty. The West Virginia Public Service Commission is in contractual negotiations with the IRS to conduct fuel sampling, but it appears there is a funding delay. West Virginia will be hosting the Southern Region FTA Meeting on June 23-25, 1996, in Morgantown, West Virginia. West Virginia became a member of IFTA on January 1, 1996.
Tennessee
The Tennessee dyed fuel law took effect January 1, 1996. The Tennessee Department of Revenue has entered into a contract with the IRS for dyed fuel sampling and has been doing on-road inspections. The violation rate has averaged around 3 percent. The majority of the violations have been found in the logging and construction industry. Tennessee is currently considering moving the point of taxation to the terminal rack and is working with Indiana to prepare a draft for the 1997 legislative session. Tennessee now has ITAS in place and motor fuel is scheduled to go on-line in November 1996.
Georgia
The Georgia dyed fuel legislation took effect, July 1, 1995, and has provisions similar to the Federal law. The Georgia Department of Agriculture has signed a contract with the IRS to do sampling at retail outlets and at construction sites. Currently, the IRS DCOs are doing terminal, retail, and on-road inspections. Georgia became a member of IFTA effective January 1, 1996.
South Carolina
South Carolina moved the point of taxation to the terminal rack effective May 1, 1996. A dyed fuel law is also in place. South Carolina is also negotiating with the IRS to do fuel sampling, however, no funding is available at this point.
Florida Task Force
Mr. David Skinner of the Florida Department of Revenue reported on the activities of the Florida Task Force. He advised the Committee that Arkansas and Louisiana, which are members of the Texas Task Force, have now joined the Florida Task Force. The Florida task force met jointly with the Indiana and North Carolina Task Forces in November 1995 in Atlanta, Georgia. Unfortunately, the meeting coincided with the shutdown of the Federal Government and therefore the IRS was unable to attend. The State auditors and investigators who were present were able to share valuable information and discuss issues relating to fuel tax enforcement policy. The next meeting of the Florida Task Force will be held April 24-26, 1996, in Orlando, Florida. Mr. Skinner noted that as of July 1, 1996, all States in the Southeast will have dyed diesel laws.
Publicus Task Force (Indiana)
Mr. John Aikman of the Indiana Department of Revenue reported on the activities of the Indiana Task Force. Mr. Aikman noted that the task force continues to emphasize joint audits and investigations with sister States in the task force and with the IRS. Multi-state audits and investigations in cooperation with IRS have proved to be an effective and efficient method of enforcement. Indiana currently has 24 active investigations of suspected motor fuel tax evasion. Indiana is continuing its on-road dyed fuel enforcement effort and has issued 25 citations for on-road use of dyed diesel since the last report to the Committee. The Indiana Department of Revenue dyed fuel investigators are reviewing all supplier returns with the objective of tracking dyed fuel sales to the end user.
Mr. Aikman advised the Committee of the need expressed by all States in the task force for need for education of prosecutors and judges. He also requested information on the availability of a portable sulfur testing unit. Mr. Rich Ackerman of EPA indicated that EPA has information on and has tested various pieces of equipment and suggested that anyone desiring information on this equipment contact him. Mr. Aikman noted that the Publicus Task Force continues to work on an advanced fuel training course. A pilot presentation of the advanced training course was given the week of March 4-8 with 20 participants. Another session will be held for 40 participants the week of April 8-12, 1996, in Indianapolis, Indiana. The Publicus Task Force will meet in May 1996, however the location and specific dates have not been determined.
Texas Task Force
Mr. Jimmy Archer of the Texas Comptroller's Office reported on the activities of the Texas Task Force. He advised the Committee that the task force had met in Austin on January 18-19. At the meeting the group decided to form a subgroup to work on specific cases on a regional level. He indicated that blending and import/export fraud appear to be increasing. The Texas Task Force will next meet in the second week in July in either Albuquerque or Santa Fe.
NETASK (Nebraska Task Force)
Ms. Janet Stege of the Nebraska Department of Revenue reported on the activities of the Nebraska Task Force. She noted that the States in the task force had put a great deal of effort into dyed fuel on-road enforcement and in legislative activity aimed at curtailing abuses associated with the uses of dyed diesel fuel in taxable settings. To that end, the States of South Dakota, Nebraska, and Iowa prohibit the tax-exempt sale of undyed diesel. Purchasers who purchase undyed diesel for use in a tax-exempt activity must file for a refund. Ms. Stege noted that this type of legislation helps preclude ultimate vendor fraud as well as insuring that all undyed diesel fuel used on the highway is tax-paid. Ms. Stege also emphasized that rotating task force meetings among the States and focusing on regional projects and joint operations have combined to forge a strong regional identity among the NETASK State agencies involved in fuel tax enforcement. The NETASK will next meet in Cheyenne, Wyoming, on May 9-10, 1996.
Northwest Task Force (Oregon)
Mr. Quintin Hess of the Oregon DOT reported on the activities of the Northwest Task Force. He informed the Committee that the task force had met twice since the last meeting of the Steering Committee. The last meeting of the task force was held in Coeur d'Alene, Idaho, to discuss issues involving the importation of fuel from Canada. In addition to the Northwest Task Force States, the States of North Dakota, Minnesota, California and Arizona also attended. Representatives of the Province of Alberta and Revenue Canada also participated. (The Alberta officials participated via a conference call.) The major issue involves the importation of fuel from the Canadian Provinces which is declared to be dyed, but is, in fact, undyed; or if it is dyed, does not meet the IRS dye specifications. As a result of the information shared at the meeting, it appears that some of this activity may be intentional fraud, while some of the problem may be the result of the inconsistency between provincial and IRS regulations. The task force concluded that more attention needed to be focused on border issues. The effect of the North American Free Trade Agreement (NAFTA) on fuel import/export regulations was also raised at the task force meeting. The Steering Committee agreed that border issues need to be specifically addressed but that more information on the matter was desirable. The Committee recommended that IRS and FHWA contact the appropriate Federal officials to insure that if any NAFTA issues are present, the requisite protocols are followed. The IRS and FHWA agreed to do so, and to report their findings and recommendations regarding international border importation issues at the next Steering Committee meeting.
California
Mr. Allan Stuckey of the California Board of Equalization reported on the activities of the California Task Force. He advised the Committee that the task force continues to meet regularly to share information and that the subcommittee set up to work jointly on specific cases continues to be extremely valuable. California continues to work on an agreement with the IRS for diesel fuel sampling. Blending and imports continue to be a problem. California may also pilot a fuels fingerprinting program for the IRS, as discussed later by Mr. Ricky Stiff in Agenda Item 9. The next meeting of the task force will be in Monterey, California, on April 24, 1996. California will also be hosting the Pacific Region FTA Motor Fuel Tax Conference in Monterey on April 25-26, 1996.
AGENDA ITEM 3: DISCUSSION OF TASK FORCE REALIGNMENT AND PROJECT ORGANIZATION AFTER FY 1997
Ms. Bloom stated that at its last meeting on September 13, 1996, the Steering Committee determined that it was necessary to consider the likelihood of continuing a formal project structure after FY 1997 if FHWA funding did not continue. The Committee had requested the task forces to discuss this issue, as well as possible task force realignment, composition, future activities and project goals and report the consensus of each task force at this meeting. In addition, the Committee had requested the Texas Comptroller's Office to report to the Committee on its intention to continue its lead State role. Ms. Bloom requested each lead State to report on the task force findings.
Mr. Jimmy Archer stated that the Texas Comptroller's Office was committed to serving as a lead State for the remainder of the project. He noted that although Arkansas, Louisiana and New Mexico had joined other task forces, the current composition of the Texas Task Force (Texas, Louisiana, Missouri, Oklahoma, Arkansas, and New Mexico) had a strong regional identity.
Mr. Joe O'Gorman stated that while the States of the New Jersey Task Force did not feel realignment was necessary, they did feel the option to join additional task forces should be preserved.
Mr. Alan Ferullo stated that the States of the New England Task Force would do their best to continue to carry on the objectives of the Joint Project. He noted that it would probably be easier for this task force to overcome travel concerns because the geographic area comprising the task force allowed for travel by automobile, whereas other task forces were dependent on air travel.
Mr. John Aikman reported that while the States of the Publicus Task Force would like to continue the work of the Joint Project, realistically, without FHWA funding, the ability to coordinate enforcement activities on a regional level would almost certainly be lost. Mr. Aikman specifically stated that the two areas where the funding was critical, were travel and training.
Mr. Robert Beck stated that the North Carolina Task Force States were pleased with their current alignment, but each State felt it was necessary to have the option to join additional task forces where specific enforcement issues made it appropriate. He also reported that the North Carolina Task Force States felt that without FHWA funding, especially for travel and training, the forums that have been established for the exchange of information and for planning enforcement strategy would suffer. However, the North Carolina Task Force would try to maintain some regional structure even if FHWA funding did not continue.
Ms. Janet Stege reported that the Nebraska Task Force States were satisfied with their current alignment. She stated that the task force was committed to continuing the work of the Joint Project even if FHWA funding was unavailable. However, as with other task forces, she noted that the NETASK States felt it was unrealistic to assume that motor fuel tax enforcement would continue to have the same emphasis or focus as it had under a formal Federal/State structure. She also stated that the NETASK States felt that it was necessary for the IRS to reaffirm its commitment to the work of the project in each of the States. She indicated that while the cooperation and interest of the IRS in the lead State of Nebraska was excellent, other States of NETASK did not enjoy the same cooperative relationship with their State IRS counterparts. Messrs. Aikman, Skinner, Hess and Stuckey concurred in Ms. Stege's remarks concerning the need for the IRS to reaffirm its interest and commitment to the project goals in each State. Mr. Washburn stated that recent IRS restructuring might have contributed to a perceived lack of interest. He stated that IRS remained committed to the project at all levels and he would review the project goals with all the IRS regions and districts.
Mr. David Skinner reported that the Florida Task Force did not feel realignment was necessary, but that the option to join more than one task force was important. He also noted that FHWA funding was critical to information sharing among the States, most particularly for specific intelligence information on blending problems, tracking sources of blending stocks, import/export information and foreign imports. Without the funding for travel and training, it would be difficult to orchestrate the meeting forums, particularly with industry, which have proved so valuable for the States of the Florida Task Force.
Mr. Stuckey reported that the California Task Force would attempt to continue its activities, however the scope of the effort would be severely curtailed without FHWA funding. He also noted that without FHWA involvement, the overall national focus and administrative coordination with other task forces and other Federal agencies would be lost almost instantly. The consensus of the California Task Force was that both FHWA funding and administrative coordination were critical to continuing a national coordinated enforcement strategy to deal with fuel tax evasion. Mr. Stuckey also reported that the States were flexible on rotating lead State status.
Mr. Hess stated that loss of FHWA funding would have an immediate effect in certain States of the Northwest Task Force. The States of Washington and Utah would probably lose investigative staff dedicated to motor fuel enforcement, and the States of Nevada and Utah would curtail their activities on import/export issues sincethe lack of travel funding would necessarily impair intelligence sharing. Mr. Hess stated that the Northwest States were also flexible on rotating lead State status.
Mr. Ray Barnhart reminded the Committee that at its recent Annual Meeting, the American Association of State Highway and Transportation Officials (AASHTO) had passed a resolution endorsing the continued funding of the project. He noted that the resolution had three parts, and called for:
(1) Reauthorizing FHWA's Joint Federal/State Motor Fuel Tax Compliance Project at no less than its current level of funding ($5million annually);
(2) Enacting legislation to provide that a State Transportation Department could, at its option, expend up to 1/4 of 1 percent of its Federal-aid apportionments on motor fuel tax theft countermeasures;
(3) Enacting legislation authorizing and directing FHWA toexpend no more than $15 million for the development, through a private, non-governmental contract, of a computerized system for fuel tracking. The system would be developed in accordance with IRS needs and accessible to Federal and State governmental authorities.
Mr. Otto Sonefeld of AASHTO advised the Committee that this resolution received almost unanimous approval by AASHTO Board of Directors. The Resolution is reproduced as Attachment 5.
Ms. Bloom summarized the discussion on this agenda item as follows:
The consensus of the States participating in the Joint Project is that:
(1) FHWA is crucial to the administration of a national project and to the information sharing process among the task forces and various participating Federal agencies;
(2) the task forces share an overall commitment to continue the work of the Joint Project, but it will be difficult to do so without Federal funding;
(3) a realignment of task forces is not a major issue, provided the States retain the option to participate in more than one task force as dictated by specific enforcement concerns; and
(4) the States are flexible in rotating lead State status, but FHWA should coordinate this decision with the IRS to insure that adequate IRS resources are available in the lead State.
Ms. Bloom asked the group whether this summation reflected the consensus of the task forces. The Committee unanimously agreed that it did.
AGENDA ITEM 4: DEPARTMENT OF JUSTICE REPORT
Ms. Bloom requested Ms. Karen Wehner of the Department of Justice (DOJ) Tax Division to brief the Committee on recent DOJ activity in the motor fuel area. Ms. Wehner reported that, like several other Federal agencies, the DOJ does not have a budget. She stated that the Department is funded through the end of the week, although it is expected that Congress will extend funding for some period. However, she advised the Committee that the uncertainty of funding, combined with cuts in the overall DOJ budget will impact all divisions in the Department, except the Criminal Division. Therefore, all divisions, including the Tax Division will absorb a share of the cuts. In motor fuel tax cases, the travel budget is a very large part of prosecution expenses. Therefore, as the Department's travel budget is curtailed, some of these cases will be turned over to the U.S. Attorneys offices for prosecution.
Ms. Wehner stated that the Tax Division does remain committed to prosecuting excise tax cases. She reported that the division was very pleased with the sentences that had been handed down in several recent cases, especially the 20-year sentence given to Mr. Tony Morelli, the lead defendant in a $60 million evasion case in New York/New Jersey. Several other recent sentences include 60 months for the Macchias (father and son) and 77 months for Mr. Marat Balagula. Other on-going motor fuel tax litigation include the Larry Iorizzo case in Texas, which has gone to jury, and several cases under indictment in New Jersey involving a $132 million fraud scheme. Ms. Wehner reported that there is a significant case in California which is currently awaiting a trial date as well as a case set for trial in March in Houston. She also reported that there are several other cases which have reached the indictment stage in the Northeast, West, and South. Ms. Wehner told the Committee that the Department was also prosecuting other excise tax cases involving the taxes on tires and on Freon. She invited anyone who wished further details on any of these cases to contact her at (202) 514-5615.
AGENDA ITEM 5: DEFENSE CRIMINAL INVESTIGATIVE SERVICE (DCIS)/ DEFENSE FUEL SUPPLY CENTER REPORT (DFSC)
Ms. Bloom asked Ms. Christine Poston of DFSC and Mr. William Christensen of DCIS to brief the Committee on activities of their respective agencies involving motor fuel issues.
Ms. Poston noted that DFSC is having difficulty in some IRS Districts regarding the taxation of fuel it purchases for the National Guard. The DFSC takes the position, based on applicable court cases, that since the National Guard is a State agency, fuel purchased for its use is tax-exempt. Ms. Poston noted that while some IRS Districts concur, others do not. Ms. Poston asked Mr. Washburn's assistance in providing uniform guidance to the IRS Districts on this issue. Mr. Washburn agreed to do so.
Ms. Poston indicated that she had several requests to give presentations at upcoming FTA Regional Motor Fuel Tax Meetings on the work of DFSC in combating fraud involving government purchases of fuel. She stated that travel, budget, and time limitations made it impossible for her to attend each of these meetings. However, she stated she would try to prepare a video which could be used at all of the FTA regional meetings. Ms. Poston provided a chart of the DFSC geographic regions for purchase of ground fuels.
Ms. Poston reiterated her request for State agencies and other Federal agencies to contact her when they have reports of indictments and convictions involving motor fuel fraud. She also provided information on how to contact her. She also indicated that she rarely receives requests from State agencies on individuals and companies which have been debarred from contracting with the government. She noted that this information could be valuable for State agencies investigating fuel tax fraud as well as for environmental protection agencies. Ms. Poston provided a data base printout of individuals/companies which have been either indicted or convicted of fuel fraud. This is an update of the list she provided the Committee last September. She noted that while DFSCconfronts various types of fraudulent activity involving its fuel contracts, some of the most prevalent are the waste fuel blending issue, product substitution and the outright theft of fuel. The material distributed to the Committee by Ms. Poston is included as Attachment 6 and updates will be posted on the FHWA Electronic Bulletin Board. Mr. Christianson reiterated Ms. Poston's comments on waste oil blending and noted the environmental crimes that are often associated with blending schemes. Mr. Christensen provided a list of DCIS offices and contacts for the Committee which is included as Attachment 7.
AGENDA ITEM 6: RESULTS OF DYED DIESEL PROGRAM/FUNDING
Ms. Bloom asked Mr. Marty Washburn of the IRS to discuss the results of current on-road testing programs and to update the Committee on the status of the IRS/State contracts for dyed fuel sampling.
Mr. Washburn advised the Committee that of 31,000 on-road inspections in 1995, the compliance rate for "over-the road" motor carriers was in the 96-98 percent range. Mr. Washburn also reported that overall diesel tax revenue collections are holding steady. Revenue increased by about 1 percent, but the actual net revenue was down slightly because refunds also increased.
Mr. Washburn advised the Committee that the IRS has signed contracts with 15 States to do dyed fuel sampling and 10 contracts are pending. He noted that funding is very limited, but enough is available through FY 1997 to fund these contracts. He reported that the IRS is revisiting some of its earlier decisions on funding and on required methodology. The IRS regions and districts have been asked to re-examine earlier proposals to see if the available funding could be stretched further. In addition, the IRS is reviewing the actual testing procedures to see if a quicker method of drawing the samples can be used. He indicated that on-road testing is being conducted in all States either by IRS DCOs or by State personnel.
Ms. Bloom then asked Messrs. Baluch and McCauley to discuss the FHWA funding mechanisms for the IRS/State contracts. Mr. Baluch advised the Committee that there appeared to be some confusion over the funding mechanism to reimburse States. He noted that in order to be reimbursed States must not only sign an agreement with IRS but also with FHWA. Some States which had completed the IRS agreement had yet to do so with FHWA. Mr. Baluch noted that these FHWA agreements could take three forms: an agreement with the State Motor Carrier Safety Assistance Program (MCSAP) agency, an amendment to the tax compliance agreement with the State revenue agency, or an entirely separate agreement between FHWA and another State agency. Mr. Baluch stated that each of these methods seemed to be working relatively well.
Mr. McCauley concurred that FHWA Office of Motor Carriers had encountered few administrative difficulties in serving as a conduit for delivering IRS funds to the State agencies participating in the MCSAP Program. However, he went on to say that while the Office of Motor Carriers had no difficulty using MCSAP as a way to funnel the IRS funds to the States, MCSAP itself was a safety program. He stated that the safety related aspects of dyed fuel enforcement are not readily apparent. Therefore, the Office of Motor Carriers would be concerned with any effort to use MCSAP funds for dyed fuel enforcement since this would dilute the safety mission of the organization. He reiterated that the Office of Motor Carriers had no difficulty in using the current MCSAP administrative procedures to funnel fuel enforcement funding to the States, provided the money was made available other than as part of the MCSAP program.
Ms. Bloom then asked Mr. Washburn to address IRS funding of these State contracts after FY 1997. Mr. Washburn indicated that the IRS budget is and will continue to be very tight and that difficult decisions on programing lay ahead, including continued funding for the State dyed fuel contracts. He stated that he hoped that if IRS funding was unavailable, those States which decided to continue on-road sampling would continue to share information with the IRS. He also expressed the hope that States would continue to use the U.S. Air Force laboratories or laboratories with the same standards. This would enable IRS to use the State information in their assessments and any related prosecutions.
Mr. John Huber of the Petroleum Marketers Association of America (PMAA) asked Mr. Washburn whether any statistics were available on assessments and penalties attributed to on-road enforcement. Mr. Washburn stated that the IRS did have these statistics, but that he did not have them available today. Mr. Huber stated that he hoped the IRS would publicize these numbers because of their deterrent value. Ms. Barbara Bush of the American Petroleum Institute (API) concurred with Mr. Huber's statement and also said that publication of these statistics would give heart to the legitimate upstream industry which feels that all the enforcement is at the terminal and none is on the highway. Mr. Washburn indicated that he would make the statistics available to Mr. Huber and Ms. Bush and anyone else who was interested.
AGENDA ITEM 7: IRS FINAL DYED DIESEL RULES/TREATMENT OF KEROSENE/INDUSTRY CONCERNS/EPA REPORT/ AASHTO SURVEY OF STATE TRANSPORTATION AGENCIES
Ms. Bloom asked Mr. Frank Boland of the IRS to discuss the status of the final IRS rules implementing the dyed diesel provisions of the Omnibus Budget Reconciliation Act of 1993. Mr. Boland stated that the final regulations were not completed but would be available by the end of the year. Mr. Boland stated that the diesel regulations would be consolidated with the gasoline regulations. Ms. Stege asked Mr. Boland how the regulations would treat kerosene. Mr. Boland replied that the issue of the treatment of kerosene was still under discussion. He went on to state that since the regulations had not been finalized he was not able to respond to specific issues that the regulations will touch. [The final regulations were published in the Federal Register on March 14. A notice of proposed rulemaking on dye injection systems and markers was also published in the March 14 Federal Register. Both are reproduced in Attachment 8.]
Ms. Bloom then asked industry participants to brief the Committee on any remaining concerns they had regarding the implementation of the dyed fuel law and regulations.
Ms. Bush replied that API members had four major concerns, all of them operational in nature. First, she stated that as she had mentioned earlier, the issue of enforcement below the terminal rack was of great importance to API members. She noted that in order for the dye system to work, enforcement was needed at all levels in the chain. There was concern among API members that enforcement was being concentrated at the terminals and very little was being done on the highway. She reiterated the need for information and publicity on roadside enforcement. Second, she noted that the industry was deeply concerned about what they perceive to be an excessive dye concentration requirement. Ms. Bush explained that the high concentration requirement has resulted in a two-step dye process. In order to avoid excessive volumes of transmix (the fuel shipped in the pipeline separating dyed and undyed product) fuel is being dyed at lower amounts at the refinery and then additional dye is added at the terminal. This is both cumbersome and costly. The third issue involves the segregation of jet fuel. Jet fuel engine manufacturers require that the fuel used in these engines contain no presence of dye--even trace amounts. Therefore, the shipment and delivery of jet fuel which is free of any dye, either from pipeline, storage or transportation, has added costs. The petroleum industry is currently working with jet engine manufacturers to investigate whether the current standard could be modified. In the interim, however, the liability associated with dye tainted jet fuel requires additional safety precautions to prevent dye contamination. The final issue identified by Ms. Bush involved the industry need for a dye concentration tolerance. She noted that currently the IRS regulation does not provide for a tolerance in the amount of the dye injected into the fuel. The result is that refiners and terminal operators are always required to "overdye" to insure that the product meets the IRS standard. This exacerbates the problems mentioned earlier.
Mr. Huber of PMAA noted that the regulations do not contain a refund mechanism when undyed and dyed fuel are inadvertently mixed. This remains a significant problem for the marketers.
Ms. Poston of DFSC noted that the jet fuel issue mentioned by Ms. Bush was also a significant issue for DFSC.
Mr. Rich Ackerman of EPA noted that dyeing of fuel for EPA purposes (sulfur content) is done at the terminal. Mr. Baluch asked whether EPA had seen a reduction in production of high sulfur fuel. Mr. Ackerman replied that while EPA has a long-term rulemaking on emission requirements for off-road engines, nothing in the current EPA agenda will drive a reduction in the production of high sulfur fuel for off-road purposes. He noted that EPA investigations focus on all levels in the production and distribution chain. Results show that there are very few violations at the upstream level. Most of the violations are in the downstream chain. He noted that EPA investigators have not discovered any large scams, but do still find some high sulfur home heating oil being sold as diesel fuel. Mr. Ackerman stated that 95 percent of EPA's testing is done by outside contractors.
Mr. Ackerman reiterated that EPA had a great deal of information on test equipment, both portable and stationary. He stated that if anyone wished any further information to call him, and he would direct them to the appropriate EPA office.
Mr. Sonefeld of AASHTO reported that AASHTO had been contacted by a firm reviewing the process used to supply diesel fuel to National Guard units (Attachment 9). The issue involves the situation in which a National Guard vehicle which is allowed to use dyed fuel, lacks access to a refueling point with dyed fuel and refuels with undyed fuel. This alters the dye concentration and results in a technical violation of the IRS regulation. AASHTO was contacted because the same situation would apply to any State-owned vehicle. Mr. Sonefeld reported that he had sent letters to all of the State DOTs and had received a reply from 25. Of these, 17 said they did not see it as a major problem. However, the majority of them also indicated that since it was a technical violation, it ought be addressed by IRS. Mr. Sonefeld stated that when he received the rest of the replies, he would notify FHWA of the result.
AGENDA ITEM 8: FEDERATION OF TAX ADMINISTRATORS (FTA) REPORT
Ms. Bloom noted that one of FHWA's most valuable partners in the fuel tax compliance effort has been FTA. She stated that FTA had provided FHWA an introduction to State revenue agencies, an element which has proved to have been a key component of the Joint Project's success. In addition, FTA developed at FHWA's request, a training program for fuel tax auditors and investigators. The training programs have provided instruction for over 1200 State and IRS auditors and investigators. Ms. Bloom asked Mr. Harley Duncan, Executive Director of FTA, to report on FTA's motor fuel tax activities.
Mr. Duncan advised the Committee that FHWA had exercised its option under an existing contract with FTA to fund four additional training programs. He stated that the FTA, FHWA and IRS representatives had met on February 12 to discuss the content and scheduling of the programs. At that meeting a schedule was tentatively set which would have provided for the first course (the basic course) to be held this summer. Mr. Duncan said that, regretfully, it appeared that other FTA commitments precluded the presentation of any courses prior to November or December of 1996. Mr. Stuckey asked Mr. Duncan to reconsider this decision as the State of California was greatly expanding its fuel audit and investigation staff and had 30 individuals which would need training in the near future. Mr. Stuckey noted that FTA provided the only formal, structured training for fuel tax auditors and investigators. Messrs. Beck and Skinner also indicated that there were individuals in their respective State agencies as well as in the States in their task forces which also needed training. Mr. Skinner stated that December would mean that there was almost a 2-year gap between basic training courses. He stated that he hoped FTA could arrange for an earlier date. Ms. Ana Escobar from the District of Columbia advised that since her staff was completely new and had no experience in fuel tax auditing and investigation, they all needed to be trained as soon as possible. Mr. Duncan indicated that he would reexamine the matter and advise FHWA shortly. [The FTA was unable to accommodate the State requests for moving up the training courses. The final FTA training schedule is included as Attachment 10.]
Mr. Duncan related that FTA had been requested to survey the States on the penalties imposed for motor fuel tax fraud. He stated that the FTA Board of Directors had determined that this was not a high priority. Therefore, FTA will not be doing a State penalty survey at this time.
Mr. Duncan also briefed the Committee on the work of the FTA Motor Fuel Tax Uniformity Committee. He noted that for the last several years, the Committee, in cooperation with industry participants, had worked on several fronts to improve fuel tax reporting information. To that end, the Committee had formed several subcommittees which had done extensive work in the areas of uniform forms, schedules and definitions. Several subcommittees were also established to work on the areas of fuel accountability and tracking, electronic reporting and model legislation.
Mr. David Briedenbach asked why the Model Legislation subcommittee was working on drafts which have several different points of taxation. Messrs. Beck and Duncan replied that, as an organization of State officials, it would be inappropriate for FTA to suggest that States adopt a particular point of taxation. The role of the Uniformity Committee and FTA was to assist States to achieve a commonality of definitions and forms and schedules, irrespective of the point of taxation.
Mr. Briedenbach asked how much Federal funding was directed to the Uniformity Committee. Mr. Baluch replied that there is no specific funding allotted for the Uniformity Committee. However, States may, if they choose, use the FHWA tax compliance grant money for travel expenses of individuals participating in Uniformity Committee activities. Ms. Mary Moehring of FHWA indicated that the early work of the FTA Uniformity Committee was instrumental in the development of the Joint Project and its continued work has been extremely important in the long term State goal of total accountability for motor fuel shipments.
Mr. Duncan then reminded the Committee that the Annual Meeting of the FTA Motor Fuel Tax Section will be held in Harrisburg, Pennsylvania, on October 2-5. He stated that at this time the agenda for the meeting was completely open. He invited agenda suggestions from the Steering Committee and the task forces.
Ms. Bloom requested that the IRS participants brief the Committee on recent IRS activities.
Mr. Gary James of the Criminal Investigation Division reviewed several of the recent motor fuel tax criminal indictments and prosecutions. He indicated that, while the Criminal Investigation Division continues to see motor fuel tax fraud schemes, overall, these schemes are of considerably less magnitude than schemes of past years. He stated that the multimillion dollar cases involving major organized crime figures appear to be a thing of the past. He attributed this to changes in the law, the successful prosecution of a large number of major cases, and the attendant publicity surrounding these prosecutions. He noted, however, that blending schemes do appear to be on the rise. No major dye removal schemes have surfaced. Mr. James reported that in FY 1995, over 83 investigations were undertaken and 90 prosecutions were recommended. Convictions for FY 1995 totaled 55, down slightly from 79 in FY 1994. Mr. James provided recent criminal investigation statistics which are included as Attachment 11.
Mr. Ron Linden of the Examination Division reported that the IRS had applied over 128 percent of the time originally committed to the Project. He noted that for FY 1995, project figures show $36.9 million in tax and penalties assessed. This constitutes $1,871 per hour and a benefit/cost ratio of $24:$1. Mr. Linden indicated that this is a rather significant increase compared to the prior year figure of around $13:$1, and is due to one major fraud case in New Jersey which had reached the civil assessment stage after having been in the criminal process. Mr. Linden stated that for the first three months of 1996, the return was approximately $1,000 per hour, and the benefit/cost ratio was $13:$1. He anticipated this figure to rise somewhat by the end of the year.
Mr. Larry Hecksher of the Examination Division briefed the Committee on revenue trends. He reported that it appears that the $1 billion revenue increase seen in 1994 in diesel fuel tax is holding steady. He noted that there is some concern in the area of refund claims, and the IRS will be monitoring this situation closely. In addition, he noted that as part of the dyed fuel program, the IRS is developing a new compliance strategy/methodology for dual users--as dual users appear to be the most prone to violations involving use of dyed fuel.
Mr. Ricky Stiff briefed the Committee on issues involving native American fuel sales. He noted that while the IRS had some measures available to insure the collection of the Federal tax on sales by native Americans to non-tribal members, it had limited ability (in part due to the recent U.S. Supreme Court decision involving the Oklahoma fuel tax) to assist the States in their mounting concerns over native American fuel sales to non-tribal members where the State tax was not collected or remitted. Mr. Stiff stated that for Federal motor fuel tax purposes, a native American tribe is treated as a State or local government. Therefore, while fuel used for tribal purposes is exempt from the Federal tax, personal use by individual native Americans is not. Mr. Stiff provided a copy of the applicable law and regulations to the Committee which is included as Attachment 12.
Mr. Stiff informed the Committee that the issue of blending/cocktailing is becoming a more serious problem. He stated that IRS is examining a system for fuels fingerprinting called the Excise Chemical Analysis Research of Distillate Distribution which would enable the IRS to track all blend stocks to their source. Mr. Stiff reported that negotiations were currently underway with the State of California to serve as a pilot for this system.
Mr. Stiff asked Ms. Helen Curtis Brown of the IRS to describe the activities of the IRS task force which has been set up to examine the problem of "below the rack blending." Ms. Brown discussed the work of the IRS blending task force. She noted, as had previous speakers, that blending fraud seems to be increasing. As part of the work of the task force, IRS has been working with U.S. Air Force laboratories to do chemical analyses of fuel sold in several retail stations in the Atlanta area. She asked Mr. Philip Howard, a chemist in the U.S. Air Force Laboratory in Cape Canaveral, Florida, to describe the results of some of these samples. Mr. Howard displayed several visual samples as well as charts of the chemical composition of the samples. Of the samples provided, several had been blended with various types of components and at least one of them was extremely volatile.
Mr. Stiff reported that IRS has a working model of the Excise Tax Fuel Information Reporting System but that no additional work had been done due to lack of funding. There was no status report on the Form 637 Registration System.
AGENDA ITEM 10: DYED DIESEL TESTING EQUIPMENT
Ms. Bloom postponed the discussion of this item due to the lateness of the hour. She indicated it would be addressed at the next Steering Committee meeting.
AGENDA ITEM 11: DISCUSSION OF COUNCIL OF STATE GOVERNMENTS (CSG) OUTREACH SYMPOSIUMS
Ms. Bloom requested Mr. Robert Silvanik of the CSG to brief the Committee on the FHWA/CSG contract to present several symposiums on State highway use tax compliance.
Mr. Silvanik first described the organizational structure and funding of CSG for the Committee. He noted that CSG's preliminary studies indicated an aggregate State road tax evasion figure of $1.4-$1.8 billion. He noted that this does not include evasion of other taxes that may be linked to road taxes. He noted that CSG would be preparing an extensive report on State road fund tax evasion. The report will be available in April. As part of its contract with FHWA, CSG will develop several symposiums focusing on the issues surrounding road tax evasion. These symposiums will be presented at various meetings of State elected officials and State fiscal and policy officers. Mr. Silvanik noted that these symposiums will give the FHWA Tax Compliance Project additional exposure to State decision makers and will help document the dividends that States can reap by focusing on tax enforcement and compliance activities. Mr. Silvanik indicated that specific dates for the symposiums would be available shortly.
Ms. Bloom thanked everyone for their participation and reminded the group that the next Steering Committee Meeting will be held in conjunction with the Annual Meeting of the FTA Motor Fuel Section in Harrisburg, Pennsylvania, on Wednesday afternoon, October 2, 1996.
DECISION ITEMS:
(1) Mr. Marty Washburn agreed to follow-up with IRS officials in Kentucky regarding the memorandum of understanding and disclosure agreements necessary to expedite Kentucky's affiliation with the North Carolina Task Force.
(2) The IRS and FHWA agreed to brief appropriate administration officials involved in NAFTA implementation on the tax issues involving the importation of fuel from Canada. The IRS and FHWA agreed to provide the Steering Committee with recommended actions to address the concerns raised by the States of the Northwest Task Force.
(3) Mr. Washburn agreed to review the goals and requirements of the Joint Project with all of the recently reorganized IRS regions and districts.
(4) The consensus of the State participants in the Joint Project regarding the continuation of the activities of the Joint Project after FY 1997 without FHWA funding was:
The FHWA is crucial to the administration of a national project, and to the information sharing process among the task forces and various participating Federal agencies;
The task forces share an overall commitment to continue the work of the Joint Project, but will find it difficult to do so without Federal funding;
The realignment of task forces is not a major issue, provided the States retain the option to participate in more than one task force as dictated by specific enforcement concerns; and
States are flexible in rotating lead State status, but that FHWA needs to coordinate with IRS to insure that adequate IRS resources are available in the States selected as lead States.
(5) Mr. Washburn agreed to provide uniform guidance to the IRS districts on the tax-exempt status of fuel purchased by DFSC for National Guard units.
(6) Mr. Washburn agreed to provide FHWA and petroleum industry representatives, statistics involving assessments and penalties attributed to on-road enforcement of the dyed fuel regulations.
(7) Mr. Sonefeld agreed to provide FHWA with the final results of the survey of State DOTs on whether the IRS regulations should be amended to take account of "technical violations" of the dye concentration requirements.
(8) Reports on testing equipment will be taken up at the October 2, 1996, meeting of the Steering Committee.
(9) Mr. Silvanik will provide FHWA a list of dates for the Road Tax Evasion Outreach Symposiums.
