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The twelfth meeting of the Steering Committee for the Joint Federal/State Motor Fuel Tax Compliance Project took place on Wednesday, September 13, in Williamsburg, Virginia. The meeting was held in conjunction with the Federation of Tax Administrators (FTA) Motor Fuel Section Annual Conference. Attachment 1 is the list of participants.
Mr. Stephen Baluch of the Federal Highway Administration (FHWA) chaired the meeting. He began the meeting by thanking the FTA Motor Fuel Tax Section President Earl F. (Jack) Crago, Pennsylvania Department of Revenue, and former President, Julian Fitzgerald, Sr., Virginia Department of Motor Vehicles, for hosting a very successful meeting. Mr. Baluch particularly thanked the FTA for the award presented to FHWA and other Federal agencies and industry groups for their efforts in combatting motor fuel tax fraud.
AGENDA ITEM 1--TASK FORCE REPORTS AND MEETING SCHEDULES
Mr. Baluch asked each task force lead State to report on their upcoming meetings. The updated meeting schedule is provided as Attachment 2. After discussion, the meeting participants agreed to schedule the next meeting of the Steering Committee on March 11, 1996, from 8:30 a.m. to 4:00 p.m. at the FHWA Headquarters in Washington, D.C. To facilitate advance planning of travel schedules, Mr. Baluch recommended the same time slot be reserved for the spring meeting in 1997. The fall meetings of the Steering Committee will be scheduled as usual to coincide with the FTA annual motor fuel conference, i.e. October 1996 in Harrisburg, Pennsylvania, and September 1997 in St. Louis, Missouri.
Mr. Baluch then asked the lead State representatives to report on the activities of their task forces.
New England Task Force
Mr. Tony Gentile, Massachusetts Department of Revenue, stated that none of the States in the New England Task Force are contemplating a change in the point of taxation. The State of Connecticut is working on a diesel fuel dyeing proposal. None of the States have major criminal cases to report at this time. The task force has been working closely with Ms. Molly Magoon of the Environmental Protection Agency on diesel fuel inspections.
New Jersey Task Force
Mr. Joe O'Gorman from the New Jersey Division of Taxation reported that recent indictments from cases in the region totaled over $144 million in stolen fuel taxes. The New Jersey Task Force has formed a working audit group with two auditors from each State. The group is currently working on three joint audits.
North Carolina Task Force
Mr. Robert Beck, North Carolina Department of Revenue, reported that North Carolina has moved the point of taxation for gasoline and diesel fuel to the rack, effective January 1, 1996. South Carolina has also moved the point of taxation for gasoline and diesel to the rack, effective May 1, 1996. Mr. Beck indicated that in recent roadside inspections of dyed diesel fuel, officers have discovered that visual inspections alone can be misleading. He stated that some fuel samples which appeared not to be dyed, were later found in lab tests to have traces of dye. He suggested that it is important to do some lab tests of fuel samples that do not appear to contain dye, as well as the fuel samples which appear to be dyed.
Mr. Beck also mentioned development of a dye-sensing device that did not even require drawing a fuel sample for visual inspection. Mr. John Aikman, Indiana Department of Revenue, suggested that FHWA act as a clearinghouse for information on dye detection and testing equipment since a number of testing devices are available or are rumored to be available and some States are developing or testing devices of their own. The Steering Committee participants agreed that FHWA should serve as a clearinghouse for this information and Mr. Phil Embry agreed to provide information on the "Quadro Non-intrusive Tracker" available from a Georgia company. The information provided by Mr. Embry is available upon request. Steering Committee members are advised to provide any information on testing devices to the FHWA Fuel Tax Evasion Program Manager (HPP-13) for further distribution. Mr. Baluch suggested that the periodic distribution of task force meeting minutes by FHWA to the lead State and IRS lead district representatives could also include dye testing equipment updates.
Florida Task Force
Mr. David Skinner, Florida Department of Revenue, reported that the task force had met in April 1995 in Jackson, Mississippi. Several Defense Criminal Investigative Service (DCIS) investigators attended the meeting as did Ms. Christine Poston from the Defense Fuel Supply Center (DFSC). He reported that the task force has formed a subcommittee chaired by Ms. Jane Brough of the Internal Revenue Service (IRS) Atlanta District to work with the Corps of Engineers. The task force hopes to be able to use Corps of Engineers data to track fuel shipments on the intracoastal waterways. He also reported that investigators from the U.S. Department of Transportation (DOT) Office of Inspector General (OIG) are working with DCIS and with the IRS Criminal Investigation Division (CID) on several cases in the southeast. Mr. Skinner noted that there will be a joint meeting of the Florida, North Carolina, and Indiana task forces in Atlanta, Georgia, on November 15-17, 1995.
Publicus (Indiana) Task Force
Mr. Aikman reported that the State of Indiana had recently enacted legislation to reduce the penalty for the use of dyed fuel on the highway from a felony to a progressive structure which specifies "infraction" for the first offense, "misdemeanor" for the second offense, and "felony" for the third and any subsequent offense. All States in the Publicus task force will be participating in an advanced fuel tax training seminar, tentatively scheduled for 2 weeks in February 1996. Indiana has three new positions dedicated to dyed fuel enforcement. Ohio has sent two individuals to the IRS "train the trainer" program for dyed fuel inspectors. Indiana also continues to work with a local lab to develop procedures for the proper storage of dyed fuel evidence.
Texas Task Force
There was no report from the Texas Task Force.
NETASK (Nebraska) Task Force
Ms. Janet Stege, Nebraska Department of Revenue, reported that 25 assessments had been made for the use of dyed fuel on the highway in Nebraska. Minnesota has taken 2,300 fuel samples under a fuel sampling agreement with the IRS and made 53 assessments. South Dakota is working on an IRS agreement. South Dakota will raise its point of taxation for gasoline and diesel to the terminal rack, effective January 1, 1996. In addition, the South Dakota law prohibits farmers from buying undyed diesel fuel tax free. Furthermore, no refund is available for farmers who buy tax paid undyed diesel fuel. North Dakota has hired additional staff to do audits and investigations. Missouri is raising its tax rate to 17 cents in 1996 which will make bootlegging fuel from Missouri to neighboring States less attractive and lucrative. Kansas is just starting its dyed fuel sampling program under an IRS sampling agreement and has 67 people trained to collect samples. Kansas will also start electronic filing on January 1, 1996. Iowa has raised the point of taxation for gasoline and diesel to the rack effective January 1, 1996, and will require electronic filing effective July 1, 1996. Colorado will require electronic filing effective January 1, 1998. Recent Colorado legislation has, however, allowed for up to three tax-free transfers of fuel among registered distributors. Ms. Stege noted that Nebraska, Iowa, South Dakota, and Montana now prohibit farmers from buying undyed diesel fuel without payment of the State tax. NETASK will next meet in Sioux Falls, South Dakota, November 14-15, 1995.
Northwest Task Force
Mr. Quintin Hess, Oregon DOT, reported that the Northwest Task Force had met twice, in May 1995 in Phoenix and this week in Williamsburg. He noted that the information sharing had been valuable and several joint audits and several cases are on-going. Idaho will require electronic filing in July 1996. Utah is working on a motor fuel tracking system. Washington is working on diesel dyeing legislation. In Oregon, the Public Utility Commission motor carrier activities will be transferred to the Oregon DOT. Alaska will be joining the Northwest Task Force shortly. The next meeting of the task force will be in December 1995. The Northwest Task Force will meet jointly with the California Task Force in April 1996 in Phoenix.
California Task Force
Mr. Allan Stuckey, California State Board of Equalization, reported that the enforcement subcommittee of the California Task Force met earlier in the week in Williamsburg. The next meeting of the full California Task Force will be in December 1995. Effective July 1, 1995, California moved the point of taxation for diesel fuel to the terminal rack. A toll-free number to report suspected evasion has also been set up. The California Board of Equalization and the California Air Resources Board are working with the IRS on a dyed fuel sampling agreement.
IRS Updates
Mr. Baluch noted that several IRS reports were presented in earlier sessions of the motor fuel conference so a formal IRS report was not included in the agenda. Information on the earlier presentations is included in Attachments 3 and 4, the summary of proceedings for the motor fuel tax annual meeting (FTA Bulletin B-31/95) and the invitation to participate in a "below the rack" tax evasion task force (FTA Bulletin B-32/95). Mr. Baluch invited the IRS participants to report any information that had not previously been reported.
Mr. Gary James from CID reported that a very large fuel tax evasion case in California had just been indicted that week. He stated that at least 20 alleged members of the Armenian and Russian mafia had been arrested. He noted that this investigation had been underway for 2 years. It had been a difficult investigation because the Armenian mafia are well entrenched in the California economy and extraordinarily difficult to infiltrate. This particular case involved not only fuel tax fraud, but prostitution, narcotics, extortion, and telephone and wire fraud. Mr. James distributed the press release (Attachment 5) and news coverage of the indictment.
Mr. Ron Linden from Specialty Taxes (Excise) in the IRS Washington Headquarters reported that the assessment to cost ratio of IRS examinations in the lead State districts up to this point in fiscal year (FY) 1995 was $25 assessed per $1 spent.
He noted that this was substantially higher than the FY 1994 figure primarily because of one multi-million dollar case completed in New Jersey. He reported that the time applied to the Joint Project so far in FY 1995 was 161 percent of what had been originally committed.
Discussion
A summary of the status of recent State legislation on point of taxation and dyed fuel provisions is provided as Attachment 6. The Idaho line has been corrected to show point of collection for diesel fuel at the distributor rather than the terminal level.
Ms. Christine Poston, Fraud Counsel, DFSC, urged the States and other Federal agencies to share information with DFSC and DCIS. She noted that DFSC has a lot of information that can be shared with States and other Federal agencies. She particularly urged the tax enforcement agencies to make use of what might be considered unlikely sources of information. She noted that she is currently working with the national park police on fuel fraud issues. She reminded the group that DFSC purchases fuel, not just for defense facilities, but for most civilian agencies as well. She also stated that an indictment or conviction for fuel fraud, whether for a State or federal violation, can lead to debarment actions to prevent indicted or convicted individuals and companies from bidding on federal procurements. She indicated that working with DFSC and DCIS can enhance investigative and audit activities as well as offer an opportunity for stiffer penalties.
AGENDA ITEM 2--DISCUSSION OF FUTURE PROJECT DIRECTION
Transportation Reauthorization Legislation
Mr. Baluch reminded the committee that funding for the tax compliance project is provided in the current Federal highway program legislation, authorized under the Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA). This act provides funding through FY 1997 (October 1, 1996-September 30, 1997). Mr. Baluch informed the committee that the DOT and the Congress have begun preparing for reauthorization of the highway program in FY 1998. Mr. Baluch noted that FHWA Associate Administrator for Policy, Ms. Gloria Jeff, had addressed the Steering Committee at the last meeting in March 1995 and she had indicated that the next DOT highway program proposal would be developed within the framework of a reorganized DOT. Mr. Baluch informed the group that some members of the congressional transportation committees have suggested new legislation to rewrite ISTEA beginning with FY 1997, instead of FY 1998. If this occurs, deliberations will be underway during 1996. Mr. Baluch stated that the chances of the tax compliance project being funded in the next reauthorization bill are very speculative. He noted that the Steering Committee and the task forces need to prepare for a scenario in which FHWA funding may not be available. Several participants voiced their hope that funding would continue to be available, particularly given the impact the project has had in increasing federal and State motor fuel tax revenue by over $1 billion annually.
Mr. Ray Barnhart stated that he had discussed some proposals for future funding with conference participants and the Texas Department of Transportation, in an effort to formalize some language that could be presented to State transportation administrators at the American Association of State Highway and Transportation Officials annual meeting in October, which is incidentally also being hosted by Virginia and will be held in Norfolk. Mr. Barnhart suggested that the regular FHWA highway program allocations to the States be specifically authorized as available, up to a specified limiting amount, for fuel tax compliance efforts at the discretion of the State transportation agency. Mr. William Salibury of the Montana DOT said that Montana had already funded a tax compliance project with regular FHWA highway program funds, since the State and the FHWA division office had agreed that existing authority was broad enough to cover such an activity. Nonetheless, Mr. Barnhart suggested that many people he had spoken with supported specific legislated authority with appropriate procedures and conditions established by regulation.
Mr. John Schulte, Nebraska Department of Roads, expressed the opinion that authority to use regular FHWA highway program funds was appropriate, but was not a substitute for the specific dedicated program funding, such as the $5 million annual authorization in ISTEA. If only authority to use regular funds were provided, it is likely that many States would choose to utilize funds for higher priority transportation needs, and some State revenue agencies would no longer receive the FHWA funds, which have been such an effective incentive to keep the State and IRS offices working together on the regional task forces. For the information of committee members, Mr. Barnhart's final written proposals addressed to the State transportation administrative officers are included as Attachment 7.
Mr. Baluch informed the committee that every State highway agency follows the reauthorization legislation in minute detail. He suggested that if State revenue agencies want to know the up-to-the-minute status of the highway bill and the tax compliance project in particular, they contact the individual in the State highway agency who is responsible for tracking the Federal legislation. Mr. Baluch suggested that this individual is usually found in either the policy, planning, or budget office of the State highway or transportation agency.
Task Force Realignment
Mr. Baluch advised that in light of the uncertainty of FHWA funding after FY 1997, the Steering Committee needs to consider and realistically discuss the likelihood of continuing a formal task force structure after that time. In particular, the committee should focus on task force alignment, composition, future activities, and the likelihood of continuing activities if FHWA funding were not available. Mr. Baluch asked the lead States to address these issues at the next task force meetings and be prepared for an in-depth discussion at the next Steering Committee meeting.
Mr. Ray Barnhart noted that while it was important to consider the project in the post-ISTEA era, it was equally important to consider whether the current structure best served the interests of all of the States. In that regard, he noted that the State of Texas, which was designated as a lead State, has not taken an active part in regional coordination activities for some time due to staffing and workload concerns. Mr. Barnhart noted that States which are members of the Texas Task Force have, therefore, not had the benefit of the cooperative investigative, enforcement, audit, and information sharing activities which are key to the success of this effort.
After discussion of the Texas situation, it was the consensus of the committee that FHWA withhold the $50,000 lead State supplement to Texas in FY 1996 until the Texas Comptroller's Office advised FHWA and the Steering Committee of its intent to continue as a lead State. The Steering Committee requested that Texas report to the committee no later than the next Steering Committee meeting in March 1996. Mr. Baluch clarified that the $50,000 available to all States in FY 1996 would still be available to Texas, and that the obligation authority to be withheld would be the extra $50,000 available to lead States.
In further discussion, Mr. Skinner from Florida noted that two States of the Texas Task Force had already been invited to join the Florida Task Force and he would be willing to extend an invitation to Texas as well, should the Texas Comptroller's Office wish to consider disbanding the Texas Task Force. This would create a "Gulf Coast Task Force." Ms. Stege from Nebraska agreed to extend an invitation to the State of Oklahoma to join NETASK. Mr. Baluch noted that New Mexico has already joined the California Task Force, and therefore all of the Texas Task Force states could be accommodated in other existing task forces.
Mr. Baluch agreed that FHWA would write to the Texas Comptroller's Office to express the concerns raised by the Steering Committee and schedule the issue for further discussion at the next Steering Committee meeting.
Steering Committee Reorganization
Mr. Baluch advised that at the conclusion of ISTEA funding in FY 1997, the Steering Committee as currently organized should be prepared to terminate activities. If future FHWA funding is available, FHWA would most likely continue to support a reconstituted Steering Committee of some sort after FY 1997. If FHWA funding is not continued, the Steering Committee should be prepared to recommend an alternative structure if continuation is desirable. Mr. Baluch suggested that the Steering Committee be prepared to recommend a course of action no later than the spring Steering Committee meeting in 1997.
AGENDA ITEM 3--ADMINISTRATIVE ISSUES
Steering Committee Membership for DCIS
Mr. Baluch noted that over the last 2 years, through the presentations of Ms. Poston of the DFSC, the Steering Committee has become aware of the extensive role of the Department of Defense in the investigation of motor fuel procurement fraud. Mr. Baluch noted that Ms. Poston has been instrumental in publicizing the work of the task forces to the defense criminal investigation staff. As a result of her efforts, DCIS staff in several areas of the country have attended task force meetings with a view to coordinating their investigative efforts with task force activities. Mr. Baluch recommended that to further foster communication and cooperation, the Steering Committee endorse the inclusion of DCIS as an ad hoc participating agency of the Steering Committee. The Steering Committee unanimously endorsed this suggestion. Mr. William Christensen, from the DCIS in Arlington, Virginia, thanked the Steering Committee for formal inclusion in the group and expressed the willingness of DCIS to become an active participant at Steering Committee meetings and a partner in the activities of the regional task forces as well. The official committee membership now includes:
Member Organizations:
Federal Highway Administration
Internal Revenue Service
Massachusetts Department of Revenue
New Jersey Division of Taxation
North Carolina Department of Revenue
Florida Department of Revenue
Indiana Department of Revenue
Texas Comptroller of Public Accounts
Nebraska Department of Revenue
Oregon Department of Transportation
California State Board of Equalization
Ad Hoc Participants:
American Association of State Highway and Transportation
Officials
American Petroleum Institute
Defense Criminal Investigative Service
Federation of Tax Administrators
Independent Liquid Terminals Association
National Association of Truck Stop Operators
Petroleum Marketers Association of America
Society of Independent Gasoline Marketers of America
U.S. Department of Justice
Mr. Baluch noted that the role and contribution of the DOT OIG should not be overlooked. The only criminal investigation capability in DOT is the investigation arm of the OIG, and OIG inspectors have participated in a number of motor fuel tax criminal investigations throughout the country.
Mr. Lavan Griffith, from the OIG regional office in Atlanta, expressed the commitment of the OIG to the tax evasion problem and the willingness to contribute to the efforts of the regional task forces.
FY 1996 and 1997 Tax Evasion Project Funds
Mr. Baluch noted that if Congress and the President do not come to agreement on the appropriations bills or a continuing resolution before October 1, 1995, non-essential government functions will be shut down. He stressed that if the DOT appropriation bill is delayed, the allocation of tax compliance project funds for FY 1996 will also be delayed. He urged States to closely monitor the unexpended balance of their current funds to be sure that there are sufficient funds to carry over into at least the first 3 to 6 months of FY 1996 in the event that the allocation of funds is seriously delayed. No additional costs should be incurred once the currently obligated funds are expended.
Mr. Baluch further advised that once the FY 1996 funds are allocated, States should obligate the funds by signing amended grant agreements (Attachment 8) with the FHWA division offices. All the FY 1996 funds should be obligated as soon as the allocations are made and not later than June 1996, since it is possible that unobligated balances withdrawn in July 1996 will not be restored in FY 1997. The proposed allocation is the same as the previous years ($100,000 for each of nine lead States and $50,000 for each of the remaining States and the District of Columbia), although it is possible that the final DOT appropriations act for FY 1996 could reduce somewhat the funds available for obligation.
Use of Project Funds after September 1997
Finally Mr. Baluch reminded the States that although the ISTEA funding will terminate at the end of FY 1997, most States will probably have remaining unexpended balances on September 30, 1997, and should extend the completion date of the grant agreements beyond that date to utilize the remaining funds.
He noted that obligated funds remain available for expenditure until the scheduled project completion date shown on the grant agreement, and the project completion date can be extended for a reasonable period of time after September 30, 1997, to expend the remaining obligated funds. He stressed that all extensions must be approved in advance by the FHWA division office. The June 8, 1995, letter to Mr. Allen Maxson (Attachment 9) explains the availability of unexpended funds after September 30, 1997. [The references in the letter are available upon request from FHWA.]
Coordination with International Fuel Tax Agreement (IFTA) Enforcement
Mr. Baluch noted that one State recently had inquired about using the FHWA tax compliance project funds for activities related to IFTA audits because of the apparent prohibition included in the March 25, 1992, Federal Register announcement on fuel tax evasion project funding. Mr. Baluch advised that although the IFTA program was not a fuel tax revenue enforcement program per se, the IFTA audit requirements are expected to enhance overall motor fuel tax compliance and are therefore eligible for the use of tax evasion project funds, despite the wording in the Federal Register Notice. The subsequent policy guide, issued July 30, 1992, softened the Federal Register language to indicate that IFTA audits, rather than precluded from funding under Section 1040, were not a priority of the tax evasion project funding since another source of FHWA funding was available to assist States with IFTA implementation. Mr. Shuirman asked whether this meant Section 1040 funds could be used for travel to all types of IFTA conferences and workshops. Mr. Baluch emphasized that Section 1040 is for enforcement purposes, and clearly the audit functions of IFTA and related travel fall within the purview of Section 1040. The general implementation and administration of IFTA within a State usually fall outside the purview of an enforcement activity.
Funding for Dyed Fuel Sampling Agreements
Mr. Baluch indicated that FHWA had received dyed fuel sampling agreements from 11 States: Arkansas, Delaware, Florida (two agreements), Minnesota, Nebraska, Oklahoma, Pennsylvania, Tennessee, Utah, Washington, and Virginia. [The Kansas agreement was received by FHWA shortly after the meeting.] A few States represented at the meeting questioned the status of other agreements forwarded to IRS for funding. Mr. Baluch said he only had information about agreements that had been signed by IRS and forwarded to FHWA for funding. The States would have to keep in touch with the IRS district offices to track progress on their agreements. Mr. Baluch noted that once signed agreements were submitted to FHWA, funding would be provided in three possible ways: 1) under a Motor Carrier Safety Assistance Program (MCSAP) grant agreement with the State MCSAP program recipient, 2) under a tax compliance project (TCP) grant agreement through the State motor fuel tax revenue enforcement agency, or 3) under a Cooperative Agreement if the State recipient agency is neither a MCSAP or TCP grant recipient. Different sets of procedures apply in each case. The predominant arrangement so far has been under the TCP projects and the specific procedures for this case (number 2 above) are provided in the draft guidance dated April 6, 1995 (Attachment 10). Agreements handled by the FHWA office of Motor Carriers with the State MCSAP agency generally follow MCSAP program procedures. Mr. Baluch indicated that procedures for working with other funding recipients (e.g. Florida Department of Agriculture) were still being finalized within FHWA.
For information, Mr. Baluch said the FHWA tabulation and nationwide map of motor fuel tax rates as of July 1, 1995, was now available (Attachment 11).
Ms. Poston also advised that her staff had compiled a database from news releases and other public records of individuals and companies indicted or convicted of motor fuel tax fraud. She has provided a copy on diskette to other agencies on request and will attempt to fill additional requests. A hard copy of the file as of September 12, 1995, is provided as Attachment 12. [FHWA will attempt to offer updates as a download file on the FHWA Electronic Bulletin Board System (FEBBS), which would then be available electronically to anyone who registers on FEBBS.]
COMMITTEE DECISIONS
Approved:
/s/ Marshall Washburn /s/ Nancy L. Bennett for------------------------- ------------------------- Marshall Washburn Madeleine S. Bloom
National Director Director, Office of Policy Specialty Taxes Development Internal Revenue Service Federal Highway Administration
Attachments Page
Attachment 1--Attendance List........................... 13
Attachment 2--Joint Project Meetings Calendar........... 18
Attachment 3--Summary of Proceedings, 1995 FTA Motor Fuel Tax Section Annual Meeting (FTA Bulletin B-31/95)..... 21
Attachment 4--Below the Rack Fuel Tax Evasion Federal/State Task Force (FTA Bulletin B-32/95)....... 33
Attachment 5--September 12, 1995, News Release, Southern California Diesel Fuel Excise Tax Evasion Scams Broken.......................................... 53
Attachment 6--State Legislation, Motor Fuel Tax Procedures............................................ 59
Attachment 7--September 19, 1995, Letter from Ray Barnhart and Associates........................... 61
Attachment 8--Amended Grant Agreement for the Joint Federal/State Motor Fuel Tax Compliance Project....... 67
Attachment 9--June 8, 1995, Letter to Mr. Allen Maxson. 69
Attachment 10--Draft Procedures for Administration of IRS Funds for Roadside Fuel Sampling under the Tax Compliance Project...................................... 71
Attachment 11--Tax Rates on Motor Fuel, July 1, 1995.... 77
Attachment 12--List of Individuals and Companies Indicted or Convicted for Motor Fuel Tax Fraud, September 12, 1995.................................... 81
