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Minutes of the Seventeenth Steering Committee Meeting

Joint Federal/State Motor Fuel Tax Compliance Project

March 16, 1998, Washington, D.C.

(April 23, 1998)

Ms. Sherri Alston, Chief of the Transportation Studies Division, Federal Highway Administration (FHWA), welcomed everyone to the 17th meeting of the Joint Federal/State Motor Fuel Tax Compliance Project Steering Committee. Following introductions by all participants, Ms. Alston introduced the first speaker. The corrected list of attendees is provided as Attachment 1.

Item 1--North American Free Trade Agreement (NAFTA) Status of Implementation

Ms. Maria Lameiro, from the U. S. Department of Transportation (DOT) Office of International Transportation and Trade in the Office of the Secretary of Transportation, provided an update on NAFTA.

1. Briefly, the status of consultations is as follows:

2. To put this in context, the NAFTA sets a timetable for lifting restrictions on the operations of Mexican motor carriers in the U.S..

3. There are four important dates in the land transportation schedule of liberalization -- three of these dates have already passed and one is two years in the future.

4. On December 18, 1995, the U.S. announced a delay in implementing the provision that would have allowed Mexican trucking in the four border States. That had the effect of also delaying the investment provision. Subsequently, it was decided that the regular-route passenger services provision would also be put on hold.

5. Since 1996, we have been conducting safety talks with Mexico in the Land Transportation Standards Subcommittee (LTSS), which was created by NAFTA to try to make more compatible the three countries' safety standards.

6. At the same time, but in separate sessions, we have been negotiating with Mexico to resolve certain commercial concerns. Originally, there were three issues that needed to be addressed: (a) increased use of 53-foot trailers in Mexico; (b) U.S. companies' investment in Mexican carriers; and (c) Mexico's regulation of express delivery services. Only the last issue is still outstanding. The NAFTA obligates Mexico to extend national treatment to U.S. express delivery companies that operate in Mexico. Mexico does not currently allow U.S. companies to use the same size trucks that Mexican express delivery companies are permitted to use. At a meeting on March 4 in San Antonio, Mexican officials informed us that new express delivery services regulations will be issued in April.

7. Our goal is to conclude an agreement on a time frame for implementing the NAFTA truck and bus access and investment provisions together with resolution of Mexican regulation of express delivery services.

8. Since the key to minimizing safety risk is to ensure that Mexican inspectors check northbound trucks before they reach the border, we are helping Mexico establish a system to assess carrier safety.

9. This is what has been accomplished in the safety area (some activities have taken place trilaterally, others bilaterally, and others are just unilateral U.S. actions):

10. The DOT will soon issue proposed regulations to assess the safety fitness of Mexican carriers and monitor their compliance with U.S. requirements.

12. As a result of a meeting between Secretary Slater and Mexico's Secretary of Transportation on January 30, DOT's assistant secretary for international affairs and Mexico's under secretary of transportation will be meeting sometime in April. In preparation for that meeting, U.S. and Mexican technical staff will meet in Mexico by the end of March. The two Secretaries are scheduled to meet again in early May during the Binational Commission meeting in Washington, D.C.

Item 2--Surface Transportation Reauthorization, Continuation Options for Fuel Tax Evasion Funding

After thanking Ms. Lameiro for the very helpful NAFTA update, Ms. Lameiro introduced Mr. Stephen Baluch, Program Manager for the FHWA Fuel Tax Compliance Program, for the latest information on the surface transportation reauthorization legislation and what it means to the highway use tax evasion program. Mr. Baluch began with a discussion of the partial fiscal year (FY) 1998 funding approved last fall, and then discussed the tax evasion program language in the House and Senate versions of the transportation legislation.

Intermodal Surface Transportation Efficiency Act Extension

Congress enacted an extension of the Intermodal Surface Transportation Efficiency Act (ISTEA) of 1991 which provided $2.5for fuel tax evasion projects in FY 1998. Attachment 2 is a copy of ISTEA Section 1040 as amended. The FHWA opted to make a selective distribution to States that have or would soon expend the remaining funds from FY 1997 and prior years. FHWA Notice 4510.387, approved by the FHWA Administrator December 22, 1997, provided the full annual allocation to about half the States, while the remaining States (with balances of approximately 2of funds unbilled) appeared to have sufficient funds to continue their activities until additional FY 1998 funds become available later in 1998. Attachment 3 shows the amounts allocated by State. All but one or two States have amended their project agreements with FHWA for these funds. In addition, the Internal Revenue Service (IRS) is receiving $1 million, or half the normal annual allocation, from FHWA for tax compliance project activities.

Interim FY 1998 funds follow the same administrative procedures as projects funded under ISTEA. When additional FY 1998 funds become available, the States that did not receive funds as part of the initial allocation will be the first to receive funds in the second distribution. The IRS will also receive the balance of their normal annual allocation. These funds, if provided under new legislation and not an extension, will follow the administrative procedures established in the new law. This means that funds provided by new legislation will most likely require entering into a new project agreement.

Surface Transportation Reauthorization Proposals

Attachment 4 is a summary of the tax evasion project provisions of three versions of possible reauthorization legislation, followed by a copy of the language from each version. All three versions would continue funding for tax evasion projects at $5per year for 6 years, so there is a very high probability of at least continuation at current funding levels.

The administration's bill, known as the National Economic Crossroads Transportation Efficiency Act (NEXTEA), which for the most part was a level-funded continuation of the ISTEA legislation, sought only the continuation of the tax evasion program for six years at $5 million each fiscal year and would eliminate annual reporting requirements to Congress.

Both the House and Senate versions would provide additional funding for the tax compliance effort. Section 122 of the House bill (H.R.) 2400, known as Building Efficient Surface Transportation and Equity Act (BESTEA), authorizes an additional $5per year beginning in FY 1999 that could be used for an "Automated Fuel Reporting System." Section 1109 of the Senate bill S. 1173, known as ISTEA-II, would authorize additional funding for an "Excise Fuel Reporting System" to be developed under terms of a Memorandum of Understanding (MOU) between FHWA and IRS which provides that "the system shall be available for use by appropriate State and Federal revenue, tax, or law enforcement authorities, subject to section 6103 of the Internal Revenue Code." Funding of $8 million is authorized for development of the system, and $2 million per year for six fiscal years is authorized for operation and maintenance of the system. In addition, S. 1173 (floor action for which was completed on March 13, 1998) was amended to include another provision favorable for the tax compliance effort. This was Amendment No. 1957, introduced by Senator Hutchison (R.-TX), which reads as follows:

The effect of this section is to allow the State transportation agencies to use a portion of the funds allocated under the Surface Transportation Program (STP) for projects, in addition to the normal $50,000 or $100,000 annual tax compliance program allocation, for projects to fight motor fuel tax evasion. Based on estimated funding levels of some $8 billion for STP, this could provide up to $20 million annually to States for fuel tax compliance projects. It appears that the regular Federal share of 80 percent would apply to these funds. State funds would have to pay the remaining 20 percent share.

There is an important distinction between the funding authorizations for the automated fuel reporting system in the House and Senate bills. H.R. 2400 provides contract authority for the additional funds, that is, the funds are available to FHWA to enter agreements as soon as the fiscal year begins for which the funds are authorized.
S. 1173 provides only budget authority for the additional funds, that is, funds must first be included in an annual appropriations act before they are available to enter contractual agreements.

With Senate action completed last week, attention now turns to the House where consideration of the transportation bill is expected in April.

Following Mr. Baluch's presentation, there were several comments and questions. Mr. Ray Barnhart asked that there be further clarification of the distinction between "contract authority" and "budget authority" funding so there can be no misunderstanding, and which would be better as far as assuring needed funding for the automated fuel reporting system. Mr.replied that "budget authority" is the more common situation for Federal agencies. This requires a two-step Congressional action: 1) authorization in a multi-year funding bill, and
2) appropriation by another committee of up to that amount in the annual appropriation bill for that agency. "Contract authority" is a special situation applicable to programs funded from trust funds such as the Highway Trust Fund (HTF). Funds are available for expenditure in the year authorized, and do not require inclusion in an annual appropriation bill. Both the Senate and House bills provide contract authority for the basic $5 million annual authorization for tax evasion projects. The Senate version's budget authority for the automated fuel reporting system would likely mean that FYwould be the first year for which the funds could be sought (FYand FYbudgets have already been submitted to Congress), and there is the possibility that DOT, the Office of Management and Budget (OMB), or the Congress would choose not to seek or appropriate the funds in subsequent years for this purpose. That is what happened with respect to the additional $2.5 million per year authorized in ISTEA for fuel tax evasion projects. These funds were never appropriated. Mr. Barnhart indicated that in discussions with Senate committee staff, he was led to believe that DOT had expressed the intent to seek an appropriation for the automated fuel reporting funds if included as budget authority in the final transportation legislation. Mr.could not confirm that such a commitment had been made by DOT. Mr. suggested that perhaps the House version with contract authority for a total of $25 million over 5 years would be preferable as long as the timing of the funding availability was compatible with IRS plans to implement the system.

Finally, Mr. Barnhart asked for the support of those lead States present in discussing these proposals with task force member States. He stressed that because there are many larger issues driving the transportation legislation discussions, it would be very easy for the tax compliance project provisions and funding to be overlooked. He encouraged the States to be sure that when the State transportation agencies discuss impacts of the proposals with their congressional delegations, they express support for the automated fuel reporting system funding and the increased eligibility to use highway funds for tax compliance projects (e.g. the Hutchison amendment) which has yet to be considered in the House.

Item 3--Native American Issues

Within the past year, bills have been introduced in the House and Senate that address State tax collection issues with respect to Native American tribes. Mr. John Huber, from the Petroleum Marketers Association of America, provided some introductory information on this issue and then introduced several speakers who discussed the background and intended results of the House and Senate proposals.

Mr. Huber began by telling the group that in the past two years, there have been two votes in Congress on the issue of requiring that a tax collection agreement be in place before land could be approved for trust status. The votes were very close both times which indicated substantial congressional interest in addressing some of the concerns about collection of State taxes with respect to sales on Native American reservations.

Some Native American tribes have indicated an interest in acquiring high-traffic retail business properties which are not currently on Indian land, and then asking the Bureau of Indian Affairs (BIA) to grant them "tribal trust" status for the property. Tribal status would provide special Federal protections to these areas not previously associated with the tribe. Once land is in trust status, the tribe could then develop the site. Often, it is developed as a retail fuel and/or smoke shop. The reason this issue is getting so much attention relates to the ability of Native Americans to sell certain products, such as tobacco and fuel, free of State tax to Native Americans. Although State taxes are supposed to be collected on sales to non-Native Americans, the collection of these taxes has been difficult, if not impossible, to enforce. In effect, the inability to enforce State tax collection laws has given the Native American retailers an unfair competitive advantage by substantially reducing the cost of fuel or cigarettes with respect to other retailers in the vicinity.

One legislative fix that was presented to the House by Congressman Ray LaHood (R.-IL) would withhold Federal highway funds unless tribes enter into motor fuel tax collection agreements with the States. This language will be offered as an amendment to BESTEA.

On March 20, 1997, Congressmen Istook and Visclosky introduced House bill H.R. 1168 (see Attachment 5) in an attempt to address the issues regarding collection of State taxes on sales to non-Native Americans on any lands that are placed in trust status. The bill would require that before the BIA granted protected trust status to any new lands for an Indian tribe, the tribe must reach a binding agreement regarding collection of fuel taxes, sales taxes, and excise taxes on sales to non-Indians on that land. The bill would only affect future transfers of land into trust status and only discretionary transfers.

A Senate bill, S. 1691 (Attachment 6), introduced by Senator Slade Gorton (R.-WA), addresses collection of State taxes and the broader issues of sovereign immunity for tribes. Mr. Huber introduced two guest speakers to discuss the provisions of H.R. 1168 and S. 1691.

Congressman Istook (R.-OK) presented his reasons for introducing the bill and what he expects will occur if the bill is passed. He began by saying that many Americans believe taxes are already too high and that nothing undercuts the voluntary payment of taxes more than a feeling of unfairness when one group can get away with not paying their share. He stated that the lack of State enforcement authority makes it easy for Native Americans to avoid paying State taxes which invites further evasion. He noted the difficulty of getting accurate data that would allow everyone the opportunity to fully understand the issue. He said there is a real need for good data that will show the magnitude of taxes evaded in real numbers. Estimated losses in several States, such as New York, Oklahoma, and Washington suggest revenue losses in the tens of millions for individual States and perhaps aggregate losses of hundreds of millions annually.

Congressman Istook pointed out that Native Americans have established businesses in areas where they interact with non-Native Americans, and some groups have begun to market their expertise on how to avoid paying up to 27 different State taxes and fees, including fuel and cigarette taxes. He referred to signs stating "Buy here, no tax!" Congressman Istook noted that Federal law provides a mechanism for these actions and emphasized that if something is not done to correct the matter, that States will continue to lose significant tax revenues. Previous votes on language similar to H.R. 1168 were very close, within 10 votes either way. He hoped that affected States would help forge a congressional coalition to support this legislation.

Mr. Todd Young, Legal Assistant to Senator Gorton, discussed Senate Bill S.1691 (Attachment 6). The bill, introduced by the Senator on February 27, 1998, focuses on restricting sovereign immunity for tribes. Senator Gorton has a long history of involvement with Native American issues dating back to the Colville Tribe litigation in the State of Washington in the 1980's. The bill would give States the ability to bring an action in Federal district court against an Indian tribe in order to enforce the obligation of the tribe to collect and remit State excise, use, and sales taxes owed from sales made by Indians to non-Indians. Furthermore, in addition to establishing original jurisdiction in Federal district court for tort and contract claims made against Indian tribes, it would also allow the State courts the authority to assert jurisdiction in such cases. A hearing last week on March 11 provided an opportunity to present both sides of the issue. There were no substantive arguments presented that would excuse the duty of the tribes to remit State taxes in accordance with several of the Supreme Court decisions handed down so far on this issue. Mr. Young also agreed with Congressman Istook on the need for better data on gallons and packs sold and the magnitude of legally imposed State taxes evaded. He stated that Washington State had good data on the cigarette sales tax, but not on motor fuel. He pointed out that additional hearings on the bill were scheduled in the coming months in Seattle and Minneapolis.

Mr. John Dosset from the National Congress of American Indians, presented some opposing arguments concerning Native Americans taxation issues (see Attachment 7). He began by stating that States do have several legal remedies to pursue collection of sales, excise, and use taxes that are due from sales on Native American reservations to non-tribal members. One way is to move the point of collection up the distribution chain. Oklahoma, for example, recently shifted the point of collection to the terminal level for motor fuel taxes, which allows pre-collection of the motor fuel tax prior to sale on the reservation. Second, tribes do not have complete sovereign immunity. In the principle arising from the ex parte Young doctrine, tribal officials can be sued in lieu of the tribal government. Third is the opportunity to negotiate compacts with the tribes for collection of State taxes. More than 200 such compacts are now in place in 18 States. (Overall, there are 331 tribes in the lower 48 States.)

Mr. Dosset pointed out that the New York tribal situation continues to be a difficult situation. Native American tribes in New York do not believe that sales made to non-Native Americans should be taxed by the State. The New York State government has been inconsistent on this issue, often changing course on enforcement strategies.

He remarked the language in the proposed bills is extreme considering that the extent of the tax collection problem is rather limited, and for the most part involves tobacco and motor fuel taxes. He pointed out that the Gorton bill destroys the concept of tribal self-government, since tribes would have no right to sovereign immunity in Federal or even State courts. He stated that tribes would find it extremely difficult to assert any sovereign rights in the face of State courts that would most likely be sympathetic to State grievances against the tribes.

He stated that the likelihood of unchecked growth of Native American fuel sales by bringing additional land into trust, is greatly exaggerated. He pointed out that the 1934 Indian Reorganization Act, the statute for putting land into trust, requires that any loss of local or State tax base is considered before BIA approves placing the land into trust. He also noted that regulations require even greater scrutiny to get land outside of a reservation or outside the State into trust, and that in fact no land in a different State has ever been approved.

Mr. Dosset cautioned that legislation to force negotiation of compacts would undermine much of what has already been accomplished between tribes and the States. He suggested that the Federal government should allow the current process to continue its successful course. He agreed that the numbers that are currently available are not complete and are sometimes incorrect when tobacco and petroleum sales figures include the tax-free sales that take place on military installations.

Mr. Dan Moenter from Marathon Oil commented that Mr. Dosset's position appears to be that this does not seem to be a really big problem and that the proposed legislation is overkill. He asked Mr. Dosset if there were any elements of the proposed legislation that he would support as a way to foster the resolution of longstanding disputes between the States and tribes. Mr. Dosset emphasized that the States do have remedies available to get their taxes without additional Federal legislation. He opposed Senator Gorton's bill outright because of its broad assault on tribal sovereignty. He stated that Congressman Istook's bill would not be acceptable either since forcing the tribes to enter compacts would tip the balance of negotiations entirely in the States' favor. He suggested that Congressman LaHood's proposal is a better starting point for further discussion since it focuses more closely on the issue of motor fuel taxation, but he cautioned that legislation that only penalizes the tribe as the recalcitrant party would not generate a great deal of support among the Native American groups.

Mr. Moenter also asked Mr. Dosset if his remarks meant to suggest that it is impossible to have land from another State put into trust status. Mr. Dosset said that it was not impossible, but the necessity to document a historical connection to the land in question would make it very difficult to succeed.

Item 4--State and Federal Taxation of Federal Military and Civilian Fuel Use

Ms. Alston thanked the presenters for sharing this information with the Committee. She then introduced Ms.Poston and Mr. John Ralston of the Defense Energy Support Center (DESC) of the Department of Defense (DOD) who discussed State and Federal taxation of fuels purchased by the Federal government.

Mr. Ralston began by explaining his agency's mission which is "to provide the DOD and other government agencies with comprehensive energy support in the most effective and economical manner possible." He stated that in general, the DESC and its customers pay Federal taxes on diesel and gasoline, except for off-road uses for which a refund may be claimed. A pilot program is underway at three military installations to facilitate the refund process by allowing refunds on a fixed percentage of total fuel delivered, with the percentage determined from the prior split between highway and off-highway use. Because of the law of intergovernmental immunity, States generally do not tax the Federal government, nor does the Federal government tax State and local governments. The National Guard, determined to be a State agency, is therefore exempt from Federal tax. However, States can tax a contractor selling fuel to the government, as long as the tax is on the contractor and not on the government. In the case of diesel fuel, seven States tax Federal purchases but allow certain refunds--five States give a full refund and two States give refunds for off-road use only. For gasoline, 41 States allow exempt purchases; five allow refunds for off-road use; Nevada refunds except for non-DOD agencies; Iowa gives a full refund; and Colorado collects the tax with no refund. As a further complication, some States allow the tax exemptions only for purchasers over a specified minimum quantity. Attachments 8 and 9 include a table and copies of view graphs that summarize the different taxes, rates, and exemptions by State. Mr. Ralston noted that by Federal law, DOD is required to take advantage of any allowable tax exemptions and refunds.

Mr. Ralston went on to explain that many government agencies may be paying fuel taxes simply because they do not know the tax rules. Fuel vendors may not be fully aware of which taxes apply to the Federal government and may either bill for exempt taxes or fail to bill for applicable taxes. Mr. Ralston admitted that neither vendors, which include some 2,000 contractors, nor the government find it easy to keep abreast of tax changes, and urged the States to keep him apprised of changes.

Certain tax evasion scams are more likely when there are so many tax laws involved. Some possible or actual schemes are improperly claiming exemptions; collecting the tax payment but not remitting it to the State; blending waste fuel below the rack; stealing tax-free JP-8 (aviation fuel) and selling it as commercial diesel; not invoicing the proper tax or remitting it to the State. Mr. Ralston suggested that Federal agencies watch out for vendors claiming an exemption in States that tax fuel sales to the Federal government. The vendors may be charging the government for the State taxes but not remitting them to the State. Mr. Ralston expressed his gratitude to those States that avoid administrative complications by fully exempting the Federal government from fuel taxes. Attachment 9 provides copies of Mr. Ralston's view graphs.

Mr. Chris McAdams asked Mr. Ralston and Ms. Poston if they knew of any cases of supply sergeants lying about inventory to cover up theft of fuel from the base. Mr. Ralston replied that he was not aware of such cases occurring in the U.S., but overseas there have been some suspicious activities involving unexplained losses from inventory. Ms. Poston noted that investigators from the Defense Criminal Investigative Service (DCIS) are specifically looking out for theft of fuel, short deliveries, and blending of off-specification products into motor fuel. More and more, the DCIS agents are working with the motor fuel tax enforcement task forces since tax fraud is often an integral part of these schemes.

In conclusion, Ms. Poston asked that she or Mr. Ralston be notified if there were any changes to the State tax laws that were not included on the table in Attachment 8. Address, e-mail address, and phone numbers for
Ms. Poston and Mr. Ralston are listed on the attendance list, Attachment 1. [Ms. Poston subsequently advised that the tax table may also be downloaded from the Internet at-- http://www.desc.dla.mil/main/doinbusi.htm]

Ms. Alston thanked Mr. Ralston and Ms. Poston and then introduced Mr. Bill Webster from the General Services Administration (GSA). He is the Chief of Fleet Operations. Mr. Webster discussed Federal credit card purchases for the 160,000-vehicle fleet owned by the Federal government. He told the group that there are 380,000 fleet service cards in use at this time and that approximately 1.2 million card transactions take place each month. He then told the group that the fleet service card program has revolutionized the GSA fuel purchase system. The service card system has proven to be "faster (data within 48 hours), cheaper issuance of new cards (free), better (electronic)" than the older GSA-issued cards where purchases were tabulated manually. The new automated system also allows the listing of invalid cards to be accessed and checked each time a transaction is made. The GSA has been very satisfied with the new program, the initial contract for which was awarded to Wright Express two years ago. Some 97 percent of transactions are recorded and reported electronically. To allay any concerns about application of tax exemption rules, the Inspector General's Office (IG) was requested to perform an audit to determine whether or not proper tax exemptions were being granted. The findings indicated they were and that the new system was more accurate than the old GSA system. The IG audit also examined whether or not there were point of sale controls to avoid abuse, and again the findings were positive.

Mr. Webster then described the latest solicitation for continuation of the program, which merges the three Federal credit card programs (American Express for official government travel, Visa for small purchases, and the Wright Express fuel purchase card) into a single solicitation. Contracts were awarded in February to six institutions that will offer various combinations of credit cards to meet the Federal government program needs beginning December 1, 1998. Federal agencies may choose any of these vendors to meet their agency needs. For motor fuel purchases, the following cards will be available:

Financial Institution--Card Type Contact/Phone Number
Citibank--Voyager/MasterCard Cathy Raffaeli (203) 975-6210 or George Koskute (718) 248-5090
U.S. Bank--Voyager Robert Abele (612) 973-7609 or Chris Pieroth (612) 973-7613
NationsBank--Voyager/MasterCard Scott Collary (704) 386-4941 or Myra Woods (704) 386-8024
American Express--Wright Express Daniel Goren (703) 312-8398 or Ross Crumlish (703) 312-8380
First Chicago-MasterCard Anna Rumsey (312) 732-3368 or Cynthia Meyer (312) 732-7216

The contracts were awarded for a five-year period with an option for five subsequent one-year renewals.
Mr. Webster emphasized that the States may not find all of these operating in each State, since Federal agencies have the option to choose from among the vendors. To conclude, Mr. Webster said that GSA is much better off today and that "electronic is fantastic."

Mr. David Breidenbach commented about the various State requirements such as the 500-gallon or other minimum purchase to qualify for tax exemption in some States. He questioned whether oil companies might have an easier time processing exemptions if there were a standard treatment for Federal government exemptions, as expressed for example in a model State law. Mr. Webster responded that GSA through the credit card program is only trying to comply more efficiently with all the State exemption requirements and procedures, not to seek changes of any State practices. He felt that the electronic processing offered much better and faster information to support the exemption or refund process, and motor fuel distributors and suppliers should find the new credit card programs much easier than the former manual system. He welcomed any comments or suggestions from industry that would improve the operation of the program from their perspective.

Mr. J. Dwight Young from the U.S. Postal Service (USPS) discussed the Postal Service contractors and the new cost cutting initiative that the USPS is considering. Mr. Young began with a brief overview and said that over the past 2 to 3 years, the USPS has been looking to reduce costs. They realized that the size of their fleet and the costs to fuel the fleet may be one place where costs could be trimmed. He told the Committee that the fleet consists of 230,000 vehicles, postal owned as well as contract vehicles, and that the Postal Service uses 586gallons of fuel each year. Of that, 300 million is purchased through contractors at a cost of approximately $345 million including taxes. Analysis shows that the USPS has been paying more for fuel on a consistent basis than other organizations (private and public sector) that purchase similar amounts of fuel.

The USPS decided to leverage their buying power. In a pilot program taking place in the southeast and southwest areas of the U.S., the USPS and some commercial facilities have reached an agreement that allows program contractors to fuel at their facilities, at a prenegotiated rate that is lower than average retail for the area. This allows the contractors to get better prices than through individual contractor purchases.

Under consideration for possible future initiatives would be allowing postal contractors to fuel at USPS facilities, since the USPS is able to buy fuel in bulk at a reduced cost. The implications for State motor fuel taxes for such a program are also being evaluated, since most USPS fuel is purchased exempt of State tax and Postal Service contractors currently pay State motor fuel taxes.

Mr. Young ended his presentation by identifying the expected results which are to better position the USPS to purchase fuel in the future; to efficiently use USPS resources; and to cut costs. If participants would like additional information regarding the USPS fuel management program, contact Mr. J. Dwight Young at (202) 268-4377.

Item 5--Task Force Reports

PUBLICUS (Indiana) Task Force

The task force reports were the next item on the agenda. Ms. Alston introduced Mr. John Aikman from the Indiana Department of Revenue to begin the reports. Mr. Aikman started the PUBLICUS Task Force report with the State of Missouri which is considering dyed fuel legislation. It appears that it will pass. In Minnesota, Mr. Aikman reported that they have been working on a large criminal case and expect it will be wrapped up by mid-May. Kentucky's attempt to pass taxation at the rack and dyed fuel penalties has been held off again. The next legislative session for Kentucky is in 2000, and it is expected that both will pass at that time. Kentucky has been working a cross border audit with Indiana and has completed several successful fuel tax audits. The State of Illinois is still trying to pass legislation to move tax to the rack and to require dye. They are currently doing extensive International Fuel Tax Agreement (IFTA) audits.

In the State of Indiana, there have been 13 dyed fuel arrests. Three cases have been opened related to businesses using dyed fuel for their truck fleet, one each against an excavating company, a small trucking company, and a company that supplies salt to the Indiana DOT. Four other fraud investigations have been opened in the past six months and two fuel cases are currently in the State prosecutors' office. Sergeant Mike Flynn of the Indiana State Police Motor Carrier Division/Revenue Motor Carrier Services told the Committee that they have created a "one stop shop" that will allow motor carriers to get real time information on registration issues. Drivers will be able to access the information and apply for other needed permits at specially equipped weigh stations in the State. The next PUBLICUS Task Force meeting will be held on May 14, in St. Paul, Minnesota.

Texas Task Force

The Texas Task Force report followed, given by Mr. Jimmy Archer of the Texas Comptroller's Office. He began his report with the State of Arkansas and noted that there have been no changes in fuel tax laws. In the area of dyed fuel inspections, Mr. Archer said that Arkansas has had a three-year contract with the IRS and has performed approximately 10,000 inspections to date. They have had a total of 109 infractions since beginning dyed fuel testing. Recent trends show that the number of infractions per month has been rising. Approximately $65,000 have been collected. Arkansas electronic funds transfer (EFT) program has been operational for over one year and is mandatory for each account holder. Electronic data interchange (EDI) went into effect on January 1, 1998, and is mandatory for all account holders. Each account holder must file EDI by June 1998. Arkansas is looking into a system that will track each load of fuel by the bill of lading number. The system will be able to run cross checks on the sales and receipts of each account holder. This will help to ensure adequate reporting as well as aid the audit process.

Mr. Archer then reported on Louisiana. The enforcement of dyed diesel regulations has been transferred from the Department of Transportation and Development (DOTD) to the Department of Public Safety/State Police in hopes of bringing about an increased effort in enforcing the regulations. Louisiana is involved in a study relating to an EDI based program for the receipt of IFTA returns and related information. Mr. Archer reported that Louisiana had been receiving anonymous reports from special fuels dealers on others who are selling clear diesel tax-free without a certificate from the Department of Revenue (DOR). The reports state that those dealers were selling the clear, tax-free diesel to anyone who wanted it regardless of the intended use. A field investigation uncovered one Arkansas company that had been selling clear diesel to these dealers without explanation of the clear and dyed fuel requirements. Those dealers have been contacted, and Louisiana hopes that will put an end to the case. The Louisiana Truck Center, a one stop operation for the trucking industry, opened in September 1997. The center houses the DOR, DOTD, Public Service Commission, and the State Police.

New Mexico has two bills before the legislature in this session. The first bill calls for a deduction for dyed gasoline sold for off-road purposes and a permit for users to purchase clear gasoline for off-road use. Currently, gasoline is dyed by the distributor with dye supplied by the Taxation and Revenue Department. The user may obtain a permit to submit invoices for refunds of gasoline tax. The proposed bill would allow the distributor to deduct any self-dyed gasoline on the tax return. New Mexico would still have refunds for clear gasoline sold to permit holders. The bill would also allow distributors to report and deduct on the tax return any dyed special fuel used in any manner other than for the propulsion of motor vehicles. There are no provisions for penalties for on- road use. This bill is an attempt to alleviate the hardship on farmers who apparently are paying the tax to the special fuel supplier and are sending in claims to the supplier to get a refund. The supplier then takes the deduction on the tax form. The second bill is an attempt to plug a loophole that has advantaged Native American retailers. Currently, New Mexico allows one tax-free sale for the importer, and the purchasing distributor owes the tax. The bill would provide that the person who owns the gasoline at the time of importation would owe the gasoline tax. Gasoline received on a reservation by an Indian distributor of that reservation without passing through non-Indian land would still be preempted from tax. The bill also provides for a 50 percent credit for gasoline owed to an Indian tribe provided that: the tribe levies a tax of at least 17 cents per gallon; the tribe uses the tax money for roads; and the tribe provides a credit of 50 percent on its tax for tax owed to the State of
New Mexico. In addition, the bill provides for cooperative agreements with the Indian Nation, tribe, or pueblo to exchange information and for the reciprocal joint enforcement, collection, remittance, and audit of gasoline tax revenues. According to the newspapers, Native Americans are not in favor of this bill.

Mr. Archer reported several changes in fuel tax laws in Arizona. As of January 1, 1998, Arizona is collecting tax at the rack for gasoline and diesel, and under the same law, has implemented a dyed diesel program for off-road use and now requires refund requests for exports from Arizona. Under a new tax law in the State, effective January 1, 1998, distributors are referred to as Suppliers or Permissive Suppliers and are originally licensed with no annual renewal required. (Prior to January 1, distributors who imported, blended or exported gasoline or diesel in Arizona had to be licensed as a distributor and the license had to be renewed each year.) There are 109 licensed suppliers/permissive suppliers in Arizona and each is required to file monthly tax reports and is subject to audit. A third law recently passed in Arizona eliminated the weight distance tax replacing it with an annual motor carrier fee. The same law set the excise tax on use fuel for motor vehicles over 26,000 pounds at 27 cents per gallon until June 30, 2000, at which time the tax will be lowered to 26 cents per gallon. This replaces the most recent rate of 18 cents per gallon and the 8-cent per gallon tax surcharge assessed on use fuel purchases reported by motor carriers. Persons exempt from paying the 8-cent surcharge may obtain a refund for a portion of the new use fuel tax rate.

Oklahoma has proposed several bills to their legislation including one to dye gasoline for exempt uses and another for interest payments made to filers if a refund is not processed within 20 days of receipt. A third bill introduced would allow a consumer to purchase an annual diesel fuel decal for $150 which would entitle the holder to purchase diesel fuel from an agricultural cooperative or similar association for a nonexempt use in lieu of paying the diesel fuel tax. Oklahoma is still showing an increase in revenue since moving the point of taxation to the rack in October of 1996.

The Texas Department of Transportation and the Comptroller's Office have been ordered by the legislature to perform a study on the effects of moving the point of taxation for diesel fuel to the rack. The request for proposals (RFP) is out and a selection is expected to be made sometime in March. The report is expected to be ready by mid-summer, 1998. Changing the point of taxation to the rack has been proposed several times in the past few years, but it has not been approved. The Audit Division of the Comptroller's Office plans to increase coverage of the 4,500 fuel taxpayers in the State. The Comptroller's Office is working with IRS gathering samples for their continued participation in the IRS Below-the-Rack Tax Evasion Project. Mr. Archer then told the Committee that Texas is working with New Mexico, Arizona and California on a blending case that had taken place in New Mexico. In addition, Texas is involved in an illicit fuel importing case with Oklahoma.

North Carolina Task Force

The North Carolina Task Force report was given by Mr. Robert Beck from the North Carolina Department of Revenue. Mr. Beck began his report by stating that the next task force meeting will be held on June 10 in Myrtle Beach, South Carolina, after the Federation of Tax Administrators' (FTA) regional meeting. The first State Mr.reported on was Virginia. He began by saying that Virginia would like to thank North Carolina for getting the tax at the rack legislation in place to present to the legislature, and for their cooperation during the Blue Flame and Red Alert programs. Mr. Beck noted that the compliance rate in Virginia is at 98 to 99 percent. In West Virginia, the legislature is in session. However, tax at the rack is a dead issue in part because there is no support from the Petroleum Marketers Association. There is a bill pending related to kerosene dyeing. Westhas no criminal investigations going on at this time.

Mr. Beck's report on Tennessee noted that they have changed the point of taxation to the rack as of January this year. In Georgia, tax at the rack legislation died in December, but it is expected to be proposed again in the next session. The IRS is holding hazardous material training and will offer retraining every 24 months. Georgia has a new IRS excise manager named Mr. Daryl Gilliam. In South Carolina, there is a bill in before the legislature that will clarify the power take off (PTO) exemption (they are attempting to get it back to the original way it was). Southhas also decided to treat kerosene in the same manner as the IRS law.

In North Carolina, there is expected to be a minor change made to their law regarding marine fuel use. Since the IRS made the marine exemption permanent, North Carolina will remove the refund provision from their law. They also plan on mirroring the Federal laws relating to kerosene and noted that there has been talk of third party credit card agreements. Mr. Beck told the Committee that the North Carolina IRS reported on a wholesale distributor based in South Carolina under investigation. In addition, there were two cases involving Federal tax implications, one of $285,000 and another of $140,000 to $150,000 in civil penalties. The first involved diesel from the rack sold as tax paid, but was untaxed. It was a simple scheme discovered by looking at the paperwork.

Mr. Chris McAdams, from the North Carolina Department of Transportation then provided a brief discussion on the FuelTACS tracking program that North Carolina is implementing. The three phase program will be used to
1) improve the cash management system by allowing cross-matching to take place between sighting reports that capture motor fuel tax information and fuel tax reports; 2) provide real time access to information for officers allowing them to check credentials and other information while a truck is stopped on the road; and 3) implement a one-stop shop where a trucker can register with his/her transponder all the information needed to allow the vehicle to travel nonstop from origin to destination. Mr. Beck finished the task force report by saying that there was no report for Kentucky because they were unable to attend the task force meeting that was held in Raleigh, in January, due to bad weather conditions.

New England Task Force

The New England Task Force report was given by Mr. Allan Ferullo of the Massachusetts Department of Revenue. He began by saying that their last task force meeting was held in Boxborough, Massachusetts, on October 10, 1997, and that all six States were represented by both State and Federal representatives. Mr. Ferullo reported that Massachusetts has been busy getting up to speed on IFTA and that they have successfully trained seven new field auditors to meet the IFTA demands. In addition, the six regular staff auditors have also been trained on IFTA and are currently doing IFTA audits along with fuel audits. Massachusetts has been working with the surrounding States in areas related to audit procedures and billing. The State Police in Massachusetts have conducted 3,096 inspections and have found 75 violations involving dyed fuel. They are actively pursuing those violators. The State Police have better success in finding violators through random stops than through other means. The Massachusetts Department of Revenue recently completed a special fuels examination of a large supplier that was selling low sulfur red diesel to four cities and towns in Massachusetts. The company was collecting the tax, but not remitting it. The company was assessed over $100,000. The State of New Hampshire recently contacted Massachusetts requesting information that indicates approximately 50 oil companies may be tied together. Mr. Ferullo said that they are in the process of requesting special fuels returns to assist them.

Mr. Ferullo continued with reports on Vermont and Connecticut. In Vermont, the bill to change the point of taxation to the terminal rack is still in committee, and the possibility of passage is unknown. If passed, the bill would also eliminate a surcharge on diesel fuel by raising the tax at the pump to 22 cents per gallon and lowering the user report tax from 26 cents per gallon to 22 cents per gallon. It would also allow tax-free bulk deliveries of clear diesel fuel. Recently, Vermont has begun to see some erosion in the gasoline receipts, while other taxes are increasing. A temporary assistant has been hired to help find the cause. In Connecticut, Mr. Ferullo reported that a possible joint audit of a Rhode Island retailer that is selling motor fuels in Connecticut is being discussed. He also noted that Connecticut was well represented at the FTA National Motor Fuel Section Annual Meeting in St.in September 1997 as well as at the Northeast Task Force meeting held in Boxborough in October.

In Rhode Island, an investigation of a special distributor revealed that the distributor was taking credit on the Motor Fuel Distributor Tax Return for taxes paid, but was not remitting the taxes. The investigation showed that the distributor owed $45,000 in taxes which was the distributor was ordered to pay along with an additional assessment of $3,200. The audit also disclosed $28,000 in sales and use tax which is also being assessed. In another case, information received from a neighboring State indicated that a Rhode Island taxpayer was purchasing gasoline in the State, picking up the gasoline in their own trucks and being charged the neighboring State's excise tax. Further review of these transactions indicate that this purchaser's supplier may have advised that the imposition of the freight charges would preclude them from incurring a Rhode Island tax liability. The supplier is being assessed. Tax-free sales between distributors are continuing to be reviewed as are sales for export made by certain distributors. It appears that some distributors are inappropriately classifying some sales as export sales when they are actually in-State sales. In Rhode Island, motor fuel audit activities have been somewhat curtailed due to the IFTA audit requirements. They are expected to resume soon.

In New Hampshire, all "accounts receivable" over 120 days old were reviewed, as were closed and suspended accounts. Following that review, the registration of vehicles by those account names was reviewed. If the vehicles were still registered under the account name, then a reminder phone call was made regarding the money owed to the Road Toll Bureau. A list of vehicles registered under suspended or closed accounts was made and a notification was sent to the account in question. If there was no response within 10 days, the vehicle registration was suspended. This worked to block any renewal or other activities under the account in question. This information was also sent to the International Registration Plan (IRP). In January 1998, $15,000 was collected as a result of these efforts. New Hampshire recently collected the fourth quarter IFTA reports and reported that the obvious errors have lessened on the reports since the first quarter of 1997. The revised collection of diesel tax for the calendar year 1997 versus 1996 showed an increase of 80 percent, after subtracting normal growth of 7and a one-time increase in revenues of 25 percent in January 1997 (due to a timing difference). In January 1997, the point of taxation was changed to the distributor level.

Maine reported that legislation (carried over from last year) to change the point of taxation is in the final stages and should be voted on by the end of March 1998. The change would move the taxation level from the supplier/distributor to the terminal rack. Federal highway funding has enabled Maine to have dedicated auditors and roadside enforcement of fuel tax evasion activities. This combination has led to many completed and ongoing audits of suppliers/distributors as well as users. The funding has allowed a measure of stability to the fuel tax division in Maine and has had a direct result on the quantity and quality of the audits performed. Criminal investigations are ongoing. Maine is becoming more active in uniformity issues and plans to be a regular member at the biannual meetings. Mr. Ferullo closed his report by telling the Committee that Maine will host the 1998 Annual Northeast Regional Conference on May 18 through 20, 1998, in York. A task force meeting for both the New England and New Jersey Task Forces will be held May 20 after the regional conference.

Northwest Task Force

Mr. Quintin Hess from the Oregon Department of Transportation gave the Northwest Task Force report. He began by telling the Committee that Alaska recently issued an assessment for $750,000 of motor fuel tax, penalty, and interest. The case resulted from an informant, and the taxpayer has agreed to pay the entire amount. Alaska is looking at legislating a bad debt allowance. Mr. Hess continued with a report on Montana. He noted that Montana is experiencing a 30 to 40 percent error rate on refund claims. In the area of legislation, Montana is looking to address unattended cardlocks that dispense dyed fuel. Montana believes that this issue should be looked at on a national level. They are considering requiring licensing of trucks transporting fuel through the State.

In Idaho, there is an ongoing investigation of two fuel distributors who are importing fuel into Idaho without a distributor's license, and who are claiming exports to Wyoming or Utah, but delivering the fuel to Idaho locations. A decision on whether to criminally prosecute or apply civil penalties is due by March 31, 1998. Legislative action in Idaho related to fuel taxes was limited to passing a law that grants interest to consumers on tax refunds. Relating to Native American issues, Idaho is in the process of issuing an administrative decision that says fuel imported from outside of the State to an Idaho Native American reservation is subject to Idaho's "first receipt" law and that the fuel tax must be remitted by the licensed distributor who owns the fuel when it enters Idaho. Idaho is preparing to litigate, in District court, a case involving an Idaho licensed distributor who sells fuel tax-free to a Native American retail outlet that has both Native American and non-Native American customers.

In Washington, a bill to change the point of taxation to the terminal rack passed on March 11, effective January 1, 1999. To aid in enforcement, the legislature funded three State Patrol criminal investigators to be assigned to the Washington Department of Licensing. The investigators will focus on fuel tax evasion. The Department of Licensing recently received a tip that a trucking company was using dyed diesel in highway vehicles. The IRS dyed diesel inspectors confirmed the dyed diesel violations. State and Federal excise tax auditors are scheduled to visit the company. There have been several challenges to Washington statutes involving Native American issues. One involved a licensed distributor exporting tax-free fuel within the State to a reservation. A second involved exporting fuel to a reservation in a different State without listing the State of destination. To date, these challenges have been successfully defended. In Oregon, efforts to improve compliance in the use fuel tax program have resulted in several legal challenges to the State's ability to go back six years in cases of neglect. A local Circuit Court ruled in the State's favor on the issue, but the results of one hearing are pending and another is being scheduled to review the same issue. The Oregon DOT has submitted legislative concepts for the 1999 legislative session that would increase bonding limits, grant additional collection powers, increase penalties for violation of statutes and permit denial of licenses in cases where similar licenses have been denied or revoked in other States or jurisdictions, and in cases where the applicant has been convicted or pled guilty to crimes involving motor fuel taxes.

New Jersey Task Force

Mr. Joe O'Gorman presented the report for the New Jersey Task Force. He first recognized the several task force members from the States of Pennsylvania, New York, Maryland, Delaware, from the District of Columbia, and from the IRS districts, in attendance at the Steering Committee meeting, who were in town for the next task force meeting in Washington, D.C., on the following day. These are listed on the attendance list, Attachment 1. He thanked the DC Office of Tax and Revenue for arranging the meeting facilities at the U.S. Department of Labor building.

Mr. O'Gorman covered some of the recent developments in each State. In New Jersey, legislation addressing dyed diesel fuel has been drafted and is still under review within the Department of the Treasury. Roadside diesel fuel sampling will begin this year under an IRS agreement with the Division of State Police. For Pennsylvania, a tax increase and penalties for highway use of dyed diesel were enacted effective October 1, 1997. The State also reports good success in implementing electronic filing. The State is gearing up a program for roadside dyed fuel inspections to replace the former IRS-funded contract which concluded in 1996. Maryland and Delaware are continuing the roadside diesel fuel sampling program under IRS funding agreements in 1998. In Maryland, only four violations were found in 1,376 samples, which indicates a very favorable compliance rate and the strong deterrent effect of an aggressive enforcement program. The DC Office of Tax and Revenue is increasing the motor fuel audit program in the coming year. Mr. O'Gorman invited Mr. Gene Williams to give the New York report. Legislation was adopted making motor fuel sales to tugboats taxable. Two bills are pending in the State legislature that would reduce the tax rate for the New York highway tax or eliminate it altogether. The State is developing "one-stop shopping" for motor carriers to comply with State permit and registration requirements. The State continues to participate in joint motor fuel tax audits with neighboring States, which are an outgrowth of the audit sub-group of Connecticut, New York, New Jersey and Pennsylvania which meets every few months.

Florida Task Force

Mr. David Skinner, from the Florida Department of Revenue, gave the Florida Task Force report. Mr. Skinner began by telling the Steering Committee that the last task force meeting was held in Jacksonville, February 18 through 20. He reported that a significant amount of time was spent discussing the kerosene "tax or dye" law which led to a separate meeting with suppliers in Florida to explain how the State will deal with several kerosene issues. Alabama reported no changes in legislation, but did have two convictions in a bootlegging case involving Fletcher Oil who was making false invoices to marinas. In Arkansas, an EDI mandate passed with an effective date of June 1998. After July 1998, paper returns will not be accepted. A change in legislation requires that diesel tax be collected on receipt by distributors instead of at time of sale. To date, Arkansas has conducted 10,000 inspections and found 150 vehicles with dye, and collected $65,000 in penalties. They have noticed that violations increased dramatically in the fall of 1997. The violations were mostly in diesel pickup trucks. In Mississippi, there were no new laws to report except for a small change in a definition. Dyed fuel inspections are continuing in Mississippi. Information for Louisiana and Georgia was covered in other task force reports.

Florida reported that it is participating in the Below-the-Rack Tax Evasion Task Force and fuel fingerprinting. There were no legislative changes this year, but the most recent legislative changes in Florida include: tax at the rack and dyed diesel; kerosene taxed as aviation fuel unless it is dyed; and, marine diesel exempt from fuel tax. Florida has had tax at the rack in place for over a year, and in one 12-month period tax revenue from gasoline has increased 1.3 percent; local option revenues have increased 3.8 percent; diesel on-road revenue increased 13.2 local option diesel revenue increased 15.4 percent; and aviation fuel (kerosene) increased 21.4 percent. All revenues show an increase after adjustments for refunds and rate changes. Under the new laws, 45 terminal suppliers pay 99 percent of the State tax and 50 percent of the local option tax. Four hundred wholesalers pay the remaining taxes. Enforcement under the new law shows low delinquency rates with tax liens filed only on four accounts. One new criminal case has been discovered. Audits of all terminal suppliers are taking place. Mr. Skinner concluded by saying that the next meeting would take place in Myrtle Beach on Junefollowing the Southeastern Regional FTA Meeting.

California Task Force

The California Task Force report was given by Mr. Allan Stuckey. He began by saying since the last Steering Committee meeting held in St. Louis, the California Task Force Subcommittee had met in Reno, in October 1997, and in San Diego, in February, 1998. The next meeting of the subcommittee is scheduled for the end of April, in Boise, in conjunction with the FTA Pacific Region Motor Fuel Tax Section Meeting. The next full task force meeting will be scheduled within the next six months. Mr. Stuckey began the State reports with Nevada. The State of Nevada passed legislation approving the use of a water emulsion fuel called A-55 which is made of naphtha, crude oil, and about 30 percent water. Nevada granted this fuel a favorable tax level in comparison to diesel based upon taxing it on the energy value of the fuel in comparison to diesel. New Mexico passed a law in 1997 to tax water emulsion fuels as an alternative fuel at a lower rate than diesel. In Arizona, the point of taxation for gasoline and diesel was changed to the terminal rack as on January 1, 1998. Arizona has also added dyed fuel provisions to allow for off-road use only. Colorado is developing a dyed fuel law under which agriculture will have to buy dyed fuel. They are also attempting to mirror the IRS law with respect to buses.

In California, dyed fuel assessments now total over $530,000 from 218 violations based on tests performed through the end of January 1998 by the California Air Resources Board and the IRS. Tests of retail samples for the year 1997 showed 39 out of 808 had dyed concentrations of 1.0 ppm or greater. Fuel testing in California is moving toward the enforcement state. Starting in 1998, California and the IRS will be working together in assessing penalties against retail stations with dye levels above 1.0 ppm. California is also dealing with the water emulsion tax issue. The developer of the fuel and a carrier that wants to use it will be attempting to get special legislation to treat it as an alternative fuel taxed at less than diesel. Revenues from changing the point of taxation for diesel to the rack are holding steady at about 15 to 17 percent increase over prior years. California is reviewing the Montana motor fuel tracking system. They recently proposed legislation to tax kerosene to mirror the Federal program.

NETASK (Nebraska) Task Force

The final task force report was given by Mr. Stephen Baluch who was filling in for Ms. Janet Stege, Nebraska Department of Revenue, who could not be present. He began by telling the Committee that 51 people attended the last NETASK meeting which was held Kansas City, Missouri, on October 23 and 24. Nearly half of the attendees were from the IRS district offices, and the States were very pleased at the increased IRS participation (up from one attendee at the prior meeting). He noted that a representative of DCIS was at the meeting and discussed fuel tax fraud as related to waste fuel. He urged attendees to check their States' laws regarding waste fuel and hazardous waste licenses. Mr. Baluch also noted the general displeasure among the States for the abrupt termination of the IRS dyed fuel sampling agreements, particularly when other States elsewhere in the country have continued to receive funding through 1998. States have found it difficult to replace this effort with State funds, particularly in the short term, even though IRS will continue to pay the laboratory analysis costs.

Investigators at the meeting identified a common problem with respect to the use of card controls for dyed diesel. It appears that a number of farmers are putting dyed diesel directly into the supply tank of their pickup trucks. Sales records show frequent sales of less than 20 gallons indicating that the fuel would be going into a supply tank and not into a storage tank. Attempts have been made to stop the practice but results have been limited due to time constraints and other factors. The group discussed several additives that cause fuel to be red or dark in color, such as transmission fluid and motor oil, that are sometimes added to the tanks and can trigger penalties or mask the presence of red dye.

Mr. Baluch then summarized recent information from the States. In Iowa, there is a case where a former employee turned in a construction company for illegal practices. Iowa has also charted an increase in tax collections over the past 10 years. They have recaptured some money on refunds. Importers are discouraged from registering as importers, and are encouraged instead to pay Iowa taxes to their suppliers.

Colorado reported that at one inspection site approximately 50 percent of the vehicles checked had dyed fuel. Colorado has no dyed fuel penalties to date, but is considering a legislative proposal that would impose a penalty for dyed fuel use on the highway. First offense would be a $500 fine. A legislative committee is looking at the point of taxation and may consider developing a proposal.

Nebraska plans to introduce legislation that would eliminate the requirement for retailers to file monthly reports. Retailers would still be licensed. Nebraska also plans to recommend that the law specify the ultimate consumer as the taxpayer even though tax is pre-collected by the distributor.

Missouri reported a recent case where kerosene was being blended with diesel fuel. The customer paid tax on the mixed product, but the distributor did not remit it to the State. They are also aware of some tanker trucks loading directly from barges. Missouri will be introducing tax at the rack legislation. They currently do not have a dyed diesel law.

Kansas has an aggressive dyed fuel program with many State officers checking vehicles. Recent results show reduced numbers of violations. Kansas has noticed that a substantial amount of butane is being imported into the State from Missouri, but they are unsure of how it is being used. Implementation of EDI is in process. Kansas has proposed a one-time tax credit to the distributor for implementing EDI.

Montana has their own lab and continues to make numerous inspections. They are finding that the violation rate is dropping. They have been tracking dyed diesel sales and found that approximately 48 percent of all diesel sold is dyed. (There is a large variance between the price of dyed and clear diesel sold at the pump.) They have also noticed a large increase in the number of diesel powered pickup trucks sold, and that in some, the storage tanks in the back have been altered to go into the supply tank. They are checking pickups for dyed diesel, and have had a violation rate of about 10 percent. Montana has completed five border projects with Canada. On the first event, 100 percent of the fuel checked was illegal. Usually, the documents indicated the fuel is dyed, when in fact it was not, even though the drivers were carrying jugs of dye. They have also discovered that about 96 percent of Canadian truckers were out of compliance with the Federal highway heavy vehicle use tax. About 1,200 vehicles were checked for dyed fuel. Overall, there was a 20 percent compliance rate. They also found a large amount of high sulfur diesel. The project has resulted in about $3 million for IRS. Significant assessments have resulted from audits on contractors.

Wyoming has had tax at the rack implemented since January 1997, and as a result have seen an increase of 21.7 percent in diesel tax collections and 14.5 percent in gasoline tax collections. In 1998, they plan on introducing legislation that will tighten up the law by: requiring importers to be bonded; providing a bad debt allowance; further elaborating on definitions; and, providing refunds to the end users instead of the seller. In addition, they want to make it mandatory that Wyoming tax is charged whenever the destination is Wyoming, regardless of where the sale originates. Wyoming's dyed fuel penalty is about one-third of the IRS penalty since their tax rate is about one-third of the Federal tax rate. They have not done any checks and do not receive IRS information. The diesel compliance officers (DCO) are restricted to using the weigh stations for roadside fuel checks.

In South Dakota, they are still seeing a violation rate around 12 percent on dyed diesel. They are assessing numerous truckers from out of State, but are finding it difficult to collect the $250 fine. They are working on a
computer program that would provide export information to other States. No new motor fuel legislation was introduced this year.

North Dakota's dyed fuel legislation went into effect on July 1, 1997. They charge two percent tax on the dyed diesel and the full fuel tax on clear diesel. The law did not provide any penalties for misuse. State officials are working with industry to prepare a proposal to be presented to the State legislature. They are considering a possible change in licensing and tax at the rack for gasoline. Diesel is more difficult to tax at the rack since the two percent is the responsibility of the end user. North Dakota is working on an EDI program.

Minnesota has had three legislative changes effective July 1, 1997, including: 1) elimination of the ethanol credit, 2) eligibility for farmers to buy tax-free gasoline, but not diesel, and 3) development of procedures for PTO refunds based on a percentage of use. On October 1, 1997, a new law took effect requiring all gasoline to be oxygenated. Dyed fuel testing is going well, but they are collecting fewer samples. Minnesota is progressing with their EDI program.

The next task force meeting will be held May 7 and 8 in Iowa.

At the conclusion of the task force reports, Ms. Alston noted that the meeting schedules (Attachment 10) for each of the task forces and for the Steering Committee, as well as the State laws regarding motor fuel taxes (Attachment 11) were included in the registration package. She asked task force leaders to check the data to be sure they were correct.

Item 6--Other Participating Agency Reports

Following the lunch break, reports were invited from other participating agencies. The only report was by Ms.Poston, from the DESC, who briefly discussed water movement of petroleum cargo by inland waterway and the regulations that govern it. She noted that a contract charge for shipping delays in route was able to be disallowed because data obtained from the U.S. Army Corps of Engineers confirmed that the delays had not occurred. Ms. Poston provided information on how to obtain information on water movement of fuel cargo from the Corps of Engineers (Attachment 12).

Item 7--IRS Reports

Ms. Alston introduced Mr. Ricky Stiff to present the IRS reports. Mr. Stiff first asked Mr. Robert Shepherd, from the New York Department of Taxation and Finance, for an update on the Below-the-Rack Tax Evasion Project. Mr. Shepherd began by saying that the latest meeting of the project task force is underway this week in San Francisco and that the last meeting was held in November in Houston. He noted that the fuel fingerprinting project has expanded its reference library and now includes samples from Arizona, Colorado, Connecticut, Florida, Maine, Massachusetts, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Rhode Island, South Carolina, Texas and Vermont. The fuel fingerprinting program can identify product found in the State, not only product from local refineries, but what is normally shipped into the State for sale. It is possible to track product subgroups such as transmix, kerosene, and aviation fuels to the end user. To date, they have been able to track 327 million gallons of transmix; 11.6 billion gallons of aviation fuel; and, 1.6 billion gallons of kerosene. As a result of the tracking program, California has uncovered a below-the-rack evasion scheme. Mr.completed his presentation by giving the group a phone number for Ms. Helen Curtis Brown , (281) 721-7941, who would appreciate any information on below-the-rack evasion schemes.

Mr. Stiff introduced Mr. Gary James of the Criminal Investigation Division (CID) of the IRS who noted that there has been an unbroken pattern of success in dealing with fuel tax evasion. He mentioned several of the larger cases that have successfully come to conclusion such as Gas Gangsters and Operation Red Daisy. He expects there will be continued success in this area, but also reminded the group that in the future there undoubtedly will be kerosene blending cases to contend with as well as tire cases. Mr. James noted that in FY 1997 there were 63 investigations initiated and 61 prosecutions recommended. Mr. James also noted that the average time served is 20 months. Attachment 13 provides some detail on investigations, indictments, and convictions for FY's 1995, 1996, and 1997.

Mr. Stiff thanked Mr. James for his report, then introduced Mr. Ron Miller of Marathon Ashland Petroleum who did a presentation on a concept for an Excise Fuel Information Reporting System (ExFIRS) that was developed by Marathon Ashland. Mr.began by explaining that legitimate businesses cannot compete with evaders and that is why industry is involved with this project. He told the Committee that a joint industry government working group, which has been active over the past four years, came up with what the system should do, questions the system should answer, and concerns it should address. The group identified their goal as "building an efficient terminal data tracking system which would minimize the leakage of motor fuel taxes." Marathon Ashland has conceived a system that includes independent verification; requires total accountability; facilitates joint partnering between Federal, State and industry levels; provides timely data to Federal and State tax agencies; and, that utilizes uniform codes and EDI maps. In addition, the system includes destination State data but only with the stipulation that the terminal operator can rely on the information given to him by the shipper/transporter. Destination State is critical to partnering between States. However, one change may be necessary to facilitate State partnering. The "position holder" taxpayer rule should be changed to recognize the receiving exchange partner in a two-party exchange to be the position holder. The system does not include any data collection prior to bulk delivery by pipeline to the terminal, or terminal receipts of inventory broken down by position holder.

The system focuses on the terminal and has four basic steps:

Database files that need to be a part of the system include: from the transporter, deliveries to the terminal and bulk receipts from the terminal; from the terminal operator, receipts into the terminal, closing inventory, and delivery from the terminal; and, Form 720 data and destination State of deliveries. Other database files that should be included are the Federal employer identification number (FEIN), 637 registrations, terminal control number, and possibly, the terminal capacity.

Future enhancements may be used to evaluate: verification of truck deliveries into "approved" terminals; "unapproved" terminals; the need for position holder information reports on untaxed non-bulk removals; and, IRS "whistles and bells."

The system needs to include reasonable tolerances such as allowing the cross verification to be within a certain percent, and taking into consideration time variances in data reporting. Most important, the system needs to be simple yet complete.

Mr. Stiff thanked Mr. Miller for his presentation and made several comments. He noted that the IRS supports this, except for the proposed change in treatment for exchange agreements which would need to be addressed with IRS Counsel and Treasury. The IRS plan, if funding is made available, is to develop a working group including Federal, State, industry, and interest group representatives, with the FTA acting as the point of representation for the States. The purpose of the working group would be to take the ExFIRS system developed by Marathon Ashland and identify what is good, what needs to be improved, and what the customer needs. Mr. Stiff discussed adding additional databases from other sources that would further expand the capabilities of the proposed system. He also admitted that the additions should be done incrementally and on some type of time schedule.

Mr. Ray Barnhart asked how the other lead States felt about this program. He was looking for input from lead State representatives. Mr. David Skinner supported this "absolutely" saying that the destination State information is very important. Mr. Barnhart emphasized to the group that if funding is to be assured for this system, we would need the House provision which provides contract authority funds. Furthermore, to allow the States to expand their tax compliance efforts, we need to get the 1/4 percent allowable use of STP funds into the House bill.

Due to limited time remaining, the usual IRS data reports were not presented but were provided for the minutes. Attachment 14, Joint Federal/State Motor Fuel Tax Compliance Project Statistical Accomplishments, shows the latest figures for examinations. Attachment 15, Dyed Diesel Accomplishments, shows the inspection and violation rates related to dyed diesel. Attachment 16 shows Diesel Fuel Revenue by Calendar Year prior to and since the January 1, 1994 effective date of the Federal tax at the rack and dyed fuel requirements.

Item 8--Industry Issues in Kerosene Dyeing

Ms. Alston then introduced Ms. Barbara Bush from the American Petroleum Institute (API) to address industry issues related to kerosene dyeing. The Taxpayer Relief Act of 1997, Pub. L. 105-34 enacted August 5, 1997, extended the dyeing requirements for diesel fuel, in effect since January 1, 1994, to kerosene, which is often blended with No. 2 distillate fuel for sale as diesel fuel. This provision is effective on July 1, 1998.

Ms. Bush indicated that API had supported the consistent treatment of kerosene under the diesel fuel tax rules. What had appeared to be a relatively simple concept turned out to be a much more complicated issue intertwined with jet fuel product requirements, use of kerosene for home heating, and availability of taxed and untaxed kerosene at terminals. Ms. Bush was accompanied by Mr. Grover Shelts, Excise Tax Director for Phillips Petroleum and the current chair of the API excise tax committee. Ms. Bush asked Mr. Shelts to describe some of the complex issues that will need to be clarified prior to implementation of dyed kerosene requirements.

Mr. Shelts stressed that the definition of "kerosene" in the final rules will have a major impact on how the petroleum industry implements the tax and dyeing requirements, since there are several products similar to or derived from kerosene that could be affected. Jet fuel, for example, taxed at a different Federal rate for commercial aviation use, is a similar product which the aircraft industry has already indicated must not be dyed or tainted with dye because of possible adverse engine performance affects. Procedures for ultimate vendor refunds for use of undyed kerosene for home heaters or blending with home heating fuel are yet to be defined. A further complication for the industry is the requirement of the Taxpayer Relief Act that approved terminals that offer undyed kerosene or diesel fuel for sale must also offer dyed (untaxed) product so that the consumer is not forced to buy the taxed fuel. Because of these and other complex issues that must be addressed in the final rules, the industry has urged the IRS to initiate an early and coordinated effort to discuss and develop proposed rules. But just a few short months from the effective date, the IRS has yet to publish a proposed rule. The industry will also be looking to State revenue authorities to integrate State tax procedures with the Federal requirements, which again begs for early guidance from IRS so that States can consider and adopt necessary changes.

Ms. Bush provided some additional background on the legislative language that required terminals selling kerosene to offer dyed kerosene as well. The House bill version of the Taxpayer Relief Act of 1997 included the requirement to tax or dye kerosene upon removal from the terminal. Because of the substantial use of kerosene for home heating, particularly in the northeastern States, and the fear that consumers would not be able to obtain untaxed kerosene for this purpose, the Senate insisted that a provision be included in conference to add the requirement for terminals to sell the dyed untaxed fuel wherever undyed kerosene was offered for sale. The production industry opposed this requirement from the outset since it would force the industry to incur additional costs for kerosene dye equipment in areas where there may be little demand for untaxed or dyed kerosene. As an interim relief measure, the industry supported an amendment to S. 1173, the Senate ISTEA reauthorization bill, to postpone these terminal requirements for two years, until July 1, 2000. The industry would expect that in this interim period, market factors would dictate areas where dyed kerosene would need to be offered for sale. If it could be demonstrated that no adverse consumer impacts related to availability of dyed fuel would occur, the requirement could ultimately be removed.

Ms. Bush closed by reiterating the importance to the industry of having some early guidance on the IRS rules. In particular, the definition of "kerosene" needs to be forthcoming so that the industry has time to adapt the product handling and tax administration procedures to the various product lines involved. In the absence of guidance, there could a great deal of confusion and unintended consequences affecting a number of related products. For example, it is conceivable that without definitions and final rules in place, application of current rules may require payment of both aviation taxes and highway excise taxes on the same quantity of fuel.

Mr. Stiff provided a brief IRS response to these concerns. Mr.admitted that the IRS Counsel's office had not moved as quickly as hoped on developing proposed rules to address the kerosene dyeing provisions. This was largely the result of the number of other excise tax law changes also adopted in the Taxpayer Relief Act that required immediate attention. He expressed the hope that the Counsel's office would be able to address these rules soon. But in any event, on July 1, 1998, IRS would begin enforcing these requirements as written in the law. He did not see any likelihood that double taxation of the same quantity of fuel could occur in applying the language of the law. Mr. Shelts suggested that in the absence of final rules, language of the law that conflicts with current rules may be subject to any number of interpretations by the taxpayer and the tax enforcers, and just about anything could happen.

Ms. Alston thanked Ms. Bush and Mr. Shelts for bringing these concerns to the attention of the group. We can only wait and see how these issues will evolve once regulations are in place.

Item 9--Review of Current Program Items and Recommendations for Future Changes

Ms. Alston again introduced Mr. Baluch to be the moderator for the final agenda item which is a round table discussion of the current program and recommendations for future changes. Since this is the part of the meeting where we get to critically examine the way we have been doing things, Ms. Alston encouraged everyone to offer suggestions to improve the effectiveness of the program.

Mr. Baluch suggested that, in the limited amount of time remaining, the discussion focus on the specific questions that were identified in the final agenda package, since these were issues that had already been brought to FHWA's attention by the States or discussed at task force meetings. As FHWA transitions to new legislative authority and funding for the Joint Project, it is appropriate to review all of the previous operating procedures to determine what should be changed to improve the program in the future. Aof all the previous guidance and policies adopted by the Steering Committee was provided to participants and is included as Attachment 17. Mr. encouraged the lead States to circulate this summary at future task force meetings, and to invite suggestions for changes and improvements to any of these items as well.

IRS Issues

With respect to IRS issues, Mr. Baluch noted that one recurring theme throughout the country is uneven participation by IRS District Offices at the task force meetings. Since this issue was brought to the attention of IRS at the last Steering Committee meeting in September 1997, some task forces have seen a dramatic improvement. For example, the last NETASK meeting in October 1997 had about 25 IRS participants. Since IRS participation has waxed and waned in the past, some States are uncertain of the extent of the IRS commitment to participate in the task force activities. Mr. Stiff responded that IRS field office participation in task force activities has been included in the business plan as a priority for field office travel funds. Mr. noted that on some occasions, IRS district personnel have not always received notice of the regional task force meetings, so he encouraged the States to be sure that all the appropriate IRS offices are invited. Both the Principal Contacts list maintained by FHWA and close cooperation between the lead States and lead IRS districts can help assure complete and up-to-date participant lists for task force activities.

Steering Committee Operations

Mr. Baluch then invited discussion of Steering Committee operations and procedures. He first suggested members review the role of the Steering Committee adopted at the first meeting. He noted that several items have been completed or are no longer needed. He suggested that lead States poll the regional task force members on a revised role for the Steering Committee for consideration at the next meeting in Denver, November 4, 1998.

With respect to Committee participants, Mr. Baluch invited suggestions for additional representation. Since Native American issues have become a regular topic, he invited comments on whether a Native American organization should be invited as a regular participant. Mr. Gregg Mazzucco commented that he found Mr. Dosset's presentation in response to the review of proposed legislation to be helpful in framing the Native American point of view. Mr. Baluch pointed out that any Federal legislation to address the issue of State fuel taxes from sales on Native American reservations would be greatly enhanced if language more acceptable to both parties could be developed. The consensus of the group was that an organization representing the Native American viewpoint should be included as a regular participant. Mr. Baluch agreed to get some suggestions on an appropriate organization from Mr. Mark Van Norman at the Department of Justice or from the Bureau of Indian Affairs, as Mr. Hecksher suggested.

Mr. Beck recommended that a representative of the Canadian provinces be included, perhaps from the motor fuel uniformity group that is now getting organized in Canada. There was general consensus that this should be done. Mr. Baluch will try to identify a Canadian provincial representative for the next meeting. No other suggestions for additional representation were offered.

The Steering Committee meeting schedule has not been set by any official Committee decision, but is set by consensus at each meeting for one or two meetings ahead. Traditionally, the Committee has met twice per year, once in the spring in Washington, D.C., and once in the fall in conjunction with the FTA annual motor fuel conference. Mr.noted that the Steering Committee meeting following the FTA annual meeting comes at the end of a long series of general sessions and committee meetings, and that many participants are losing stamina and interesting topics by the time the Steering Committee takes place. It has been suggested that a single annual meeting be considered. One disadvantage of deleting the second meeting in conjunction with the FTA conference is that the non-lead States would lose their single annual opportunity to participate in the Committee deliberations. This could be remedied by inviting additional non-lead States to the Washington, D.C. meeting. Mr.commented that a full year would be a long time between meetings that would surely interrupt the continuity of Steering Committee deliberations. Mr. Ferullo suggested that the Steering Committee meeting at the FTA conference be scheduled on Sunday rather than by adding on to the end of the meeting. Mr. Baluch thought this might interfere with other committee meetings scheduled on Sunday, such as the Uniformity Committee. For the November FTA meeting in Denver the Steering Committee time slot of Wednesday afternoon, November 4, has already been discussed with Ms. Cindy Anders-Robb, the conference coordinator, but in the future we will try to find a different time slot.

State Funding Issues

Mr. Baluch pointed out that FHWA has always sought to offer the States the greatest flexibility possible for the use of FHWA grant funds within the cost principles established by the OMB in Circular A-87. Mr. Baluch noted that A-87 was revised in 1995, and for all grants funded under the new transportation legislation, the States will be following the revised document. One important change from the old document is that all cost items, both eligible and ineligible expense types, are included in a single list in alphabetical order, so it is imperative that the State grant recipients read carefully the description of each cost category proposed for the use of grant funds.
Mr. Baluch will be attending many of the upcoming task force meetings to describe the new cost principles and other changes in grant administration.

Almost all activities proposed for funding with FHWA grant funds have been determined to be eligible. For example, costs associated with dyed fuel enforcement, IFTA enforcement, and Uniformity Committee participation have all been determined to be eligible. See Attachment 17 for discussion of cost eligibility issues. One notable exception has been that FHWA did not agree to pay the expenses of State representatives attending the FTA regional and annual motor fuel conferences. This issue alone has probably generated the most discussion between FHWA and the States, particularly since task forces are frequently scheduled in conjunction with these conferences and travel costs now have to be split between eligible and ineligible portions of the meetings. Mr. Baluch invited discussion about whether this policy should be changed. He quoted the following from Circular A-87 concerning allowability of costs for meetings and conferences:

The regional and annual FTA motor fuel conferences clearly seem to fall within this definition, and the technical content of the meetings has been overwhelmingly devoted to the fuel tax evasion issues directly related to the purpose of the FHWA grant funds.

Based on this information, Mr. Beck recommended that the travel policy be revised to allow State participants to charge costs for these conferences to the FHWA project. Mr. Hess asked how that would be consistent with the Section 1040 language that requires States to certify that the FHWA grant funds do not replace activities previously funded by the State. The actual certification is that "the aggregate expenditure of funds by the State, exclusive of Federal funds, for motor fuel tax enforcement activities will be maintained at a level which does not fall below the average level of such expenditure for its last 2 fiscal years." Mr. Baluch explained that Federal funds may be substituted for any single cost item, previously paid with State funds, as long as the aggregate expenditure, including all motor fuel tax enforcement costs, exceeds the prior 2-year average plus the Federal grant funds.

Mr. Baluch will notify FHWA finance and counsel's office of the proposed change, and if no objections are expressed, the modified policy will be effective from the date of FHWA approval of the minutes of this meeting.

No other issues on cost eligibility were suggested for reconsideration. The State maintenance of effort certification is a requirement of Section 1040, and may be changed by congressional action. All versions of the proposed transportation legislation would retain this certification.

Motor Fuel Training

Mr. Baluch introduced Mr. Ron Alt, FTA, for an update on the remaining motor fuel training course FTA will be offering under the training contract with FHWA. Mr. Alt distributed a memorandum describing a proposed Basic Motor Fuel Audit Training Course (Attachment 18) that would cover industry practices, motor fuel transaction records, and types of fuel tax fraud. Based on the comments and suggestions FTA has received from the States, it appears that a basic course is needed for new motor fuel tax auditors as a result of normal turnover in State audit staff. Ms. Cindy Anders-Robb, the recently appointed motor fuel specialist for FTA, will be coordinating the development of the course. She will be in touch with the compliance project participants to identify speakers for the topic areas shown in the proposed course agenda. Preliminary plans are to offer the course this coming September in Indianapolis. Mr. Alt advised the States to watch for the formal course announcement on the FTA home page at www.taxadmin.org.

Since FHWA has no source of funds for continuation of training programs, he invited suggestions on the types of training that would be needed in the future and how it could be funded. FHWA would be willing to administer a pooled-fund arrangement where States would allocate a portion of the FHWA grant funds back to FHWA for use in entering another training contract. As an alternative, the task forces may wish to develop their own training opportunities such as the Advanced Motor Fuel Training developed by the PUBLICUS Task Force. It was agreed that the lead States would discuss these options at future task force meetings and suggest some recommendations at the next meeting in November. Mr. Baluch asked IRS whether additional Advanced Motor Fuel Training courses would be offered. Ms. Holly Apke, indicated that no additional courses were scheduled at the present time, but IRS would certainly try to offer additional courses if there were a demand. At the moment, Mr. Dave Steward, the principal IRS coordinator for the course development, is developing some less complex modules for the IRS basic level auditor training programs. A pilot for these simplified modules is scheduled this coming June. These modules will follow the same model as the larger course, hands-on auditing of actual financial records to uncover imbedded fraud schemes.

In a related issue, Mr. Baluch noted that supplies of the "Attention Trucker" brochure were nearly exhausted, and that it would not be worthwhile reprinting it unless it were updated. Ms. Apke said she had received requests for an updated version, and that Ms. Rhonda Janes in the IRS Central California District had developed an updated draft. For cost reasons it was suggested that a black-and-white version would be more economical to reproduce. Ms. Heidenreich said Indiana would like to have an updated national version that could be customized with additional specific items and contacts for Indiana. It was agreed that the draft produced by Ms. Janes would be attached to these minutes (Attachment 19), for comment by any Joint Project participants, and that a final draft would be circulated for formal agency concurrence and distribution. The approved final version would provide a consistent nationwide message and serve as a common starting point that could be customized with State-specific information.

Reporting

Mr. Baluch concluded with a discussion of reporting requirements. The reporting requirements for the FHWA tax compliance project grants will need to be revisited depending on the final language of the reauthorization legislation. Some options for consideration at the next meeting are replacing the current 6-month report with an annual report, simplifying the current data report to just a narrative summary, or expanding the data report to include dyed fuel sampling and penalty summaries. Ms.felt that the States should have a consistent way to report the dyed fuel checks to complement the data already summarized and reported by IRS (which covers Dyed Diesel Compliance Officer inspections and roadside checks under IRS-funded State agreements).
Mr. Baluch agreed to work with Ms.on a format that could be discussed at the MayPUBLICUS Task Force meeting and presented at the next Steering Committee meeting in Denver.

That concluded the discussion of program operations and procedures. Mr. Baluch invited any other comments prior to adjournment. Mr. Barnhart offered a few closing suggestions. He reiterated his earlier remarks that the States need to be sure that their congressional representatives are apprised of the importance of the tax compliance program to State motor fuel revenues, both State motor fuel tax revenue and Federal-aid highway funds returned to the States under the surface transportation legislation. He also encouraged the States to support funding for the automated motor fuel reporting system discussed earlier today. Even though the funds for implementation of the system would go to the IRS, important information would also be available to State revenue agencies, and the additional revenue such a system would generate are funds that would ultimately go back to the States to support transportation programs. He again urged the lead States to get this message back to the other States in the regional task forces. Another issue he felt should be mentioned was the extent of fuel tax evasion that might be attributed to the current Federal allowance for farmers to receive undyed diesel fuel without paying the Federal excise tax, where the ultimate vendors claim the refund for fuel taxed at the terminal rack. He noted that this system provides an opportunity for evasion that he hopes IRS and the States are vigorously monitoring. Mr. Beck noted that in North Carolina, the only way for farmers to get diesel fuel without paying the State tax is to purchase the dyed fuel. Several other States have likewise enacted statutes contrary to the Federal legislation on this issue. Mr. Baluch advised that since the potential for abuse of the ultimate vendor refund for sales to farmers is a recurring theme at task force meetings, he is compiling information on the States, such as North Carolina, which do not allow these tax-free sales to farmers. This information will be added as a footnote to the State legislation summary (Attachment 11).

Mr. Baluch reminded everyone that the next meeting is planned for the afternoon of November 4 at the Denver Marriott City Center. The meeting adjourned at 4:15 pm.

Summary of Steering Committee Decisions

1. The lead States should circulate the summary of Steering Committee decisions at future task force meetings and invite suggestions for changes and improvements to any of these items, and specifically address the following:

2. An organization representing the Native American viewpoint should be included as a regular participant on the Steering Committee. FHWA will identify an appropriate organization based on suggestions from the Department of Justice and from the Bureau of Indian Affairs.

3. A representative of the Canadian provinces should be included on the Steering Committee. FHWA will try to identify a Canadian provincial representative for the next meeting.

4. For the November FTA annual motor fuel conference in Denver the Steering Committee meeting time slot of Wednesday afternoon, November 4, will be retained, but in the future we will try to find a time slot that will not extend the length of the motor fuel conference.

5. It was agreed that the revised "Attention Truckers" draft produced by Ms. Janes would be attached to these minutes (Attachment 19), for comment by any Joint Project participants, and that a final draft would be circulated for formal agency concurrence and distribution.

6. FHWA and Indiana agreed to work together on a format for the States to report dyed diesel roadside inspections and penalties not included in the IRS data. This could be discussed at the May PUBLICUS Task Force meeting and presented at the next Steering Committee meeting in Denver.

7. It was recommended that the travel policy be revised to allow State participants to charge costs for the annual and regional motor fuel conferences to the FHWA project. FHWA will notify finance and counsel's office of the proposed change, and if no objections are expressed, the modified policy will be effective from the date of FHWA approval of the minutes of this meeting. The revised "Policy on Use of Project Funds for Travel" is provided as Attachment 20.

Approved:

__________________________________ ______________________________
Thomas R. Hull Date Madeleine S. Bloom Date
National Director Director, Office of Policy
Specialty Taxes Development
Internal Revenue Service Federal Highway Administration

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