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S Verdon, Paul E 
328.3 Pluigin^ the 
L13rropLleak to prevent 
1988 avoidance of taxes 

01 through diversion 
M of consumption in 
Montana gasoline 



"statHkWWTO 1 ^^^ 






JAN 



311989 



HELENA,- MOt'TANA 59620 



PLUGGING THE LEAK 



REVENUE OVERSIGHT COMMITTEE 



A Report to the 51st Legislature 



December 1988 



JUL mc 




Montana Legislative Council, 



PLEASE RETURN 

Published by 
MONTANA LEGISLATIVE COUNCIL 

Room 138 

State Capitol 

Helena, Montana 59620 

(406) 444-3064 



3 0864 00062516 3 



PLUGGING THE LEAK 



To Prevent Avoidance of Taxes 

Through Diversion to Consumption in Montana 

of Gasoline Sold for Export 



A REPORT AND RECOMMENDATIONS 

to the 

5 1ST LEGISLATURE 

As Requested in House Joint Resolution No. 56 

50th Legislature of the State of Montana 

from the 

REVENUE OVERSIGHT COMMITTEE 

By Paul Verdon, Staff Researcher 
June 1988 



Published by 






Montana Legislative council 



Room 138 

State Capitol 

Helena, Montana 59620 



MEMBERSHIP 
REVENUE OVERSIGHT COMMITTEE 



Sen. Robert (Bob) Brown 
Chairman 

Sen. Bruce Crippen 

Sen. Dorothy Eck 

Sen. Thomas 0. (Tom) Hager 

Sen. Joseph P. Mazurek 

Sen. Bill Norman 



Rep. Dan W. Harrington 
Vice Chairman 

Rep. Gerry Devlin 

Rep. John G. Harp 

Rep. Nancy A. Keenan 

Rep. Jack Ramirez 

Rep. J. Melvin (Mel) Williams 



MONTANA LEGISLATIVE COUNCIL 

Sen. J. D. Lynch, Chairman 

Robert B. Person, Executive Director 

David D. Bohyer, Director, 
Division of Research and Reference Services 



Committee Staff 
Paul E. Verdon, Researcher Connie F. Erickson, Researcher 
Jeff Martin, Researcher James H. Lear, Attorney 



TABLE OF CONTENTS 

Page 

HOUSE JOINT RESOLUTION NO. 56 i 

RECOMMENDATION iii 

GENESIS OF THE PROBLEM 1 

PLAN FOR STUDY TO EVALUATE PROBLEM 3 

PROPOSED REMEDY IN 50TH LEGISLATURE 7 

RESOLUTION AUTHORIZING THE STUDY 9 

OBJECTIVES OF INQUIRY 11 

REVENUE OVERSIGHT COMMITTEE CONSIDERATION 13 

IMPACT OF GASOLINE TAX EVASION 19 

FUNDAMENTALS OF GASOLINE TAXATION 21 

SIMILAR PROCEDURES IN NEIGHBOR STATES 2 3 

RECENT REMEDIAL ACTIONS 2 5 

COMPARISON OF GASOLINE SALES IN FIVE STATES 29 

VOLUME OF FIRST SALES OF MOTOR GASOLINE 29 

RECOMMENDATIONS OF NATIONAL ASSOCIATION 3 3 

Appendix 

LC 2 A 

GASOLINE TAX COMPLIANCE ISSUES, 

DEPARTMENT OF REVENUE B 

INDUSTRY COMMENTS C 

Statement by Janelle Fallan, Montana 
Petroleum Association 

Conoco Statement 

Cenex Statement 

Ashland Oil Statement 

Sinclair Oil Statement 

NEIGHBOR STATES' TAX TREATMENT OF GASOLINE 

SOLD FOR EXPORT D 



HOUSE JOINT RESOLUTION NO. 56 



A JOINT RESOLUTION OF THE SENATE AND THE HOUSE OF 
REPRESENTATIVES OF THE STATE OF MONTANA URGING THE 
REVENUE OVERSIGHT COMMITTEE TO STUDY METHODS TO 
STRENGTHEN ENFORCEMENT OF THE GASOLINE LICENSE TAX 
COLLECTION LAWS; REQUIRING A REPORT OF THE FINDINGS OF 
THE STUDY TO THE 51ST LEGISLATURE. 

WHEREAS, gasoline exported or sold for export out of 
the state is excluded from the gasoline license tax; and 

WHEREAS, certain unscrupulous purchasers of gasoline 
sell within the state gasoline that is purchased for 
export, using various methods to avoid the tax; and 

WHEREAS, Senate Bill No. 116 was introduced in 
recognition of the problem of gasoline license tax 
avoidance but unfairly required the distributor to pay 
the tax for the tax evaders; and 

WHEREAS, the Revenue Oversight Committee has the 
expertise and time to properly investigate the extent of 
gasoline license tax evasion and to devise an equitable 
and fair method of enforcement. 

NOW, THEREFORE, BE IT RESOLVED BY THE SENATE AND THE 
HOUSE OF REPRESENTATIVES OF THE STATE OF MONTANA: 

That the Revenue Oversight Committee study the 
enforcement of the gasoline license tax collection laws 
relating to gasoline purchased for export. 

BE IT FURTHER RESOLVED, that the Committee report 
its findings to the 51st Legislature and, if necessary, 
draft legislation to implement its recommendations. 



Passed April 23, 1987 



RECOMMENDATION 

The Revenue Oversight Committee respectfully presents to 
the 51st Legislature and recommends for passage LC 2, as 
embodied in Appendix A of this report. 

After considering the facts as presented by staff, the 
Department of Revenue, petroleum industry 
representatives, and other interested persons, the 
Committee believes that evasion of gasoline license tax 
on exported gasoline could reasonably be expected to 
occur, and that if such evasion does occur or is 
attempted, the enactment of LC 2 will provide the 
Department of Revenue the statutory mechanism necessary 
to collect the lawfully imposed taxes. 



GENESIS OF THE PROBLEM 

In response to the need to increase the revenue available 
to finance completion of the Montana sections of the 
Federal-Aid Interstate System and reversal of the 
deterioration of the aged and aging Federal-Aid Primary 
System, the Legislature substantially increased the rate 
of the gasoline distributor's license tax during the 1983 
regular session and the June 1986 special session. 1 

The cumulative effect of these increases was that after 
August 1, 1986, Montana's gasoline tax rate was almost 
twice as high as its level only 38 months earlier. 

The 50th Legislature prescribed another significant 
increase, and on July 1, 1987, the rate rose to 20 cents 
a gallon 2 to put Montana in a tie for the dubious 
distinction of imposing the nation's highest motor fuel 
tax, an honor that has since been assumed solely by 
Wisconsin, which increased its tax to 20.9 cents a gallon 
on April 1, 1988. 3 

From a situation of relative equality of gasoline tax 
rates with its neighbor states, Montana escalated to a 
markedly higher position that was as much as 250% of the 
rate in one adjoining state. This interstate inequity 
gave particular importance to section 15-70-204(2), 
Montana Code Annotated (MCA), that exempts from the 
license tax gasoline exported from the state. Coupled 
with the lack of statutory recognition of an "exporter" 
as distinct from a "distributor" or a "dealer", the 
difficulties that this inconsistency between state tax 
rates created for those charged with administering the 
motor fuel tax laws were magnified by legislative 
limitations of staff and budget that impeded an effective 



audit process by the Motor Fuels Tax Division of the 
Department of Revenue. 

These facts and circumstances engendered suspicions that 
an undetermined volume of gasoline purportedly sold for 
export from Montana was, in reality, being consumed on 
Montana highways. If such a situation exists, the 
contravention of the law and evasion of the tax 
constitute a mockery of the legislative intention and an 
attack on the fiscal integrity of the state. 

During the 1987 Legislature, SB 116, offered as a remedy 
for these perceived abuses, won unanimous approval in the 
Senate, but the House Taxation Committee could not muster 
enough favorable votes to send the bill to the floor, and 
it died in that Committee. 

After the demise of SB 116, HJR 56 was offered as a 
possible solution to the problem. That measure required, 
as a first step, the gathering of information to assess 
the severity of the problem, if one did exist, and to 
propose a legislative remedy. 



PLAN FOR STUDY TO EVALUATE PROBLEM 

The staff of the Motor Fuels Tax Division of the 
Department of Revenue along with industry observers had 
suspected that some users of gasoline on Montana's 
highways had found and utilized methods to evade payment 
of the gasoline license tax on substantial volumes of the 
product by: 

(1) purchasing the gasoline ex-tax from a licensed 
Montana distributor in conformance with 
15-70-204(2), MCA, purportedly for export out of the 
state, followed by secret diversion of that product 
to use in Montana in a situation that is legally 
taxable; or 

(2) importing from a neighboring state or province 
gasoline that had been taxed at a much lower rate or 
exempted from all tax in the other jurisdiction and 
had evaded this state's lawful tax through 
surreptitious introduction into Montana contrary to 
the stated intention at the time of purchase. 

Both of these stratagems contravene the intention of 
Title 15, chapter 70, MCA, which is to assure that motor 
vehicle operators provide the funds necessary to plan, 
design, construct, maintain, and repair the 11,700 miles 
of federal-aid highways within Montana. Historically, 
the gasoline license tax has been the principal source of 
the state's matching share of the cost of federal 
interstate, primary, secondary, and urban highway 
systems. 

Because the Motor Fuels Tax Division's staff of three 
auditors — only one of whom concentrates on the 
enforcement of the gasoline tax — was unable to 



investigate fully these rumors, the suspicions remained 
unconfirmed although subsequent information and 
complaints from reputable Montana citizens appeared to 
provide substantial verification. With more than 1,300 
service stations retailing gasoline in Montana and 
thousands of farm and industrial users purchasing large 
volumes, budget constraints and limited personnel have 
prevented effective enforcement actions. 

During the summer and fall of 1987, the division 
conducted field audits of retailers at selected locations 
and of distributors at headquarters locations in Montana, 
Kentucky, Wyoming, and North Dakota. Those audits failed 
to turn up evidence of criminal evasion, but in one 
instance it was found that a Wyoming dealer had sold 
gasoline for use in Montana without collecting or paying 
the tax. In this case, a settlement of more than $1,600 
in tax due and penalty was obtained. 4 

The investigation confirmed, however, that in Montana 
there exists the possibility for creation of a "daisy 
chain" type of scam similar to those effectively operated 
in several eastern states. This procedure involves 
passing title to gasoline through a succession of shell 
organizations, resulting in eventual obliteration of the 
trail of responsibility for payment of the tax. 

"Distributors", who are defined in the gasoline tax law 
as any persons "producing, refining, manufacturing, or 
compounding gasoline" or who import gasoline, distribute 
gasoline wholesale, or blend alcohol with gasoline, 
export about 90 million gallons of gasoline from Montana 
annually. At the tax rate of 20 cents per gallon, which 
became effective July 1, 1987, diversion of only a 
fraction of those tax free purported exports to use on 
Montana roads will deprive the state of several million 



dollars of highway construction money each year. Because 
this money will be unavailable to match the federal share 
of construction funds, the loss will be magnified by a 
ratio varying from about 1:5 to 1:9 in terms of 
contracting ability. 

The records they are required to maintain by the 
regulatory agencies shield the common carriers from 
suspicion of contributing to the problem. However, 
lacking supervision, a private carrier, who is immune 
from further scrutiny after obtaining ex-tax gasoline 
from a terminal upon a legitimate order for transport 
beyond the boundary of Montana, can deliver the product 
to Montana users or outlets at a margin substantially 
less than the state's license tax. If a problem exists, 
it is probably in this context. 

The problem arises because Montana's gasoline license tax 
far surpasses the rates in neighboring states. On July 
1, 1987, Montana's gasoline license tax rate increased to 
20 cents per gallon from 17 cents per gallon, a rate that 
had become effective on August 1, 1986, when it was 
increased from 15 cents. From 1979 to 1983, the rate had 
been 9 cents. 

By comparison, the gasoline tax rates of Montana's 
neighbors, according to the State Tax Guide , published by 
Commerce Clearing House, Inc., and the Embassy of Canada 
in Washington, D. C, on July 1, 1987, were: 

Idaho , 14.5 cents per gallon (18 cents 5 on April 1, 1988) 

North Dakota , 17 cents per gallon 

South Dakota , 13 cents per gallon (18 cents 6 on April 1, 
1988) 

Wyoming , 8 cents per gallon 



Alberta , none 

British Columbia , 7.8 cents per gallon 

Saskatchewan, none 



PROPOSED REMEDY IN 50TH LEGISLATURE 

A remedy to the perceived problem was proposed in the 
1987 Legislature in SB 116, sponsored by Senator Farrell, 
which would have: 

(1) amended the definition of "distributor" to include: 
"(b) any person who imports not less than one 
transport load of gasoline during any 6-month period 
from outside the state into Montana for sale, use or 
distribution; " 

(2) repealed the language that allowed a wholesale 
distributor to opt to pay the annual license fee and 
renewal fee of $100 by striking the word "wholesale" 
and the option privilege; 

(3) stricken the exemption from the license tax on 
gasoline exported or sold for export; 

(4) required a gasoline distributor to collect the tax 
on gasoline sold for export unless the purchaser 
provides bills of lading showing the destination of 
the gasoline with proof of delivery outside of 
Montana; and 

(5) required a person who transports gasoline from a 
foreign country through Montana to inform the 
Department of Revenue each month of the quantity and 
destination of gasoline so transported. 

Enactment of SB 116 would have increased revenues by 
requiring distributor's fees from additional importers 
and refiners and would have increased the gasoline 
license tax revenue by the amount realized from the 



additional gallonage it would bring into the tax system 

SB 116 was approved by the Senate on a vote of 50-0 but 
was tabled in the House Committee on Taxation. 



RESOLUTION AUTHORIZING THE STUDY 

House Joint Resolution No. 56, sponsored by 
Representative Gilbert, recognized the problems that SB 
116 was intended to address and pointed out that "the 
Revenue Oversight Committee has the expertise and time to 
properly investigate the extent of gasoline license tax 
evasion and to devise an equitable and fair method of 
enforcement" . 

House Joint Resolution No. 56 resolved: "That the Revenue 
Oversight Committee study the enforcement of the gasoline 
license tax collection laws relating to gasoline 
purchased for export." 

House Joint Resolution No. 56 also instructed the 
Committee to draft legislation to solve any problem it 
found. 

Both the Senate and the House of Representatives approved 
HJR 56. 



10 



OBJECTIVES OF INQUIRY 

The necessary tasks facing the Revenue Oversight 
Committee as it embarked upon its study of the problem of 
evasion of tax on exported gasoline were to determine if 
a problem did in fact exist: 

(1) What are the dimensions of the problem? How much 
gasoline is consumed in Montana contrary to tax law? 
How does this gasoline pass through a distributor? 
How does it reach the purchaser? What is Montana's 
tax loss? 

(2) Is this problem peculiar to Montana? Do other states 
have similar problems? How have other states dealt 
with the problem? 

(3) Can an interstate cooperative mechanism be devised 
to monitor and share information on exports of tax 
free gasoline? 

(4) Can Montana's enforcement mechanisms be 
strengthened? Would increasing the field auditing 
staff be cost effective? Could the distributor's 
reporting requirements be made more stringent? 

(5) Are statutory changes needed? Can the definition of 
"distributor" be broadened to bring private carriers 
into the system? Should exemption from the tax for 
exported gasoline be eliminated? Would a recycled 
SB 116 provide the legislative framework to solve 
the problem? What are the alternatives? 



11 



12 



REVENUE OVERSIGHT COMMITTEE CONSIDERATION 

After a brief introductory discussion by staff at an 
early meeting during the interim, followed by submission 
of a number of research papers by staff, the Committee, 
on November 20, 1987, received input from government 
agencies, industry representatives, and staff. 

Encapsulating the information developed during the review 
of the circumstances surrounding taxation of exported 
gasoline, the staff reiterated the lack of precise 
information on the subject but affirmed that the 
circumstances create an environment in which the 
temptation for abuse of the law is substantial because 
Montana's gasoline tax rate, matched only by Wisconsin 
among the other 49 states, is 250% of Wyoming's and is 
significantly greater than the rate of any of its three 
other neighbor states. 

Problems similar to those which could develop in Montana 
if the present system goes unremedied were recently 
eliminated in the states of New York and Florida by 
adoption of more stringent statutes. Experience shows 
that lack of uniformity in the states' treatment of motor 
fuels taxes, where dissimilarities do exist, hinders 
effective enforcement, and informed observers tend to 
share the following beliefs: 

(1) All exporters and importers should be licensed and 
should be required to post sufficient bond to 
protect the state's interests. 

(2) An unlicensed exporter or importer should pay tax on 
all fuel delivered, subject to refund upon proof of 
delivery and consumption outside of Montana. 



13 



(3) Exemption from imposition of a tax on fuel shipped 
by an unlicensed exporter should be allowed for 
exports transported by common carriers with 
substantiating bills of lading and proof of delivery 
outside of Montana. 

(4) Detailed sharing of information between states on 
standardized forms and in a time frame to allow 
expeditious collection of tax due and verification 
of that collection to the exporting state would 
reduce the likelihood of evasion. 

(5) Adequate enforcement efforts will require more 
trained tax enforcement professionals to conduct 
field audits and other reviews necessary to obtain 
full compliance. 

Representative Gilbert, the sponsor of HJR 56, cautioned 
the Committee that the purpose of legislation should be 
to impose taxes on consumers, not on manufacturers. 
Distributors deserve protection from unfair market 
advantages, and motor carriers deserve protection from 
unfair and illegal competition from unauthorized private 
carriers transporting gasoline. To eliminate these 
potential problems, he proposed that: 

(1) exporters should be licensed and bonded; and 

(2) carriers transporting taxable motor fuel should be 
regulated. 

The Motor Fuels Tax Division of the Department of Revenue 
recommended that compliance with the law could be 
improved and tax collections enhanced by enactment of 
statutes embodying the following provisions and 
authorizing the department to require: 



14 



(1) control through licensing by requiring all persons 
importing or exporting gasoline to be financially 
solvent and to be licensed and bonded; 

(2) increasing the audit staff, which would probably 
result in a net revenue increase; 

(3) balanced inventory reporting, including all imports 
and tax free inventory on the monthly gasoline tax 
returns, to facilitate auditing without frequent 
visits to the distributor or exporter; 

(4) information sharing between states to allow cross- 
checking of information on gasoline movements 
between those states sharing import/export schedules 
with adjoining states; and 

(5) magnetic tape to facilitate rapid cross-checking of 
gasoline movements between licensed distributors and 
between states. Electronic data would result in 
long-run savings. 

Extensive audits of the U. S. Customs Service records by 
the Motor Fuels Tax Division staff have turned up no 
evidence of abuses of the tax law in regard to movement 
of gasoline into Montana from Canada. The department has 
the statutory right to audit common carriers, but the 
department is unable to audit the thousands of individual 
farm users because they are not required to maintain 
records and invoices. 

The Department of Revenue emphasized its belief that the 
only assurance of collection of all lawful taxes on 
exported gasoline lies in allowing tax free exports only 
by licensed exporters who meet the same bonding 



15 



requirements as distributors and who are responsible for 
payment of the tax on all gasoline except that 
specifically exempted by statute. In cases of other 
persons who purchase gasoline for transport beyond 
Montana's borders, refund of the tax could be made upon 
proof of delivery and consumption outside of Montana. 

The Montana president of the Western Petroleum Marketing 
Association agreed that the department's proposal to 
license exporters would allow accurate identification of 
the point of consumption of gasoline and of the ultimate 
tax liability, but the requirement for up-front payment 
of tax would impose an additional burden on the 
distributor's cash flow. 

The Montana Petroleum Association endorsed the necessity 
to eliminate tax evasion and to impose the tax burden 
equally on all users on the condition that the methods to 
achieve this objective must prove to be cost effective 
for the supplier as well as for the Department of 
Revenue. Three avenues that could lead to a remedy for 
the problem include strengthening of the existing system 
through licensing of exporters, increased auditing 
including cross-checking of data with surrounding 
jurisdictions, and surveillance. 

Ashland Oil, Inc., the parent company and supplier to one 
of Montana's largest retailing chains, believed that 
statistics on the recent increases in gasoline sales in 
Montana's neighbor states coupled with sales declines 
here indicate that some gasoline from out-of-state 
sources is being introduced into Montana for consumption. 
The company suggested that the problem, if it exists, 
could be solved by: licensing and bonding of exporters; 
requiring all exports to be transported by common 
carriers; subjecting importers and exporters to the same 



16 



requirements; close monitoring of sales between exporters 
to discover possible collusion; and further controls at 
the borders of states to improve recordkeeping. 

Sinclair Oil Corporation, another large volume 
distributor, cited the recent actions of New York State 
to enact stricter penalties and enforcement laws and to 
assure prosecution of evaders as possible models for 
effective remedies in Montana. Sinclair warned that new 
requirements for payment of the gasoline tax up front 
could prove to be an obstacle to new business activity in 
the state. 



17 



18 



IMPACT OF GASOLINE TAX EVASION 

Evasion of any tax is a matter of concern to public 
policy makers and public administrators for many reasons, 
but two are of particular significance here. First, 
failure to pay any tax legally due is a manifestation of 
contempt for lawful authority, and the accompanying 
failure to detect and punish scofflaws jeopardizes the 
effective enforcement of all taxes. Second, evasion of 
any tax deprives the levying jurisdiction of revenue and, 
to maintain the same level of services, requires other 
taxpayers to carry an inordinate share of the burden of 
governmental cost. In this instance, evasion immediately 
decreases the resources available to the Department of 
Highways to construct, repair, and maintain the highways 
demanded and deserved by the people of Montana. 

Untaxed gasoline is likely to be distributed through a 
marketing system outside the normal trade channels and is 
likely to intensify the competitive burden upon the law- 
abiding businesspeople whose legitimate markets are 
invaded by the contraband fuel. 

Of concern to the regulated carriers, although somewhat 
beyond the scope of tax considerations, are unlicensed 
transporters who may invade the domain of licensed 
truckers by delivering cargoes that they are not legally 
authorized to carry. 

From these variegated threads is woven a pattern of 
concern affecting virtually everyone in Montana. 



19 



20 



FUNDAMENTALS OF GASOLINE TAXATION 

Montana's gasoline tax law, Title 15, chapter 70, MCA, 
includes these basic provisions: 

Montana's gasoline license tax of 20 cents a gallon 
is a tax levied directly on the "distributor" who is 
defined as any person who produces, refines, 
manufactures or compounds or imports gasoline "for 
sale, use, or distribution" or any wholesale 
distributor who chooses to become licensed. The 
distributor passes the tax along to the retailer by 
adding the tax to the price, and the retailer 
likewise adds the tax to the price he charges to the 
ultimate purchaser, the motorist. (15-70-201, MCA.) 

By the 25th day of each month, every distributor 
must report to the Department of Revenue and pay the 
license tax on all gasoline distributed by him 
during the preceding calendar month. (15-70-205, 
MCA.) 

For purposes of calculating the gasoline license 
tax, gasoline is considered "distributed" when it is 
withdrawn from tanks or storage facilities at a 
refinery or pipeline terminal for sale or use in 
this state or for transportation other than by 
pipeline to another refinery or pipeline terminal in 
this state. After withdrawal, the gasoline may be 
distributed only by a licensed distributor. 
(15-70-201, MCA.) 

Gasoline exported or sold for export is exempt from 
the license tax. (15-70-204, MCA.) 

No private purchaser, other than an exporter, is exempt 

21 



from the gasoline license tax. The tax on gasoline used 
for agriculture or other approved off-highway purposes 
may be refunded upon submission of a claim in the proper 
form accompanied by the required documentation. 

If only one-tenth of the 90 million gallons of gasoline 
withdrawn from Montana terminals and refineries for 
export each year were delivered to Montana users and 
ultimately consumed on Montana highways, the state's 
annual loss would be $1.8 million. Because the ratio 
between state funds and matching federal highway funds is 
at least 1:5 and perhaps as high as 1:9, the diversion of 
even that small portion of the untaxed export product 
could deny the state the funds to build a dozen miles of 
new highway, a loss that would immediately impact 
Montana's highway construction program. 



22 



SIMILAR PROCEDURES IN NEIGHBOR STATES 

From an informal survey of the motor fuels tax collection 
agencies in North Dakota, South Dakota, Wyoming, and 
Idaho along with information about Montana's collection 
process, the following similarities in the laws and 
procedures of all five states were noted: 

Generally, exported gasoline is not subject to the 
tax imposed by the state of origin. 

Each state attempts to monitor the movement of 
gasoline sold purportedly for export, but the timely 
completion of this function is frustrated by lack of 
enforcement personnel. 

Each state asserts that it attempts to share 
information with its neighbors, but this effort is 
only marginally effective. 

None of the other states acknowledges a serious tax 
evasion problem, perhaps because none has a tax rate 
that creates as great a temptation as Montana's. 



23 



24 



RECENT REMEDIAL ACTIONS 

Evasion of gasoline taxes has been recognized in the past 
decade as a serious problem in several states, 
particularly along the eastern seaboard, and lawmakers in 
several states have acted to legislate control before the 
situation reaches crisis proportions. 

Actions taken to correct problems in New York and Florida 
may point the way for other states to follow in solving 
the problems if they develop elsewhere. 

New York's Solution 

New York requires that an export certificate be completed 
for all gasoline shipments out of state. The certificate 
must identify the buyer, verify that he is a taxpayer in 
another jurisdiction, and show the delivery terminal. 
The final step in the procedure requires matching the 
export certificate with documents filed at the 
destination. 

Because Canadian provinces do not require licenses for 
gasoline importers, a New York owner who exports gasoline 
to Canada may experience some difficulty in qualifying 
for a refund of tax paid in New York since the burden is 
upon the exporter to prove that an offsetting tax was 
paid in Canada. 

With a total staff of 45 auditors plus 20 supervisors and 
clerks, the New York State tax department annually 
devotes about seven staff-years to auditing motor fuels 
tax returns. The department has some additional 
resources in an enforcement division about twice as 
large, some of whom are available to check on deliveries 
of gasoline and to observe movements of transport trucks. 



25 



Tax collections increased substantially after the "first 
sale" law became effective on July 1, 1985. During the 
first year, motor fuels tax collections grew by $160 
million. 7 



Florida's Restrictions 

Florida's enforcement efforts are primarily in three 
areas: restricting the number of tax free transactions; 
the installation of an automated fuel tracking system; 
and extensive cooperative efforts with other states and 
the federal government in information sharing and 
auditing. After the Department of Revenue was given 
responsibility for collecting local option taxes, the 
number of licensed distributors soared from 250 to 450 
without changes in departmental staffing or resources. 
Subsequent amendments reduced the number of the former 
distributors who could qualify as refiners or importers 
to about 120 and required fuel carriers and terminal 
facility operators to register and file monthly product 
movement reports. 

Beginning in September 1987, all those filing returns who 
have automated recordkeeping systems are required to file 
electronically. The state thus avoids the handling and 
storage of paper work and bypasses keypunch operations. 
These changes, when correlated with information-sharing 
agreements with neighboring states and with the Internal 
Revenue Service, increase the ability of Florida's 
Department of Revenue to monitor and control fuel tax 
evasion. 

Since January 1, 1988, Florida's tax has been imposed on 
the first sale or removal of fuel from storage after 



26 



importation ("tax on first rack sale"). 

Florida has six categories of motor fuels licenses: 

(1) "Refiner" is a person who owns and operates a 
refinery and who maintains storage facilities or 
imports fuel. 

(2) "Importer" is a person with no business location in 
the state who holds a valid importer of motor fuel 
license. 

(3) "Wholesaler" is a person who holds a valid 
wholesaler of motor fuels license and has a business 
location in the state. 

(4) "Jobber" is a person who holds a valid jobber of 
motor fuels license that grants the privilege of 
storing and transporting tax-paid fuel and making 
sales to persons other than the ultimate consumer as 
well as the ultimate consumer. 

(5) "Carrier" is a railroad company, pipeline company, 
water transportation company, common carrier, and 
any person transporting motor fuel, casinghead 
gasoline, natural gasoline, naphtha, or distillate 
for others, to or from points within Florida. 

(6) "Terminal Facility" is a waterfront or offshore 
appurtenance including a pipeline on land used to 
store, handle, or transfer petroleum products. 

The sale of motor fuel for export from Florida is exempt 
from fuel tax only when the purchaser of the motor fuel 
is licensed as a refiner or importer. 



27 



A wholesaler, refiner, or importer may export motor fuel 
to his own location tax exempt if the licensee maintains 
adequate shipping documentation that the fuel was removed 
from the state. Adequate documentation includes bills of 
lading and delivery tickets provided by the seller or a 
common carrier hauling the fuel or complete shipping logs 
provided by the purchaser along with the receiving 
records from the location outside the state. 8 



28 



COMPARISON OF GASOLINE SALES IN FIVE STATES 

The tabulations on the following two pages show the 
changes in gasoline sales in Montana and its four 
neighbor states for the first nine months of 1985, 1986, 
and 1987. The information shows that Idaho was the only 
state to register a net gain in sales between 1985 and 
1987. 

VOLUME OF FIRST SALES OF MOTOR GASOLINE 

Source: Petroleum Marketing Monthly , 1987, (Table 
No. 67, succeeded by Table No. 45) and Petroleum 
Marketing Annual 1985 , Volume No. 2 (Table No. 32), 
Energy Information Administration. 

Total first sales in Montana, Idaho, Wyoming, North 
Dakota, and South Dakota: 

First 9 months 1985 1,511,143,000 gallons 
First 9 months 1986 1,491,021,000 gallons 
First 9 months 1987 1,486,009,000 gallons 

Total sales changes in five states for first 9 months of 
year : 

1985 to 1986 -20,122,000 gallons or -1.33% 

1986 to 1987 -5,012,000 gallons or -0.34% 
1985 to 1987 -25,134,000 gallons or -1.66% 



29 







TABLE 


I 






SALES BY 


STATES 






(Thousands o 


f Gallons) 


Month 


Montana 


Idaho 


Wyoming 


Jan 85 
Jan 86 
Jan 87 


36,106 
31,989 
32,930 


28,359 
28,686 
32,954 


22,172 
20,676 
22,942 


Feb 85 
Feb 86 
Feb 87 


36,519 
28,625 
27,975 


26,286 
25,404 
28,298 


20,277 
16,324 
20,364 


Mar 85 
Mar 86 
Mar 87 


39,890 

37,935 
32,491 


30,464 
34,413 
33,583 


22,049 
20,195 
25,546 


Apr 8 5 
Apr 86 
Apr 87 


39,357 
36,751 
36,467 


33,986 
37,142 
35,219 


23,478 
18,957 
22,481 


May 85 
May 86 
May 87 


42,883 
42,929 

40,339 


36,793 
43,868 
38,564 


27,628 
27,363 
24,991 


Jun 85 
Jun 86 

Jun 87 


48,065 
42,202 
50,139 


37,561 
40,556 
43,055 


29,139 
27,508 
29,388 


Jul 85 
Jul 86 
Jul 87 


54,374 
54,981 
46,334 


41,327 
43,691 
47,345 


35,096 
32,585 
32,776 


Aug 8 5 
Aug 86 
Aug 87 


50,344 
50,073 
50,548 


40,074 
46,224 
43,224 


31,969 
33,389 
32,778 


Sept 85 
Sept 86 
Sept 87 


40,102 
39,498 
41,106 


34,638 
38,089 
38,774 


26,532 
27,389 
26,151 



NDakota SDakota 

30,439 25,531 

24,570 23,378 

23,299 24,069 



28,614 25,233 
24,865 21,957 
20,673 21,653 



27,606 28,745 
32,916 29,112 
26,291 26,655 



31,071 30,911 

29,901 27,852 

32,277 31,064 

32,991 33,746 

38,569 34,756 

30,885 31,119 



30,271 33,509 
29,313 31,274 
36,390 36,971 



39,380 42,075 

40,812 39,894 

36,189 40,485 

37,852 36,700 

42,603 37,423 

34,060 34,956 



31,914 29,087 
26,862 27,522 
30,319 31,262 



30 





Montana 
387,640 


Idaho 


Wyoming 
238,340 


NDakota 
290,138 


SDakota 


9 mo. 8 5 


309,488 


285,537 


9 mo. 86 


364,983 


338,073 


224,386 


290,411 


273,168 


9 mo. 87 


358,329 


341,016 


237,417 


271,013 


278,234 


Change 
85-86 
% Change 
85-86 


-22,657 
- 6.21% 


+28,585 
+ 9.24% 


-13,954 
- 5.85% 


+ 273 
+ 0.09% 


-12,369 
- 4.33% 


Change 
86-87 
% Change 
86-87 


-6,654 
-1.82% 


+ 2,943 
+ 0.86% 


+13,031 
+ 5.49% 


-19,398 
- 6.68% 


+5,066 
+1.85% 


Change 
85-87 
% Change 
85-87 


-29,311 
- 7.56% 


+31,528 
+10.19% 


923 
- 0.39% 


-19,125 
- 6.59% 


- 7,303 

- 2.56% 



31 



32 



RECOMMENDATIONS OF NATIONAL ASSOCIATION 

During 1987, the National Association of Tax 
Administrators drafted a policy proposal for actions that 
may be taken by states to control or eliminate the 
evasion of taxes on gasoline, and later expressed that 
policy in a formal resolution. 

Policy on Export of Gasoline 

The Association's Uniformity Committee Draft Report on 
Import/Export Uniform Procedures, adopted at Atlanta, 
Georgia on August 17, 1987, set forth this policy 
statement : 



When gasoline and fuels taxed in the same 
manner as gasoline under the origin state's 
statutes are purchased for export and 
transported by for hire carrier by the seller 
or the seller's own equipment, that is an 
export by the seller. The seller shall report 
the sale in the state of origin and take credit 
for export on an exception schedule. The 
seller will also report the sale as an import 
to the destination state. 

When gasoline and fuels taxed in the same 
manner as gasoline under the origin state's 
statutes are purchased for export and 
transported by a for hire carrier hired by the 
purchaser or by the purchaser's own equipment, 
that is an export by the purchaser. 

The seller will report the sale as an origin 
sale and pay the origin tax which applies, if 
any, when the fuel is delivered into the 
carrier. The purchaser will be allowed and 
encouraged to become licensed as a fuel dealer 
in the state of origin and the states will 
provide the capability to accomplish this end. 
The purchaser must also be properly licensed as 
a fuel dealer in the destination state. 



33 



If the purchaser is licensed as a fuel [dealer] 
in the origin state, he may purchase product 
free of the origin state tax and must report 
exports to the origin state and imports to the 
destination state. If the purchaser is not 
licensed, he must purchase origin tax paid and 
may apply for a refund. He must still be 
licensed in the import or destination state and 
file reports and pay the appropriate tax to the 
destination state. 

States shall exchange information on cross 
state transactions. 

Bonds may be imposed to the extent provided by 
individual state statutes. 



Resolution Defining Terms 

At its national conference in Savannah, Georgia, held 
October 11-14, 1987, the National Association of Tax 
Administrators was presented with Resolution No. 5 from 
its Motor Fuel Section. As adopted, the resolution 
stated: 



WHEREAS, industry and state government desire 
to operate in the most effective and efficient 
manner, and 

WHEREAS, the states impose different licensing 
bonding, and refund requirements on dealers 
exporting and importing fuel into and out of 
their jurisdictions, and 

WHEREAS, the National Committee on Uniformity, 
NATA Motor Fuel Tax Section, has met and has 
adopted a concept and definition dealing with 
the terms EXPORT and IMPORT as they relate to 
gasoline and fuels taxed as gasoline, and 

WHEREAS, the membership of the NATA Motor Fuel 
Tax Section, wishes to refer the uniform 
EXPORT/IMPORT definitions to the Executive 
Committee of NATA for adoption and 
implementation, 



34 



NOW THEREFORE BE IT RESOLVED that the concept 
and definition of the terms EXPORT and IMPORT 
for state gasoline tax purposes be adopted as 
follows: 

When gasoline, and fuels taxed in the 
same manner as gasoline under the 
origin state's statutes, are sold for 
export and delivered out of state by 
or for the seller, that is an export 
by the seller in the origin state and 
an import by the seller in the 
destination state. 

When gasoline, and fuels taxed in the same 
manner as gasoline under the origin 
state's statutes are purchased for export 
and transported out of state by or for the 
purchaser, that is an export by the 
purchaser in the origin state and an 
import by the purchaser in the destination 
state. 



35 



NOTES 

^ec. 1, Ch. 624, L. 1983; Sec. 1, Ch. 20, Sp. L. 
June 1986. 

2 Sec. 1, Ch. 30. L. 1987 

3 State Tax Review , Commerce Clearing House, March 
29, 1988 

4 Gasoline Tax Compliance Issues , A Report by the 
Department of Revenue to the Revenue Oversight Committee, 
November 20, 1987 

5 Summary of Current Tax Legislation , State Tax 
Guide, Commerce Clearing House, May 1988 

6 Ibid. 

'Telephone interview with Bill Frank, New York State 
Tax Department, July 27, 1987 

8 Letter from Stephen J. Barger, Jr., Florida 
Department of Revenue, July 27, 1987 



36 



APPENDIX A 



LC 2 



51st Legislature LC 0002/01 



1 BILL NO. 

2 INTRODUCED BY 



3 

4 A BILL FOR AN ACT ENTITLED: "AN ACT CLARIFYING THE TAXATION 

5 OF GASOLINE EXPORTED FROM MONTANA; AMENDING SECTIONS 

6 15-70-201, 15-70-202, 15-70-204, 15-70-209, 15-70-221, AND 

7 15-70-222, MCA; AND PROVIDING AN IMMEDIATE EFFECTIVE DATE 

8 FOR RULEMAKING AUTHORITY." 
9 

10 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF MONTANA: 

11 Section 1. Section 15-70-201, MCA, is amended to read: 

12 "15-70-201. Definitions. As used in this part, unless 

13 the context requires otherwise, the following definitions 

14 apply: 

15 (1) "Agricultural use" means use of gasoline by a 

16 person whose major endeavor and primary source of earned 

17 income is from the business of farming or ranching. 

18 (2) "Aviation dealer" means any person in this state 

19 engaged in the business of selling aviation gasoline, either 

20 from a wholesale or retail outlet, on which the license tax 

21 has been paid to a licensed distributor as herein provided 

22 for. 

23 (3) "Aviation gasoline" means gasoline or any other 

24 liquid fuel by whatsoever name such liquid fuel may be known 

25 or sold, compounded for use in and sold for use in aircraft, 



/h 



Montana Legislative council 



LC 0002/01 



1 including but not limited to any and all such gasoline or 

2 liquid fuel meeting or exceeding the minimum specifications 

3 prescribed by the United States for use by its military 

4 forces in aircraft. 

5 (4) "Bulk delivery" means placing gasoline in storage 

6 or containers. The term does not mean gasoline delivered 

7 into the supply tank of a motor vehicle. 

8 (5) (a) Gasoline refined, produced, manufactured, or 

9 compounded in this state and placed in tanks thereat or 

10 gasoline transferred from a refinery or pipeline terminal in 

11 this state and placed in tanks thereat or gasoline imported 

12 into this state and placed in storage at refineries or 

13 pipeline terminals shall be deemed to be "distributed", for 

14 the purpose of this part, at the time the gasoline is 

15 withdrawn from such tanks, refinery, or terminal storage for 

16 sale or use in this state or for the transportation to 

17 destinations in this state other than by pipeline to another 

18 refinery or pipeline terminal in this state. When withdrawn 

19 from such tanks, refinery, or terminal, such gasoline may be 

20 distributed only by a person who is the holder of a valid 

21 distributor's license. 

22 (b) Gasoline imported into this state, other than that 

23 gasoline placed in storage at refineries or pipeline 

24 terminals, shall be deemed to be "distributed" after it has 

25 arrived in and is brought to rest in this state. 



LC 0002/01 



1 (6) "Distributor" means: 

2 (a) any person who engages in the business in this 

3 state of producing, refining, manufacturing, or compounding 

4 gasoline for sale, use, or distribution; 

5 (b) any person who imports gasoline for sale, use, or 

6 distribution; 

7 (c) any person who engages in the wholesale 

8 distribution of gasoline in this state and chooses to become 

9 licensed to assume the Montana state gasoline tax liability; 
10 (d) any exporter as defined in subsection (8); 

H f dt { e ) any dealer licensed as of January 1, 1969, 

12 except a dealer at an established airport; 

13 fet(f) any person in Montana who blends alcohol with 

14 gasoline. 

15 (7) "Export" means exporfc-as-def tned-in-15-79-593 to 

16 transport out of Montana, by any means other than in the 

17 fuel supply tank of a motor vehicle, gasoline received from 

18 a refinery or pipeline terminal within Montana . 

19 (8) "Exporter" means any person who transports, other 

20 than in the fuel supply tank of a motor vehicle, gasoline 

21 received from a refinery or pipeline terminal in Montana to 
2 2 a destination outside Montana for sale, use, or consumption 
2 3 beyond the boundaries of this state. 

24 f 8> (9) "Gasohol" means all products commonly or 

25 commercially known or sold as gasohol, used for the purpose 



LC 0002/01 



1 of effectively and efficiently operating internal combustion 

2 engines, consisting of not less than 10% anhydrous ethanol 

3 produced in Montana from Montana agricultural products, 

4 including Montana wood or wood products. 

5 f 9} ( 10 ) "Gasoline" includes all products commonly or 

6 commercially known or sold as gasolines, including 

7 casinghead gasoline, natural gasoline, aviation gasoline, 

8 and all flammable liquids composed of a mixture of selected 

9 hydrocarbons expressly manufactured and blended for the 

10 purpose of effectively and efficiently operating internal 

11 combustion engines. Gasoline does not include special fuels 

12 as defined in 15-70-301. 

13 f 3r8| ( 11 ) "Import" includes and means to receive into 

14 any person's possession or custody first after its arrival 

15 and coming to rest at destination within the state of any 

16 gasoline shipped or transported into this state from point 

17 of origin without this state other than in the fuel supply 

18 tank of a motor vehicle. 

19 f lit ( 12) "Motor vehicle" means all vehicles operated or 

20 propelled upon the public highways or streets of this state 

21 in whole or in part by the combustion of gasoline. 

22 fl:2> (13) "Person" means any person, firm, association, 

23 joint-stock company, syndicate, or corporation. 

24 f 3:9} ( 14 ) "Use" includes and means the operation of 

25 motor vehicles upon the public roads or highways of the 



LC 0002/01 



1 state or of any political subdivision thereof." 

2 Section 2. Section 15-70-202, MCA, is amended to read: 

3 "15-70-202. License, fee, and security of gasoline 

4 distributors. (1) All gasoline distributors, including 

5 exporters as defined in 15-70-201(8) , prior to the 

6 commencement of doing business, shall file an application 

7 for a license with the department of revenue on forms 

8 prescribed and furnished by the department setting forth the 

9 information as may be requested by the department. Each 

10 distributor shall at the same time file security with the 

11 department in an amount to be determined by the department. 

12 However, the required amount of security may not exceed 

13 twice the estimated amount of gasoline taxes the distributor 

14 will pay to this state each month. Upon approval of the 

15 application, the department shall issue to the distributor a 

16 nonassignable license which shall continue in force until 

17 surrendered or canceled. 

18 (2) Any person who engages in the wholesale 

19 distribution of gasoline in this state exercising the option 

20 under 15-70-201 ( 6 )( c) shall pay an annual license fee of 

21 $200 and upon renewal of the license shall pay an annual fee 

22 of $200. 

23 (3) "Security" means: 

24 (a) a bond executed by a distributor as principal with 

25 a corporate surety qualified under the laws of Montana, 



LC 0002/01 



1 payable to the state of Montana, and conditioned upon 

2 faithful performance of all requirements of this part, 

3 including the payment of all taxes and penalties; or 

4 (b) a deposit made by the distributor with the 

5 department, under such conditions as the department may 

6 prescribe, of certificates of deposit or irrevocable letters 

7 of credit issued by a bank and insured by the federal 

8 deposit insurance corporation." 

9 Section 3. Section 15-70-204, MCA, is amended to read: 

10 "15-70-204. Gasoline license tax — rate. (1) Every 

11 distributor shall pay to the department of revenue a license 

12 tax for the privilege of engaging in and carrying on 

13 business in this state in an amount equal to 1 cent for each 

14 gallon of aviation gasoline, which shall be allocated to the 

15 department of commerce as provided by 67-1-301, as amended, 

16 and 20 cents for each gallon of all other gasoline 

17 distributed by him within the state and upon which the 

18 gasoline license tax has not been paid by any other 

19 distributor. 

20 (2) Gasoline exported er-seld-£ or -exporfc — eufc--e£--fehe 

21 sfcafce shall not be included in the measure of the 

22 distributor's license tax. 

23 (3) Alcohol that is blended or is to be blended with 

24 gasoline to be sold as gasohol is subject to a tax per 

25 gallon equal to the license tax imposed on nonaviation 

-6- 



LC 0002/01 



1 gasoline distributors under subsection (1)." 

2 Section 4. Section 15-70-209, MCA, is amended to read: 

3 "15-70-209. Information reports. (1) Any person 

4 receiving gasoline, including every exporter , common 

5 carrier, private carrier, and contract carrier of property 

6 who shall haul, receive, transport, or ship any gasoline 

7 from any other state or foreign country into this state or 

8 from this state to any other state or foreign country or 

9 from any refinery or pipeline terminal in this state to 

10 another point within this state, shall submit to the 

11 department of revenue, upon its request and within the time 

12 specified, a statement showing the number of gallons of 

13 gasoline contained in each shipment in interstate commerce 

14 and the movement of such products from any refinery or 

15 pipeline terminal located within this state to another point 

16 within thi a state during the preceding calendar month, the 

17 names and addresses of the consignor and the consignee, and 

18 the date of delivery to the consignee. 

19 (2) In case of any person, except licensed 

20 distributors or exporters , who refuses or fails to file a 

21 statement as herein provided for, there is hereby imposed a 

22 penalty of $25 for each failure or refusal; provided, 

23 however, that if any person shall establish to the 

24 satisfaction of the department that his failure to file a 

25 statement as prescribed by the department was due to 



LC 0002/01 



1 reasonable cause, the department shall waive the penalty." 

2 Section 5. Section 15-70-221, MCA, is amended to read: 

3 "15-70-221. Refund authorized. (1) Any person who 

4 shall purchase and use any gasoline on which the Montana 

5 gasoline license tax has been paid for denaturing alcohol to 

6 be used in gasohol or operating or propelling stationary 

7 gasoline engines, tractors used off the public highways and 

8 streets, or for any commercial use other than propelling 

9 vehicles upon any of the public highways or streets of this 

10 state shall be allowed a refund of the amount of tax paid 

11 directly or indirectly on the gasoline so used. Such refund 

12 or drawback should in no instance exceed the tax paid or to 

13 be paid to the state and no refund shall be allowed of that 

14 portion of the tax per gallon upon aviation gasoline 

15 allocated to the department of commerce by 67-1-301. 

16 (2) Any distributor paying the gasoline license tax to 

17 this state erroneously shall be allowed a credit or refund 

18 of the amount of tax so paid. 

19 (3) Any person who purchases and exports for sale, 

20 use, or consumption outside Montana any gasoline on which 

21 the Montana gasoline tax has been paid is entitled to a 
2 2 credit or refund of the amount of tax so paid up on 
2 3 completion of the information reports required under 
24 15-70-209 and presentation to the department of such other 
2 5 proof of delivery outside Montana as it may b y rule 



LC 0002/01 



1 require. " 

2 Section 6. Section 15-70-222, MCA, is amended to read: 

3 "15-70-222. Required records. (1) Gasoline purchased 

4 and delivered into bulk storage for use in motor vehicles on 

5 public roads and nonhighway use must be fully accounted for 

6 by detailed withdrawal records to accurately show the manner 

7 in which used. Gasoline on hand, determined by actual 

8 measurement, shall be deducted from a claim and shall be 

9 reported as an opening inventory on the next claim. 

10 (2) If separate storage tanks are maintained on 

11 claimant's premises for use in licensed vehicles and in 

12 unlicensed equipment, the bulk delivery invoices shall be so 

13 marked by the dealer at the time of delivery. No further 

14 record is required, provided refunds are claimed only on the 

15 number of gallons delivered into the unlicensed equipment 

16 tank. Withdrawal of gasoline from the unlicensed vehicle 

17 tank for licensed vehicles will invalidate this method of 

18 determining refundable gallonage. 

19 (3) Special storage facilities used for certain 

20 periods must be identified and explained. If such storage is 

21 used entirely for off-highway purposes and is not used in 

22 licensed vehicles, no records will be required other than 

23 purchase invoices showing the delivery into such storage. 

24 (4) Service stations, bulk dealers, and marinas must 

25 prepare a separate and complete invoice for each withdrawal 



LC 0002/01 



1 of gasoline for own use upon which a refund is to be 

2 claimed. 

3 (5) When no highway use of gasoline is deducted from 

4 the claim, the applicant must substantiate purchases of 

5 gasoline and miles traveled for licensed motor vehicles upon 

6 request of the department of revenue. 

7 (6) Any person who operates a licensed motor vehicle 

8 on and off the public roads for commercial purposes may 

9 claim refund of the state license tax on the gasoline used 

10 to operate the vehicle on roads or property in private 

11 ownership if such person has maintained the following 

12 records: 

13 (a) the total number of miles traveled on and off 

14 public roads by each licensed vehicle; 

15 (b) total gallons of gasoline used in each vehicle; 

16 (c) purchase invoices supporting all gasoline handled 

17 through bulk storage, as well as all fuels purchased at 

18 service stations or received from other sources. 

19 (7) An exporter or an y other person who transports 

20 gasoline out of Montana for sale, use, or consumption 

21 outside of Montana shall maintain detailed and 
2 2 contemporaneous records of withdrawal, transportation, and 

2 3 delivery of the gasoline to destinations outside of Montana 

2 4 as required by the departme nt o f_ r e v e n ue. " 

25 Section 7. Extension of authority. Any existing 

-10- 



LC 0002/01 



1 authority to make rules on the subject of the provisions of 

2 [this act] is extended to the provisions of [this act]. 

3 Section 8. Saving clause. [This act] does not affect 

4 rights and duties that matured, penalties that were 

5 incurred, or proceedings that were begun before [the 

6 effective date of this act]. 

7 Section 9. Severability. If a part of [this act] is 

8 invalid, all valid parts that are severable from the invalid 

9 part remain in effect. If a part of [this act] is invalid 

10 in one or more of its applications, the part remains in 

11 effect in all valid applications that are severable from the 

12 invalid applications. 

13 Section 10. Effective date. [Section 7 and this 

14 section] are effective on passage and approval. 

-End- 



-11- 



APPENDIX B 



GASOLINE TAX COMPLIANCE ISSUES, DEPARTMENT OF REVENUE 



GASOLINE TAX COMPLIANCE ISSUES 



A Report by the Department of Revenue 

to the 

Revenue Oversight Committee 

November 20, 1987 



GASOLINE TAX COMPLIANCE ISSUES 



I. Description of Compliance Problems 

There are two different compliance problems of an undetermined 
extent that prompted the current gasoline tax study. These 
problems include: 

Gasoline Claimed for Export, but Sold in Montana 

Some gasoline dealers who are not licensed distributors 
allegedly claim when they buy gasoline from Montana supply 
terminals that some or all of this gasoline is destined for 
export. Hence, they do not pay the Montana gasoline tax (or 
any tax) on the those purchases. However, this "claimed for 
export" gasoline may be sold in Montana. In these cases, 
the dealers evade the Montana tax and gain an unfair 
competitive advantage over other dealers who comply fully 
with the law. 

When these cases are discovered, the Department assesses the 
licensed distributor who sold the gasoline the appropriate 
tax, penalty and interest. These assessments are 
adjustments to the amounts originally deducted by 
distributors on their returns as exported gasoline. The 
distributors typically complain that they cannot control 
where the gasoline is sold after they sell it to dealers. 
However, under current law, the Department's only recourse 
is against the distributor who originally sold the gasoline 
to the dealer who subsequently evaded the tax. 

With respect to this problem, the current law is deficient 
in two respects. First, the law does not clearly require a 
timely set of records to trace the export of fuel. Records 
can be discovered after the fact only through costly 
auditing. Second, the law places the burden on correcting 
the problem with a party — the licensed distributor — who 
may not have caused the problem. 

"Underground" Imports 

The Department has discovered some gasoline being imported 
into the state by persons who are not licensed as gasoline 
distributors. They pay the tax to the state in which the 
product is purchased and bring it into Montana for sale or 
use free of our tax. Under the law, persons who import must 
be licensed and pay the Montana tax on any imported 
gasoline. Persons who engage in this activity are 
exploiting the following tax differences between Montana and 
surrounding states: 



Wyoming - Montana 12 cents 

Montana - N. Dakota 3 " 

Montana - S. Dakota 7 ". 

Montana - Idaho 5.5 " 

There is adequate legal authority to respond to this 
problem. Persons discovered engaging in untaxed imports are 
notified of the requirement to license and pay the tax. If 
they refuse, legal remedies are available to the Department. 

II. Extent of Problems and the Department's Response 

The Department has given increased attention to gasoline 
compliance problems in the last year. Because the problems 
appear to have arisen recently, their extent and the degree of 
revenue lost is not known at present. 

The Department is discovering and correcting tax evasion through 
these steps: 

* All complaints from citizens of possible evasion are 
evaluated and where justified audits or investigations 
are undertaken. 

* Records of gasoline movements between Canadian 
provinces and Montana are monitored. 

* Information is exchanged with fuel tax agencies in 
other states to cross check reports on fuel moving 
across state lines. 

* Tax returns from different tax periods are compared to 
discover unusual patterns of sales. 

* Gasoline dealers engaging in export activity are 
audited. 

Historically, the Department has had limited staff in the 
gasoline tax area because our laws have generally allowed for 
efficient administration of the tax. These new problems are 
being pursued as aggressively as possible within existing 
resources . 



III. Potential Legislation 

Adequate legal authority exists to deal with the problem of 
"underground" imports. Hence, no alternatives are presented here 
to address that subject. 

Legislative action should be considered, however, with respect to 
the issue of gasoline being claimed as exported, but actually 
being sold in Montana. Legislation is justified because a) the 



law does not guarantee a timely set of records to trace exported 
gasoline and b) the burden of correcting problems sometimes falls 
on parties who did not create them. 

Three alternatives are available to improve compliance in the 
case of gasoline being claimed as exports: 

1) Exporters could be licensed as distributors, allowed to 
purchase gasoline free of tax, and be responsible for 
the payment of tax to the Department on all gallons 
purchased. 

2) Current distributors could be required to obtain from 
gasoline exporters at the time of sale records of where 
the gasoline is destined (city and state) by each 
dealer. (This option was proposed in SB 116 in the 
1987 session. ) 

3) Exporters could be required to pay the tax on all 
gasoline purchased in Montana and could apply for 
refunds on gallons they export with appropriate 
documentation. This option extends the existing proven 
refund system to exporters who are not licensed 
distributors. 

The third option has certain advantages over the other two. It 
fixes the responsibility for correcting problems with parties who 
might be the source of those problems: the exporters themselves. 
Licensed distributors would be relieved of the responsibility of 
paying assessments caused by the actions of persons to whom they 
sell gasoline. An existing administrative system — gasoline tax 
refunds — would be used to solve the problem. Finally, this 
alternative would effectively reduce tax evasion. 

The first option might reduce evasion through exports, but it 
would create other opportunities for lost tax revenue. As the 
number of licensed distributors increase, increased problems of 
delinquent tax collections arise. Further, with more licensed 
distributors, control of the collection of the tax is reduced and 
new opportunities for tax evasion are created. For example, 
other states have already experienced problems associated with 
the abuse of tax free exchanges that occurs when number of 
licensed distributors in increased. Those states envy Montana's 
current laws providing for a limited group of licensed 
distributors. Finally, not all exporters, especially those who 
export infrequently, are likely to want to become licensed 
distributors. 

The second option was considered and rejected by the 1987 
session. It places a burden of collecting and reporting 
information from gasoline dealers on current licensed 
distributors. Those distributors object to the additional costs 
associated with the record keeping. 



On balance, the third option appears to solve the problem of tax 
evasion through exports without creating other problems or 
placing the burden of compliance on the wrong parties. 



STATE OF MONTANA 



RECEIVED 

SEP 31987 



DEPARTMENT OF REVENUE MONTANA LEGISLATIVE 

MOTOR FUELS TAX DIVISION COUNCIL 

P.O.Box 5895 
Helena, MT 59604-5895 



INSTRUCTIONS 
GASOLINE DISTRIBUTOR'S LICENSE TAX REPORT (revised 7/87: 

DISTRIBUTOR'S STATEMENT 



Each distributor shall, not later than ths 25th day of each 
calendar month, render a true statement, duly signed, to the 
department of revenue of all gasoline dlstributsd and rscsived by 
him in this stste during the preceding calendar month. 



TAX RATE 



The tax rate on gasoline was increased to twenty cents per 
gallon effective July 1, 1987. The rate on aviation gasoline and 
jet fuel remains at one cent per gallon. 



ONE; PERCENT ALLOWANCE 



Effective October 1, 1987, the one percent allowance is 
applicable to the total tax on gasoline. No part of the one cent 
tax on aviation gasoline and Jet fuel is subject to the one 
percent allowance for evaporation and other losses. 



ADJUSTMENTS AND CORRECTION 

All adjustments and/or correcting entries an schedules muat be 
briefly explained. When offsetting entries are made, they must 
be cross-referenced to facilitate identification during the desk 
audit of the .tax reports. 



TIMELY REPORTING 



Sine* the gasoline becomes subject to tax at the time of 
withdrawal from refinery of terminal storage for sale, use or 
distribution, shipping dates shall be used for tax reporting. 
Any shipment not reported timely as Indicated by the shipping 
date is delinquent and is subject to penalty and interest as 
provided by Section 15-72-225 of the Gasoline License Tax Act. 



BILLS OF LADING 



The original bill of lading or manifest number issued at the 
time of withdrawal from refinery or terminal storage shall be 
used for tax reporting purposes. The destination shown on the 
original bill of lading or manifest will determine if the 
shipment is subjected to Montana tax. 

GALLQNAGE BASIS FOR TAXABLE DELIVERIES 

The amount of tax due on any shipment must be computed on the 
gallonage basis (net or gross) which will be Invoiced or charged 
as a stock transfer. For tax reporting purposes, the gallonage 
basis must be consistent to any customer, consignee, jobber, ect. 



AVIATION GASOLINE 



Since the tax rate on aviation gasoline and Jet fuel has been 
reduced to one cent per gallon effective July 1, 1981, these 
products must bs listed separately or identified by name rather 
than by code numbers. 



GASOLINE LOST OR DESTROYED 

Distributors ssy take crsdlt for the license tax on the 
Distributor's Monthly Tax Return for loss of gasoline due to 
casuslty while in transit and for contaminated products returned 
to a refinery. All losses must be verified and aupportsd in 
accordance with Rule and Regulation No. 42.27.311. 



PIPELINE TR ANSF E RS 



Pipeline transfer of gasoline between refineries, refinery to 
pipeline terminal or terminal need not be included in the report. 

MF 32 
GENERAL INSTRUCTIONS 



Schedule* must be completed for each classification of 
shipment of gasoline as specified below, when applicable, and 
attached to each Distributor's Gasoline License Tax Report, Form 
No. MF-32. Machine tabulated data will be accepted in lieu of 
these schedules, provided that the date is in the same format as 
shown on the required schedules. If any other format is to be 
used, the distributor must make his request in writing to the 
Motor Fuels Tax Division with a copy of the format to be used 
before authorization will be granted. Except for the 
reconciliation of deliveries to licensed distributors filed on 
Form HF-32B, the standard Form MF-32A is to be used for all 
schedules or as a cover sheet for machine processed listings. 
The heading of each schedule must be completely filled out to 
identify the classification and origin of shipments listed 
thereon. The listing of shipments or any schedule may be grouped 
by customer or consignee and subtotaled. 



SCHEDULE NO- 



GASOLINE WITHDRAWN FROM OWN REFINERY OR PIPELINE TERMINAL 



Submit a separate listing from each refinery and terminal 
location. List in detail all withdrawals for distribution to 
Montana customers, consignees. Jobbers, etc. Gasoline delivered 
to or for the account of any person or company not licensed as • 
distributor in Montana must be included on this schedule. Any 
gasoline withdrawn for use in company equipment or for use by 
employees must be listed on this schedule. Include the total of 
the invoiced gallons in Section 2, line 11, Form MF-32. 



SCHEDULE NO. 2 
GASOLINE IMPORTED 



List in derail all gasoline imported into Montana and 
distributed to ovn stations, bulk plants, jobbers and cuatosen 
Refer to Rule and Regulation 42.27.203, concerning Imported 
gasoline that la delivered to another licensed distributor. 



Submit a separate schedule for each supplier and/or location. 
Total invoiced gallons must be entered in Section 2, line 16, 
Form MF-32. Gasohol imported vill be treated the same as 
gasoline. 



SCHEDULE NO. 3 
GASOLINE EXPORTED 



Submit separate schedules in duplicate for each supplier 
and/or location. List in detail all gasoline exported from 
Montana on vhich the tax has not been previously paid. If the 
receiving distributor is not licensed in Montana, the delivering 
distributor must complete his section of schedule 6A for each 
non-licensed distributor to whom he delivers gasoline. The 
receiving non-licensed distributor must complete his section of 
this schedule and send a copy to the Motor Fuels Tax Division- 
Any difference between delivering and receiving distributor 
reports must be detailed and fully explained by the receiving 
distributor. Refer to Rule and Regulation No 42. 27. 201 and 
42.27.202. Enter total gallons exported in Section 2, lines 11 
or 12 and 17, Form MF-32. 



SCHEDULE NO. 4 
TAX PAID GASOLINE EXPORTED 



LICENSED DISTRIBUTORS: Submit schedules in duplicate for 
each location. List in detail all tax paid gasoline exported or 
sold for export (other than in the supply tank of a motor 
vehicle) from bulk plants, consignees, etc. Enter total gallons 
on Line 18, Form MF-32. 

OTHER PE RSONS i Any person vho exports or sells gasoline for 
export (other than in the supply tank of a motor vehicle) upon 
which the Montana tax has been paid may obtain credit for the tax 
on the gallonage of gasoline so exported by submitting schedule 4 
in duplicate to the licensed distributor from whom the gasoline 
was purahasa^d. Upon receipt of properly and timely executed 
schedule 4, the distributor shall credit the person who exported 
the gasoline for the amount of the tax. The distributor will 
then obtain credit by entering the total gallons in Section 2, 
line lfl, Fora MF-32. 



SCHEDULE NO. 6 
DELIVERIES OF LICENSED DISTRIBUTORS 

Us* applicable columns only on Form MF-32A. Recap deliveries 
to licensed distributors by totals at each refinery or pipeline 
terminal location. This schedule will include both the 
deliveries to licensed distributors from own refinery and 
pipeline terminals and gasoline received at another distributors 
refinery or terminal which is delivered to a third distributor. 
Also, this schedule will Include shipments into Montana from 
another state, reported on schedule 2, which are deliveries to 
another licensed distributor. Refer to Rule and Regulation No. 
42.27.281. Enter total gallons in Section 2, line 14, Form MF- 
32. 



SCHEDULE NO. 6B 
GASOLINE RECEIVED ON EXCHANGE 



Detail the distribution of gasoline received from other 
licensed distributors which is delivered to customers, 
consignees, Jobbers, etc. Any shipments for export must be 
detailed on schedule 3. Any gssoline delivered to yet another 
licensed distributor must be included on schedule 6. Total 
gallons received from other distributors must be entered in 
Section 2, line 12, Form MF-32. 



SCHEDULE NO. 6A 
RECONCILIATIO N OF DELIVERIES TO LICENSED DISTRIBUTORS 

Use separate Form MF-32B from the Motor Fuels Tax Division. 
The delivering distributor must complete his section of schedule 
6A for each licensed distributor to whom he delivers gasoline. 
The gallonage at each location will agree with schedule 6. The 
delivering distributor is to send schedule 6A in duplicate to the 
receiving distributor. The receiving distributor must complete 
his section of this schedule and send on copy to the Motor Fuels 
Tax Division to complete his tax report. Any difference between 
delivering and receiving distributors reports must be detailed 
and fully explained by the receiving distributor. 



P.O. BOX 5895 
Helena, MT 59604-5895 



MONTANA 

DEPARTMENT OF REVENUE 
MOTOR FUELS TAX DIVISION 



(406) 444-3474 



GASOLINE DISTRIBUTOR'S LICENSE TAX REPORT 



DO NOT WRITE IN THIS SPACE 



OWNER NAME. 



MONTH. 



TRADE NAME (DBA). 

ADDRESS LINE 1 

ADDRESS LINE 2 _ 
CITY 



ST. 



.ZIP. 



LICENSE NUMBER. 

SOC.SEC.NO. 

FEDI.D.NO. 

PHONE( ) 



TAX COMPUTATION 



Total Gallons Aviation Fuel (from Page 2, Line I 



2. Aviation Fuel Tax Due (Multiply Line 1 by $.01) $_ 

3. Total Gallons Other Gasoline (from Page 2, Line 19) 

4. Total Gallons Gasohol (from Form MF-32C, Line 13) 

5. Total Gallons Unblended Alcohol Sold (from Form MF-32C. Line 6, 

if not a licensed distributor) 



6. Total Gallons on which Gasoline Tax is due 
(Add Lines 3, 4, and 5) 



7. Gas Tax Due (Multiply Line 6 by $.1980. which is $.20 less 1 % evaporation allowance) $_ 

8. Total Tax Due (add Lines 2 and 7) $_ 

9. Penalty $_ 

10. Interest $_ 

11. Credit (attach substantiation) $_ 

12. Total Amount Due (add Lines 8. 9, and 10, then subtract Line 11) $_ 



(make remittance payable to Department ot Revenue} 
(It $500,000.00 or greater, contact this office for wire transfer instructions) 



l declare, under penalties of penury, that this return (including any scheduiesi nas been examined by me and to the best o* -> • ■*>•• 
edge and belief is true, correct and complete. 

FORMS NEEDED: 

MF-32 I 

MF-32A Z 

MF-32B Z 
r MF-32C Z 



SIGNATURE OF AUTHORIZED AGEN' 



MF-32 



CHAPTER 7UTTn.E 11 I 



SECTION 1 - AVIATION GASOLINE AND JET FUEL 



1 . Gallons withdrawn from distributor's own refinery or pipeline terminal 
(Total of all Aviation Schedule 1) 

2. Gallons withdrawn from other distributor's refinery or pipeline terminal 
(Total of all Aviation Schedule 68) 

3. Gallons delivered to other licensed distributors 

(Total of all Aviation Schedule 6) 

4. Net withdrawal from storage (Add lines 1, and 2, then subtract line 3) . . . 

5. Gallons imported into Montana 

(Total of all Aviation Schedule 2) 

6. Gallons exported or sold for export outside of Montana 

(Total of all Aviation Schedule 3) 

7. Gallons exported or sold for export already taxed 

(Total of all Aviation Schedule 4) 

8. Total gallons Aviation Fuel (Add lines 4 and 5, then subtract line 6 and 7) 
(Enter here and on page 1. line 1) 

9. Portion of line 8 that is Aviation Gasoline 

10. Portion of line 8 that is Jet Fuel 



SECTION 2 - GASOLINE 



1 1 Gallons withdrawn from distributor's own refinery or pipeline terminal 
(Total of all Gasoline Schedule v 

12. Gallons withdrawn from other distributor's refinery or pipeline terminal 
(Total of all Gasoline Schedule 68) 

1 3 Gallons blended into gasohol (Must match MF-32C, line 11) 

14. Gallons delivered to other licensed distributors 

(Total of all Gasoline Schedule 6) 

1 5 Net withdrawal from storage 

(Add lines 11, and 12, then subtract lines 13 and 14) 

16 Gallons imported into Montana (Total of Gasoline Schedule 2) 

1 7 Gallons exported or sold for export outside of Montana 

Total of all Gasoline Schedule 3) 

18 Gallons exported or sold for exoort already taxed 
(Total of ail Gasoline Schedule 4) 

19 Total gallons Gasoline (Add lines 15 & 16. then subtract lines 17 & 18) 
(Enter here and on page 1, line 3) 



MONTANA 

GASOLINE DISTRIBUTORS LICENSE TAX REPORT 



LICENSE NUMBER 



MULTIPLE SCHEDULE 



FOR USE WITH GASOLINE AND AVIATION GASOLINE 

1 Z Distribution from Own Refinery/Pipeline 

2. Z Gasoline Imported 

3. Z Gasoline Exported 

4. Z Tax Paid Gasoline Exported 

6. Z Deliveries to Licensed Distributors 

6B. Z Gasoline Received on Exchange 

6C Z Tax Paid Gasoline Received on Exchange 



FOR USE WITH ETHANOL ONLY 

7. Z Ethanoi Received 

8. □ Ethanoi imooned 

9. □ Ethanoi Sold 

10. Z Ethanoi Exported 



SUPPLIER LICENSE NO. 


SUPPLIER NAME 


FUEL TYPE (CHECK ONLY ONE) 
Z GASOLINE 


POINT CF SHIPMENT 


Z AVIATION GASOLINEJJET FUEL 

Z ETHANOL (SCHEDULE 7. 8. 9, 10 ONLY) 


Delivered to 


Point of 
Delivery 


Carrier 


BILLOF LADING 


Gross 
Gallons 


Net 


NAME 


LICENSE NO 


Mo. • Day Number 


Gallons 








































































































































































































































































































































































































































































































TOTALS THIS PAGE 







MF-32A 



SCHEDULE NUMBERS AND TITLES 



DISTRIBUTION FROM OWN REFINERY AND TERMINALS: 

Taxable deliveries to own stations, bulk plants, jobbers and customers. Submit separate schedule for each re- 
finery or terminal location. 



Schedule 2. 



GASOLINE IMPORTED: 

Submit separate schedule foreach supplier and location. 



Schedule 3. GASOLINE EXPORTED: 

Submit separate schedule in duplicate for each supplier and location. List shipments delivered outside the 
State of Montana or sold for export on which the tax has not been previously paid. 

Schedule 4. TAX PAID GASOLINE EXPORTED OR SOLD FOR EXPORT: 

Submit separate schedule in duplicate for each location. List deliveries outside the State of Montana on which 
the tax has been already paid. 

Schedule6. DELIVERIES TO LICENSED DISTRIBUTORS: 

Use applicable columns only. Recap deliveries to distributors licensed in Montana by totals at each location 
Attach this schedule to Form No. 32. Send schedule 32-B to receiving companies. 

Schedule 6B. GASOLINE RECEIVED ON EXCHANGE: 

Submit separate schedule foreach supplier and location. Detail thedistribution of gasoline received from other 
licensed distributors. 

Schedule 6C TAX PAID GASOLINE RECEIVED ON EXCHANGE: 

Submit separate schedule foreach supplier and location. Detail the distribution of gasoline received ffcm otne' 
licensed distributors. 



Schedule 7. 



ETHANOL RECEIVED: 

List deliveries received. Prepare a separate schedule for each supplier. 



Schedule 8. 



ETHANOL IMPORTED: 

List aiy loads of ernanoi imoorted into Montana. 



S:iedule9 



EThANOLSCLD: 

L,<ii H ' IV p r ,p S t0 CuSlorr;er5 in Montana. 



Schedule 10 ETHANOL EXPORTED 



List shipments delivered outside the State of Montana or sold for export on which the tax has ->ct :**" . •*» 
ousiy oaid. 



Schedule 6-A 
Motor Fuels Tax Dlvis.o 
Helena, Montana 59601 



STATE OF MONTANA 
DEPARTMENT OF REVENUE 

RECONCILIATION OF DELIVERIES TO LICENSED DISTRIBUTORS 



Delivering Distributor Month 

Receiving Distributor 



TERMINAL or REFINERY 






GALLONS 


REPORTED 




DIFFERENCE 


LOCATION 


DEL 


VER 


NG DISTRIBUTOR 


RECEIVING DISTRIBUTOR 




Receiving Distributor 
Short or (Lonq) 




1 ' 




i I 












1 










TOTALS: 








1 







DETAIL OF DIFFERENCES AT EACH LOCATION 



Delivering 
Distributors 
Document No 



Receiving 
Distributor's 
Document No. 



Gallons Reported 



Destination 



Delivering ' Receiving ' "'"erence 

Distributor Distributor Short or I Long) 



MONTANA 

GASOLINE DISTRIBUTORS LICENSE TAX REPORT 



MONTH 



SCHEDULE A 
ETHANOL INVENTORY/GASOHOL BLENDING REPORT 



LICENSE NUMBER 



ETHANOL INVENTORY 



1 Beginning Inventory: (Must match previous month ending inventory) 



Additions to Inventory: 

2. Ethanol Received or Produced (Total of all Schedule 7). 

3. Ethanol Imported (Total of all Schedule 8) 

4 Total Additions to Inventory (Add lines 2 and 3) 

5. "otal Ethanol Available (Add lines 1 and 4) 



Reductions from Inventory: 

6. Ethanol Sold in Montana (Total of all Schedule 9) 

7 Ethanol Exported (Total of all Sched' ile 10) 

8. Ethanol Us3d in Blending gaso! o: Mui m. ch line 12, below) . 

Total Redi :tions from ln>/e?tc .y (Add line. o. 7 and 8) 

3. Ending Inventory (Subtract line 9 from line 5) 



GASOHOL BLENDING 



1 1 Gasoline Used in blending Gasohol (Must match MF-32, page 2, line 13) 

12 Ethanol Used in blending Gasohol (Must match line 8, above) 

13. Total Gasohol Blended (Add lines 11 and 12) (Enter here and on MF-32, page 1. line 4). 

14. Percentage Computation (Divide line 12 by line 13 -must beat 10%) 



MF-32C rev 



/ 



STATE OF MONTANA 

DEPARTMENT OF REVENUE 

MOTOR FUELS TAX DIVISION 

P.O. BOX 5895 

HELENA, MOTANA 59604-S89S 

NAME . Farmers Cooperative Station (Co-op) 



Period Q f 1-86 thru 7-87 



ADDRESS:. 



Box 3001 



Gillette, WY 82716 



( X) Field Audit 

( ) Field Examination 

( ) Office Examination 

( ) Requested (Attach request) 



( ) Special Fuel User 

( ) Special Fuel Dealer 

( X) Gasoline Distributor (unlicensed) 

( ) Gasoline Refund 



Average taxes paid: 

□ Quarterly $ 

D Monthly $ 

Amount of current bond $ 

Bond amount required 1 ? f nnr)-nn 

Date of this report s 8-10-87 

Time spent s m days 

Audit charges S n/a 

Tax 



Total amount due/oadlt 



$1,019.16 



$88.82 



$58.20 



$1,166.18 



Explanation, Remarks, Recommendations: 

&\ July 28, 1987 a field audit was conducted to find out if any gasoline was being irrported 
to Montana by bulk. In examining Farmers Cooperative Station's records I located five 
accounts which should have had the Montana tax charged. 

Farmers Cooperative Station was advised that the driver of the bulk truck should be 
logging the trips into Montana. 

The bond and application forms are being sent for this company to become licensed as a 
Montana Gasoline Distributor, and a refundable dealer for Montana. 

Kindly attach your remittance of $1,166.18 to the enclosed copy of this audit cover sheet 
for identification purposes. 



/ 



Audit sho^ t 



Ciru.lv Anders 



^TA '. 1 : 



APPENDIX C 
INDUSTRY COMMENTS 

Montana Petroleum Association 

Conoco 

Cenex 

Ashland Oil 

Sinclair Oil 



#*fcfcP0 



MONTANA PETROLEUM ASSOCIATION 

A Division of the 

Rocky Mountain Oil and Cas Association 



Helena Office 
2030 11th Avenue, Suite 23 
Helena, Montana 59601 
(406) 442-7582 



Janelle K. Fallan 
Executive Director 



Statement to 

Revenue Oversight Committe< 

November 20, 1987 



Billings Office 

The Grand Building, Suite 510 

PO. Box 1398 

Billings, Montana 59101 

(406) 252-3871 



Concerning Gasoline Tax Evasion 

Montana Petroleum Association 
Janelle Fallan, Executive Director 

With us today are representatives of two oil companies, 
Ashland and Sinclair, who are very active in the state of 
Montana. Both Jim Butler of Ashland and William Gray of Sinclair 
have a great deal of expertise in this field, and I hope you will 
take advantage of their presence to ask any questions you have. 
I know that both of them would also be happy to answer any future 
questions by letter or by telephone. 

I would like to state briefly that we are as interested as 
anybody in seeing an end to tax evasion. Any methods employed 
must be cost effective for the supplier and for the state, and 
must get the job done. 

Three areas will receive the most emphasis in the 
discussions today. These are: effective laws, perhaps including 
licensing of exporters; auditing, and surveillance. 

It is unlikely that major statutory changes are necessary to 
deal with this problem. Possible changes are suggested in the 
testimony of Conoco, which I have submitted to you. These 
changes would provide that deliveries for export to persons other 
than licensed distributors would not be made on a tax-free basis. 

Perhaps the most significant area to be explored is 
auditing. While the state's current staff receives high marks 
for efficiency, dedication and thoroughness, it is simply too 
small to do the job. Auditing exports would require Montana 
auditors to cross-check gasoline tax report data with surrounding 
jurisdictions, a difficult task with a staff of three. 

Finally, actual surveillance has worked very effectively in 
other states, specifically Pennsylvania. A toll-free number has 
been very helpful, especially will calls from honest dealers who 
are more than willing to report violations. 



15gas-roc 



NOV] r. m 



REPORT TO THE MONTANA 

REVENUE OVERSIGHT COMMITTEE 

NOVEMBER 20, 1987 

Conoco Inc. supports the efforts of the state of Montana to stop 
the evasion of gasoline tax in that state. Conoco opposed Senate 
Bill 116 because it would have created administrative problems for 
the taxpayers and state gasoline tax administrators without 
accomplishing the intended objective. 

We believe that control of gasoline tax evasion lies in the following 
areas: 

A. Effective and comprehensive gasoline tax laws and regulations 

B. Auditing 

C. Surveillance 

Gasoline Tax Laws and Regulations 

The Montana gasoline tax law is basically sound and, in our opinion, 
should be an effective tool in controlling gasoline tax evasion. 
However, we would recommend a change in Section 15-70-204(2). 

The section currently reads as follows: 

"Gasoline exported or sold for export out of the state shall 
not be included in the measure of the distributors license 
tax." 

Our recommendation is to change the law to read: 

"Gasoline exported out of the state shall not be included 
in the measure of the distributors license tax." 

The reason for this change is to provide that deliveries for export 
to persons other than licensed distributors may not be made on a 
tax-free basis. If the delivering taxpayer moves the product 
out-of-state in his vehicle or hires and pays the freight to a common 
carrier to do so, then you have a tax-free export. If a non-licensed 
person receives product in his vehicle or hires and pays a common 
carrier to move the product out-of-state, then the delivering 
distributor must pay the Montana gasoline tax. The state must 
therefore allow the exporting person to become a licensed distributor. 
To accommodate this. Section 15-70-201(6) should be amended by adding 
a subsection as follows: 



(6) "Distributor" means: 

"(f) any person who receives gasoline in the state of Montana 
for export to another state or country." 

This licensed distributor will file monthly tax returns and be subject 
to audit by the Montana Department of Revenue. 

To bring rule No. ARM 42.27.202 into line with the proposed law change, 
Subsection (3) should be changed as follows: 

"If a distributor makes a sale of gasoline for export to 
a person not qualified as a Montana distributor, who then 
removes the product from the state in his own vehicle or 
hires and pays freight to a common carrier to do so, the 
Montana gasoline license tax applies. If the distributor 
removes gasoline from the state in this vehicle, or hires 
and pays the freight to a common carrier to do so, the 
distributor may make such delivery without payment of the 
Montana gasoline license tax." 

Auditing 

To audit exports of gasoline from the state would require Montana 
auditors to crosscheck gasoline tax report data with surrounding 
jurisdictions. This would no doubt be a difficult task considering 
the state has an audit staff of only three persons (according to 
the July 22, 1987, "Study Plan to Implement H. J. R. No. 56). This 
is a very small audit staff, especially for a state that has a much 
higher tax rate than surrounding jurisdictions. 

Surveillance- 

The state of Pennsylvania has an effective surveillance program where 
state investigators follow trucks to detect violations. This has 
proven especially effective when leads have been provided through 
the state's toll-free "hot line" number. Pennsylvania found that 
the honest dealers in the state were more than willing to report 
violations and the publicity encouraging use of the "hot line" was 
very effective. They found the leads to be very accurate. 

The surveillance program would also probably involve an increase 
in personnel . 

Imports 

We believe the Montana law provides adequate controls for good tax 
enforcement on imports. The same audit and surveillance effort that 
we have discussed applies to imports. 



Conclusion 

Conoco believes that the state of Montana would benefit from the 
above plan. Tho state should resist plans that involve increased 
administrative problems without resulting in improved compliance. 



11-12-87 



JW ANEW MkM 
4» SPIRIT OF a 

^IT COOPERATION Wl 



November 17, 1987 



Dear Members of the Revenue Oversight Committee, 



CENEX wholeheatedly supports your study to resolve the issue of 
gasoline tax evasion in Montana. CENEX shares in your concern about 
the loss of tax revenue due to evasion. Not only because evasion 
creates an uncompetitive disadvantage for the honest taxpayer, but 
because many of our employees are Montana citizens as well as the 
patron farmers of our affiliated cooperatives. Dollars taken from the 
Montana treasury through evasion must be replaced with tax dollars 
from our employees and farmer members. 

Senate Bill 116 attempts to correct any evasion problems by imposing 
an additional paperwork and financial burden on the licensed 
distributors in the State of Montana. While at the same time, those 
persons evading taxes will continue to evade taxes, only now they will 
have to sign the manifests and verify that is was actually "exported." 
While Senate Bill 116 may put the lid on some evasion, the hard core 
tax evadors will continue even if Senate Bill 116 was put into law. 

It is our belief that the response to evasion should be addressed on a 
threefold approach. First, the law should be ammended to allow for 
the licensing of persons on an "export only" basis. This would allow 
the state to require detailed reporting by exporters, and conduct 
audit of export companies for compliance. By issuing "export only" 
licenses, the state would not increase the number of tax free sales 
since licensed distributors are currently reporting these sales as tax 
free exports. This system is currently in use in Wisconsin and works 
quite well. 

The second response would be through the use of an increased audit 
program. For example, The Administrative Rules of Montana section 
42.27.201 and 42.27.202(3) require distributors, in support of export 
credits claimed, to execute a Schedule 6A, Reconciliation of 
Deliveries To Licensed Distributors, to export dealers showing in 
detail the number of gallons delivered to such dealers for export. 
The exporting dealer is then required to make a reconciliation and 
submit the Schedule 6A back to the Department of Revenue. It would 
appear that this reconciliation gives the Department of Revenue the 
same third party verification of exports as Senate Bill 116. However, 
even though this rule has been in effect since 1972, it was only on 
July 1, 1987 that the Department of Revenue began enforcing it. Audit 
tools such as this one are effective only if used. 



CENEX/LAND O' LAKES AG SERVICES 

P.O. Box 64089, St. Paul, MN 55164-0089 • (612) 451-5151 • 5500 Cenex Drive, Inver Grove Heights, MN 55075 



Page 2 



The third response would be surveillance. The easiest way to prove 
that a shipment of gasoline did not leave the state is to physically 
observe the product being unloaded in Montana. Surveillance would 
also include collecting information from points of entry. This 
information could then be cross checked against exports reported on 
monthly distributor reports. 

CENEX appreciates all efforts made by the state to collect all taxes 
due the state on behalf of citizens, however, we feel as though 
complience can be met through minor adjustments to the law and 
effective use of the laws and regulations in place. 



Thank you. 



Timothy A. Turgeon 
Excise Tax Supervisor 



MONTANA MUST STRENGT HEN GASOLINE TAX COLLECTION PROCEDURES 

A major marketer of petroleum products in Montana is 
Ashland Oil, Inc., which distributes through its Super 
America retailing organization. Ashland has followed 
closely the progress of the study under HJR 56, and 
its Director of Tax Compliance, J. g. Booten, made 
these comments in a memorandum dated July 27, 1987. A 
copy of the memo was provided to the staff researcher 
by Janelle Fallan, executive director of the Montana 
Petroleum Association. 

Mr. Booten proposed that Montana take these steps to 
assure timely and complete payment of excise taxes 
legally due on gasoline consumed within this state: 

1) Exports - Reporting procedures for exports should 
be tightened up substantially. This could be 
accomplished by: 

1) Licensing exporters - Individuals who 
regularly export from the state should be 
licensed and required to post sufficient 
bond to protect the state's interest. 

2) Refunds - If a person exports only on an 
occasional basis or for other reasons finds 
it burdensome to become licensed as an 
exporter, the tax should be charged on all 
deliveries. He would then apply to the 
state of Montana for a refund, which would 
be granted only if the exporter provided 
sufficient documentation to determine that 
the product was, in fact, exported. 

3) Exports By a Common Carrier Only - If the 
above combination licensed exporter and 
refund procedure does not meet with the 
state's approval, exports should be 
permitted only via common carriers, who 
operate under restrictions that make it very 
difficult for them to divert shipments and 
evade tax payment. If the shipment is made 
via an unregulated carrier, the sale should 
be considered a Montana sale and the tax 
charged. 

4) Importers - Importers must be licensed if 
the proper Montana tax is to be paid on fuel 
coming into the state. This is the only 
viable way for Montana to protect its 
revenue base. There should be sufficient 
penalties involved to make it very costly 



for nonlicensed persons importing product. 
An importer should be allowed to maintain 
tax-free storage at his own storage loca- 
tions, but tax-free sales between licensed 
distributors should be disallowed. 

Commitment by the State - The state must 
make a more serious effort in motor fuel 
enforcement. As noted in the ROC staff's 
preliminary report, there are only three 
auditors in the motor fuels tax division and 
only one concentrates on gasoline license 
tax enforcement. Montana's tax rate of 20 
cents per gallon is the highest state excise 
tax in the nation. The apparent lack of 
enforcemen- and the high rate of tax tempt 
unscrupulc persons to evade the tax. The 
department .should jive serious consideration 
to the following recommendations, which 
probably would not require statutory change: 

a) Establish immediate working 
relationship with neighboring 
state and provincial authorities 
to exchange export and import 
information. The reports for 
motor fuel tax are usually quite 
detailed and allow easy tracking 
of product from one jurisdiction 
to another. 

b) Authorize other state agencies 
such as weigh stations and state 
highway patrol to verify bills of 
lading or other shipping documents 
on product entering the state. 
The information should then be 
forwarded to motor fuel tax 
officials to cross check with 
reports. 

6) Enforcement and Staff - Montana must 
provide adequate enforcement personnel 
to obtain full compliance. Other 
states have proved that the only 
effective tax collection system 
involves tax professionals in the field 
doing day-to-day auditing and investi- 
gative wc..c. No licensed distributor 
should go more than two years without a 
full scale audit. The state will 
simply have to dedicate more resources 
to effectively administer the tax. 



Paul2:7266:eg 



OPTIONS TO IMPROVE GASOLINE TAX COMPLIANCE 
An Industry Viewpoint as Presented in a Letter to 
Members of the Revenue Oversight Committee from William 
B. Gray, Excise Tax Manager, Sinclair Oil Corporation, 
Dated August 14, 1987 

There are a number of steps which states have adopted and which 
should be considered in order to improve compliance. Montana has 
not adopted several of these measures. Implementation of the 
entire package would enhance collections. These suggested steps 
include: 

(1) Control of licensing - Licenses should be required of 
all persons importing into or exporting from the state, but 
licenses should be issued only to financially solvent, 
bondable persons. Montana does not now allow licensing of 
exporters as other states do. 

(2) Increasing audit staff - One of the most effective 
steps, but it is often resisted because of the increased 
costs to the state. A net revenue increase usually results 
as the revenue enhancement is greater than the additional 
costs. 

(3) Balanced inventory reporting - All imports and the tax- 
free inventory in the state should be reported on the 
monthly gasoline tax return which, in effect, includes 
reports of all tax-free transactions of gasoline. Under 
this system, the state can audit gasoline tax returns 
without frequent visits to the taxpayer. Montana does not 
require balanced inventory reporting. 

(4) Information sharing between states - Cross-checking 
information on gasoline movements between states requires 
sharing import\export schedules between adjoining states. 
Sinclair believes Montana does not use this compliance tool. 

(5) Cross-checking tax reports between licensed 
distributors - An essential element in proper gasoline tax 
enforcement in which Montana is very thorough. 

(6) Magnetic tape recording - Replacing ordinary gasoline 
tax return with a magnetic tape is attractive to states 
because it facilitates quick cross-checking of gasoline 
movements between licensed distributors and between states. 
Industry foresees long-run savings in eliminating the 
necessity of converting data processing records into paper 
documents acceptable to the state, and the state would 
realize savings in not having to convert the paper documents 
back into electronic data for use in automated systems. 
Problems may occur in a state that has a large number of 



taxpayers who lack the requisite technology. Coordination 
between the states and the taxpayers is essential to 
developing an effective program. 

Upstream Incidence of Tax 

The number of taxpayers and the number of locations holding tax- 
free inventory are reduced as the imposition of tax is moved 
upstream in the movement of gasoline, and thus the opportunity 
for tax evasion is reduced. It does, however, cause some 
economic hardship on legitimate taxpayers. When the tax is 
imposed upstream, the licensed distributor should be allowed to 
withdraw fuel from the terminal operator tax-free and then be 
required to collect and remit the tax at his first sale 
regardless of whether or not his customer is licensed. 

Assess the Magnitude of the Problem 

The system for administering Montana's gasoline tax laws may need 
some improvement, but Sinclair urged that the state document, 
quantify, and analyze the incidence of evasion before changing 
statutes, regulations, or administrative requirements in any way 
that would increase compliance costs. 



pev 



APPENDIX D 



NEIGHBOR STATES' TAX TREATMENT OF GASOLINE 
SOLD FOR EXPORT 



NEIGHBOR STATES' TAX TREATMENT 
OF GASOLINE SOLD FOR EXPORT 

Source: State Tax Guide . Commerce Clearing House 

How Montana's adjoining states treat exported gasoline 
for tax purposes: 

Idaho allows a refund to a person who buys 50 gallons or 
more of gasoline for use in vehicles on highways 
outside Idaho where a duplicate tax is assessed for 
the same gasoline. Support for the exemption is 
required in the form of a shipping document issued 
by a common carrier, an invoice signed by the 
purchaser, or other property documentation approved 
by the State Tax Commission. 

North Dakota allows a refund for tax paid on motor fuel 
which is removed to another state where payment of 
the tax on the fuel is required, but the refund paid 
is reduced by one-eighth of a cent per gallon below 
the tax originally paid. Importers for use must 
file quarterly tax returns to determine their tax 
liability or tax credit. 

South Dakota exempts from taxation motor fuel reshipped 
from South Dakota and not sold for use in South 
Dakota. 

Wyoming exempts from taxation motor fuel sold for export. 



FINDINGS OF SURVEY OF MONTANA AND NEIGHBOR STATES ON POSSIBLE 
EVASION OF TAX ON GASOLINE SOLD FOR EXPORT 

October 5, 1987 

Prepared by Paul E. Verdon, Staff Researcher, Tor Revenue Oversight Committee 

Compiled from Responses to Questionnaire by Motor Fuels Tax Agencies in the Five States 



MONTANA 



SOU TH DAKOTA N ORTH DAKOTA 



WYOMING 



No 



1. Is gasoline shipped out of your state subject to your state's tax? 



No 



No 



NO, if exported by 
licensed distributor. 

YES, if exported by 

unlicensed 

distributor. 



2. If not, how do you verify that such gasoline is not consumed in your state? 



Can't be verified. 


By forwarding 


Dealers report total 


Internal distribution 


See above. 


Motor Fuels Tax 


export schedules to 


gallons exported on 


verification: refiners 




Division receives all 


the state into which 


their tax reports 


report all sales and 




bills of lading from 


the fuel was 


and must verify 


destinations of 




terminals for each 


exported to cross- 


those exports by 


shipments, and 




delivery, but 


check against the 


listing the sales on 


reports are cross- 




destination is 


importing dealer's 


a Schedule of Out- 


referenced in 




sometimes listed as 


tax return. 


of-State Sales. 


Department of 




"various North 






Revenue and 




Dakota" or "various 






Taxation. If tax 




Montana" or left 






evasion suspected, 




blank so division 






verification is 




does not know 






required in form of 




where the product 






bills of lading and 




is going. 






documentation of 
delivery. 





Montana sends copy 
of export schedule, 
but receiving state 
does not confirm 
whether product 
delivered there. 



3. Do you notify destination state of shipment? 



YES 



YES. Send copy of 
Schedule of Out-of- 
State Sales to the 
state named on the 
schedule. 



Not customarily. 
Would do so only if 
requested or if 
violation suspected. 



YES 



4. Do you otherwise exchange information on exports or imports of gasoline with other states? 



Neighbor states 


YES 


YES. Receive Out- 


Has general tax 


YES, including with 


send information. 




of-State Sales 


information 


Montana. 


but usually not 




Schedules from 


exchange 




timely. Idaho's 




other states on 


agreements with 





(continued) 



Page 2 

MONTANA 



SOUTH DAKOTA 



NORTH DAKOTA 



WYOMING 



IDAHO 



4. Continued - Do you otherwise exchange information on exports or imports of gasoline with other states? 



1986 reports only 
recently received. 



exports into North 
Dakota. 



some other states 
but they are 
effective only when 
a problem exists or 
there is need for 
information. No 
such agreement with 
Montana, which has 
no general sales tax 
which is the normal 
cause ofneed for 
exchange. 





5. Is there 


a standard information exchange form? 




YES 


Uniform 

Disbursement 

Schedule. 


NO 




Send copies of 
required export 
schedules filed by 
licensed distributor. 



6. Is evasion of tax on gasoline purportedly exported a problem? If so, have you devised control method? 



Suspicions of tax 
evasion have been 
suggested. No 
effective controls 
yet devised. 



Doesn't believe so. 



Not to their 
knowledge. 



Not that they are 
aware of. Has 
"fairly extensive 
audit program", but 
only one auditor is 
assigned to 
gasoline tax. 



Possibly. Several 
vendors were 
suspected of 
claiming exports of 
product to 
Wyoming in the 
vendor's truck while 
the product actually 
stayed in Idaho. If 
the vendor used a 
common carrier, the 
practice can be 
monitored through 
the monthly reports 
required. If vendor 
uses his own truck, 
a fuel use tax audit, 
also administered by 
the Fuels Tax 
Section, is 
performed on him; 
if his log book fails 
to show a trip to 
Wyoming that day, 
the export claim is 
disallowed and the 
tax assessed. 



727<)b/C:JEANNE\WP:iJ 




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