Accounting for Motor-Fuel Losses

Motor fuel may be lost by leakage from storage tanks, spillage, fire, or other means; in addition, measurement differences brought about by temperature or other conditions and meter faults can result in apparent losses. Because this lost fuel is neither consumed on the highway nor used for off-highway purposes, it presents a problem for determining the appropriate base for taxation. In the past, FHWA allowed States to report actual losses or a percentage loss, which was capped at 1%. Usage data for States that did not report losses were not adjusted by FHWA to account for losses. In addition, diesel losses were not considered significant and were not counted. During the reassessment meetings and in the Federal Register notice of August 17, 2000, it was recommended that actual diesel losses also be documented and reported. However, because diesel reporting accounts for actual on-highway fuel use, a reporting of diesel losses is unnecessary.

Process Refinement
To ensure equitable and consistent reporting, States will report actual losses of gasoline. FHWA will discontinue calculating percentage losses; no percentage losses will be allowed.

On comments to the Federal Register notice, three States opposed the change in percentage allowances. These States were concerned that the change would confuse distributors who are accustomed to taking a flat percent loss allowance. Other States supported the change.

Oversight of State-Reported Data

For decades, States reported motor fuel usage data to FHWA for record-keeping purposes and publication in Highway Statistics. During the past two decades, this data has been increasingly used for apportioning highway funds to the States. Responsibility for oversight of State-reported motor-fuel data is an FHWA Division Office responsibility. Currently, FHWA Division Offices conduct motor-fuel reviews on a three-year cycle. The purpose of these reviews is to address key reporting issues, help the FHWA evaluate the quality of the data being submitted by the States, and identify problem areas. The GAO report mentioned earlier concluded that the FHWA needed to ensure that State data were independently verified. Enhanced FHWA oversight of State-reported motor-fuel data is beginning in FY 2002. Baseline oversight reviews will be conducted using the continuous process improvement technique and risk assessment as tools.

Another potential data verification tool is the Excise File Information Retrieval System (ExFIRS). ExFIRS is a tracking and reporting system developed cooperatively by the IRS, U.S. DOT, States, and the motor fuel industry. The purpose of ExFIRS is to ensure proper payment of excise taxes on motor fuels. ExFIRS contains several modules, one of which is the Excise Summary Terminal Action Reporting System (ExSTARS). ExSTARS collects and analyzes data on fuel delivery into terminals (about 1300 nationwide), fuel inventory balances, and fuel destination information. ExSTARS then compares this information with taxpayers' Federal Excise Returns. ExFIRS was demonstrated as a prototype in 1995; actual development began in FY98 with a 5-year development timeframe. ExSTARS, planned as the first module for development, officially started March 31, 2001. About 20 major oil companies are submitting data for testing.

Process Refinement:
To ensure appropriate oversight of State-reported data, FHWA Division Offices will be conducting bench-marking motor-fuel reviews and establishing a plan for continuous process improvement. In addition, training and technical assistance in the implementation of periodic reviews will be provided to the FHWA field offices. Finally, FHWA will disseminate the preliminary attribution data early (February to June) for verification by the States. Thus, the States can provide comments, revisions, or concerns to the FHWA prior to the data's use in the appropriation process. This process will either be part of the preliminary notice of apportionment or will be part of a separate motor-fuel verification process.

States generally agreed that oversight and verification is important. The methodology for conducting the oversight was not generally agreed upon. Two States did not support the use of ExSTARS data for verification because they do not believe that it will be accurate enough to be useful. FHWA will continue to monitor ExSTARS.

Special Fuel Versus Diesel Fuel as an Attribution Issue

Historically, the FHWA has allowed States to report gallons of diesel fuel together with small amounts of other special fuels and has labeled the total "special fuels." These special fuels include liquefied petroleum gases (LPG), compressed natural gases (CNG), liquefied natural gases (LNG), 85% alcohol mixtures, and other fuels. The language of TEA-21 directs that the amount of diesel fuel used on highways be used as one factor (worth 30%) in apportioning NHS funds. The language does not include LPG and other fuels, which implies that these special fuels should not be reported as part of the diesel gallons. Unfortunately, about half of the States do not, or cannot, separately identify these other special fuels from the diesel. In addition, the amounts of these special fuels are estimated to be very small (less than 2%).

Process Refinement
No change; the FHWA will retain its current reporting position and not require States to split diesel and other special fuels. For those States that can readily provide information on a variety of alternative fuels, the FHWA will request that they report this information so FHWA can monitor the use of special fuels.

No States responding to the Federal Register notice disagreed with the FHWA assessment that it would be too difficult to capture the data necessary to separate diesel and special fuel gallonage.

Reporting of Alternative Fuels

Alternative fuels, such as 85% ethanol (E85), 85% methanol (M85), LPG, LNG, and CNG, are currently a very small portion of the motor fuels used on highway. Trends indicate, however, that the use of alternative fuels is growing. Although gallons is the traditional unit for measuring fuels, some alternative fuels are compressed gases which are measured in other units. In addition, some States impose taxes for alternative fueled vehicles in the form of registration fees rather than on a per-gallon basis. Although these receipts are reported to FHWA as State revenue, no gallons of highway fuel are reported or shown in the consumption and attribution tables. For States that report "gallons" of fuel use rather than a registration fee, E85 and M85 fuels are reported with State-reported gallons of gasoline, and CNG and LNG are reported as LPG. These amounts are reported in FHWA tables and used in the attribution process.

Process Refinement
The FHWA will revise the method for reporting alternative fuels and will develop a methodology for reporting motor fuel gallons for use by those States that have a registration fee in lieu of per gallon taxes on alternative fuels.

Only one State opposed mandatory reporting. This State currently has a tax structure for alternative fuels and is concerned that the Federal methodology might require major changes in its current reporting system. All other commenting States agreed with the proposed change.

Accounting for International Fuel Tax Agreement Procedures

IFTA is a motor fuel accounting process which became mandatory in 1996 and is now used in all States. Under IFTA, carriers report the distances trucks travel in all States and Provinces in which they operate. They pay fuel taxes in their base State (where the carrier's business is headquartered). Then, on a quarterly basis, the States adjust the motor carrier tax revenues among themselves to allocate motor fuel taxes to the State in which the travel actually took place.

FHWA requires the States to report adjusted gallons, adding in and subtracting out gallons of fuel based on the adjusted tax receipts sent to and received from other States. Accurate and timely reporting of the IFTA adjustments is important.

Process Refinement
The FHWA will implement actions to document State practices in reporting IFTA data to the FHWA. This documentation will describe how States collect IFTA revenue, how States separate out revenues not related to the gallons of motor fuel and motor fuel taxes, how they calculate net gallons and revenues, and the time required to process IFTA data and report to the FHWA. FHWA will suggest alternatives for IFTA calculations if full data are not available. These actions will improve FHWA's instructions to States for reporting IFTA data.

No States disagreed.

Additional Comments Received on the Federal Register Notice

Two additional comments were received which were not included as issues in the original notice. One State suggested that the FHWA should provide additional guidance and procedures to address issues related to motor fuel sold on Native American Tribal Lands. In addition, one State expressed concern over the recent efforts to convert from the gasoline additive Methyl Tertiary Butyl Ether (MTBE) to ethanol and the impact that this change will have on the receipts assigned to the HTF.


 Native American Tribal Lands Comment

As with State and local government uses, fuel purchased for Native American government uses is exempted from Federal tax. In the past few years, some Native American tribes have purchased motor fuel for resale or for uses associated with tribal business (e.g., casinos). In many cases, the State and Native American representatives have agreements for reporting this data; in other cases, they do not. If the States do not receive the data, they cannot report the gallons to FHWA, and therefore they do not receive credit for this on-highway fuel usage during attribution. Obviously, this is a disadvantage for the State.

There is currently no statistical model available to estimate this fuel use. It is possible that the ExSTARS may provide data on fuel shipped to Native American reservations. FHWA wants States to report gallons of motor fuel sold on reservations and will work to resolve the problems.


 MTBE Comment

In November 1998, a Blue Ribbon Panel was appointed by the Environmental Protection Agency (EPA) to examine the effects of MTBE, an oxygenate added to reformulated gasoline to reduce air pollutant emissions. Although the Panel found that reformulated gas provides considerable air quality improvements they also recommended that the use of MTBE as a gasoline additive be substantially reduced because of water quality problems.5

One State expressed concern that a conversion from a gasoline/MTBE fuel to a gasohol or ethanol fuel would have an adverse effect on receipts to the HTF and on a particular State's contributions. The concern was based on (1) the lower tax rate on ethanol fuels, and (2) the transfer of a larger percentage of the gasohol taxes (than for gasoline) to the General Fund of the Treasury.

There is no process revision based on this concern. Several factors will contribute to the actual impact of any change in fuel composition based on MTBE. The Minimum Guarantee will tend to make up what the State may lose through converting to gasohol or ethanol fuels. A State's losses may also depend on which States impose MTBE bans, and precisely which oxygenate, if any, replaces MTBE.


5 U.S. Environmental Protection Agency, "The Blue Ribbon Panel on Oxygenates in Gasoline: Executive Summary and Recommendations," July 27, 1999.



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