Motor Fuels Tax Audit Procedures Manual - Ch. 153

Chapter 11 - Bonded User, DD User, AG User

Bonded User-Diesel Fuel

A bonded user permit authorizes a user whose purchases of diesel fuel are predominantly for non-highway use to purchase diesel fuel tax-free from permitted suppliers. They report and pay taxes on that part of the diesel fuel that is delivered into the fuel supply tanks of motor vehicles owned or operated the user. (Prior to 09/01/00.)

Effective September 1, 2000, two separate bonded user permits - Agricultural and Dyed Diesel were created by statute changes. The "Bonded User" permits were all put out of business as of 08/31/00. Taxpayers were required to re-apply for the appropriate permit.

A Dyed Diesel Bonded User permit authorizes a user to purchase dyed diesel fuel only for the user's own use.

An Agricultural Bonded User permit authorizes a user to purchase dyed and undyed diesel for the users' own use for agricultural purposes ONLY.

Basic Guidelines

The following are some basic guidelines in auditing a bonded user, AG Bonded User and/or DD Bonded User:

  • Determine the total gallons purchased.
  • Determine if the taxpayer has maintained a distribution log for all uses of tax-free diesel (dyed and undyed).

Question and Answer

In auditing a user (bonded or AG), audit tests indicate that all fuel used in a taxable manner has been reported; however, records of tax-free uses are incomplete or non-existent and several tax-free purchases were not reported. Is there a basis for additional tax due?
(This would also apply to a DD user who was exempt from federal excise tax but not state fuels tax such as a city, county, a state agency or a political subdivision of the state. These entities are allowed to use dyed diesel on the public roads, but are responsible for accruing and reporting state tax.)

Yes, Sec. 153.219. Records of the Motor Fuels Statutes have very specific record keeping requirements for all persons acquiring tax-free diesel (dyed or undyed. Logs are required for tax free and taxable use.

Reconciliation of Highway Vehicles

A list of vehicles and equipment using diesel fuel should be made. Examination of license receipts, titles, depreciation schedules, etc., may be helpful in determining a complete list of highway vehicles. The list of highway vehicles may include:

  • Description: year, make, model, size, etc.
  • Acquisition and retirement dates of each vehicle.
  • Location of vehicle and purpose used.

Invoices for Taxable Use

The law requires that where fuel is delivered into the fuel supply tank of a motor vehicle, a bonded user or other user shall issue an invoice or enter the information in a distribution log. The invoice or distribution log must have the name and address of the person making the delivery stamped or pre-printed on it and provides spaces for:

  • the name of the user
  • the date of the delivery of the fuel
  • the number of gallons delivered
  • the odometer or hubmeter reading
  • the state highway license or unit number
  • the type of vehicle
  • the Texas diesel tax stated separately
  • the signature of the person receiving the fuel.

If the delivery of tax-paid diesel fuel is made through an automated method whereby the purchase is automatically applied to the purchaser's account, one invoice may be issued at the time of billing covering multiple purchases made during a 30-day billing cycle.

If the fuel delivery into the fuel supply tanks of a motor vehicle is through a method where there is no seller or agent present, then the purchaser or recipient must prepare the required invoice at the time of delivery.

Records for Non-Taxable Use

Section 153.219(c) of the law states: "A dyed diesel fuel bonded user, an agricultural bonded user or other user with nonhighway equipment uses who files a claim for a refund shall keep a record showing the number of gallons of:

(1) inventories of all diesel fuel on hand at the first of each month;
(2) all diesel fuel purchased or received, showing the name of the seller and the date of each purchase;
(3) all diesel fuel deliveries into the fuel supply tanks of motor vehicles;
(4) diesel fuel used for other purposes, showing the purpose for which used; and
(5) all diesel fuel lost by fire, theft, or accident.

Rule 3.173(c) (4) Refund claim for gasoline or diesel fuel used off highway. A claim for refund on fuel used solely for off-highway purposes must list each off-highway vehicle or piece of equipment and the total number of gallons used. Documentation that shows that the state tax was assessed and a schedule that lists the number of gallons of gasoline, dyed diesel fuel, and undyed diesel fuel used in both on-and off-highway vehicles and equipment must be maintained.

Records Available

Whatever situation arises while examining any bonded user's records, the following information will be helpful:

  • Determine the bulk storage and capacity.
  • How is fuel measured when delivered into the fuel supply tanks of motor vehicles? Of off road equipment?
  • How is the taxpayer maintaining control of the fuel?
  • Are all invoice numbers accounted for or is there a distribution log?
  • Does the taxpayer have a tank calibration chart and measuring stick to take a physical inventory?

If use records are available and contain the needed information, they can be used for a quick test. The basic formula to use for each diesel-powered vehicle for each month is as follows.

Odometer/hubmeter reading at the end of
the most current month                       48,290

Less:  Odometer/hubmeter reading at the
end of the previous month                   (46,940)

Equals: Miles traveled during the month       1,350

Divided by gallons put into vehicle during
the month                                       300

Equals: Miles per Gallon (MPG) factor           4.5

If the MPG on each vehicle is reasonable, then total the gallons used and compare them with the gallons reported. If there is an insignificant difference between the numbers of gallons used than is reported, then examine another month. A significant difference might indicate adjustments should be made. This could be done by totaling taxable uses if the difference is errors in reporting.

If the MPG factor is not reasonable, this indicates some fill ups have not been recorded. It could also be due to tax-paid purchases from other sources.

Half-ton pickups average from 10 to 20 MPG between fillips. Truck/tractors generally average from 3 to 6 MPG. Some newer truck/tractors equipped with the latest in electronics and aerodynamic equipment may get as high as 7 MPG.

Off Highway Machinery and Equipment

The tax-free use of diesel by any bonded user, AG user or DD user includes the delivery into the fuel supply tanks of refrigeration units, motorboats, stationary equipment, railway engines, farm machinery or any machinery or equipment not designed or licensed to operate on public roads.

Incidental Highway Use

The fuel used in certain motor vehicles may qualify as tax-free use except for that portion used on the public highways (incidental travel). The highway use is taxable and may be computed at the rate of 4 MPG. These vehicles are used entirely off the highway except for incidental travel for repairs, maintenance or to travel from one base of operation to another.

A good guideline to determine whether the vehicle qualifies for incidental highway use is the type of license the vehicle has. If it has a machinery type license, it probably qualifies for the tax-free use except for highway travel. If it has a regular highway license, then it probably does not qualify and all fuel placed in the fuel supply tank is taxable.

Vehicles that generally qualify for tax-free use include graders, maintainers, rollers, packers, paving machinery, loaders, draglines, motor cranes, pulling units, workover rigs, oil drilling rigs, spudders, seismograph units, water well drilling units, etc.

Transport trucks that haul liquids or materials would not qualify even if less than 10% of their travel were on-highway and the rest off-highway. However, the statute allows a 5% allowance for PTO units.

There are exceptions to the above guidelines. A vehicle may be registered for regular highway use and still qualify for tax-free use except for highway travel. Some of these exceptions may include water well drilling units, oil field equipment such as pulling units, workover rigs, hot oiler trucks, kill trucks, etc. They should be equipped with a wheelmeter or hubmeter to measure the highway miles and report fuel used at 4 MPG.

AG Bonded Users — On-Highway Travel of Farm Machinery

Per Rule 3.183, the gasoline and diesel used for travel on the highway to move farm tractors, combines, and similar self-propelled farm machinery over the public highways for the purpose of transferring the base of operation of the machinery is not taxable.

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(Revised 02/2004)