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Committee hears DMV on diesel refunds, dyed diesel and potential tax leakage
Summary
DMV staff described how on-road diesel taxes are collected at the rack, how diesel refunds for non-propulsion uses work, and cited gaps around sales-tax reporting and dyed diesel use that may be losing revenue to the transportation fund; staff said they are pursuing an MOU with the Department of Taxes and launching an internal audit program.
Renee Foto and compliance staff told the House Transportation Committee on April 16 that Vermont collects motor-fuel taxes at the wholesale rack and that the DMV is working to close compliance gaps around diesel refunds and the use of dyed diesel for on-road propulsion.
Foto summarized the motor-fuel tax rates in current use: gasoline is taxed at 32.61 cents per gallon, clear on-road diesel at 32 cents per gallon; she also described additional components including a petroleum distributor licensing fee (1 cent per gallon) and an additional motor-fuel transportation assessment (MFTIA) of 6.1 cents per gallon and an MFTAF component that is calculated at 4% of the state average retail price and collected as about 13.4 cents per gallon in the current schedule shown to the committee.
On refunds, Foto said certain on-road vehicles that consume diesel for non‑propulsion activities (for example, a refrigerated trailer or a cement-mixer drum) may request a refund for the on‑road diesel tax on the gallons used for that non‑propulsion purpose. "We would give the refund for the entire amount, but in conjunction, they're supposed to report that 6% tax," Foto said, referring to a 6% sales/use tax obligation reported to the tax department on taxable non‑propulsion use. She said the DMV does not yet have a systematic mechanism to verify the 6% sales-tax remittance and is working on an MOU with the Department of Taxes to allow that verification.
Brandy Robillard, compliance director, described enforcement observations and said enforcement has found instances of dyed (red) diesel being used on-road. Dye diesel (typically sold for heating, agricultural and certain off-road equipment) is not taxed as on-road diesel at the DMV, and when it is used on public roads without paying road taxes it represents lost transportation revenue. Robillard said some jurisdictions deploy roadside testing and graduated penalties; she described plans to use the DMV enforcement team for tank dipping, sample testing and audit referrals.
Foto described the DMV's planned next steps on diesel refunds: "I am in the early stages of implementing an internal audit discovery program that is going to focus solely on diesel fuel refunds. ... If I audit this and I find that they were not eligible for said refund, I'm going to bill them back what they were issued in a refund plus penalties and interest. And that will also in turn into an exchange of information to the tax department." The DMV said it expects to provide more data to the committee as that program develops.
Committee members asked whether taxing dyed diesel at the pump would be the simplest fix; staff said changing the tax collection point or statutory definitions would require legislative action and that other states have adopted different approaches for diesel substitutes and emerging fuels. The DMV said it is monitoring practices in other states (staff named Pennsylvania as one point of contact for approaches to taxing electricity and propane used for propulsion).
