The Folly of Tax-Free Fuel

For most people, the duty-free store is a place to pick up a cheap bottle of liquor or carton of smokes. For others — specifically, for truck operators crossing the border at the Ambassador Bridge in Detroit — it’s a place to fill up the fuel tanks. That’s where Ammex Inc., the chain of duty-free shops owned by the Ambassador Bridge Co., sells gas and diesel duty-free at a price that’s too good to be true — usually around 15 cents US a gallon less than nearby competitors.

That’s only half the attraction for truckers. The other is this romantic notion that the store operator is thumbing his nose at the government. The U.S. Customs Service has tried for years to stop Ammex from selling fuel tax-free, so far to no avail. (A federal court has barred the company from selling duty-free fuel in Canada since 1998.)

But if you’re going out of your way to buy cheap fuel at Ammex, you’re probably not doing yourself any favours. Here’s why.

If you have a licence under the International Fuel Tax Agreement, you have to adhere to the rules of the plan as laid out in the IFTA Articles of Agreement. There may be no tax included in the pump price when you fill your tanks in Detroit, but that doesn’t absolve you from your obligation to pay tax. Remember, under IFTA, you’re taxed based on where you burn the fuel, not where you buy it. And once you put an IFTA decal on your truck, each and every kilometer you travel becomes reportable.

The real problem isn’t with the guy selling the fuel — he’s just not collecting the tax on behalf of the government. It’s with truck operators mismanaging their fuel tax reporting and taking the credit on their IFTA return where no fuel tax was paid. The mistake may not become evident until you get an audit five years down the road, and it could also be assessed as part of the total fleet error factor. In that case, your whole fleet could be penalized for taking credit for tax you never paid. Ouch.

Complicating the issue is Michigan’s convoluted method of levying fuel tax. If you have an IFTA decal, you can buy fuel at a state tax rate of 9 cents per gallon. If you don’t have one, you pay 15 cents per gallon, but you can apply for a refund if you can show that you reported it on your IFTA return.

In addition to the state sales tax at the pump, Michigan levies a 12 cents per gallon surcharge on the fuel you consume there, regardless of whether you buy it in Michigan or not. On fuel bought in Michigan (but not necessarily consumed there), you’re entitled to a sales tax refund of 6 cents per gallon. However, you have to file a separate return directly to Michigan and attach a copy of your IFTA return.

Whew.

So let’s put this into a real-world context. If you buy 100 gallons of fuel in Michigan, the state tax on the pump price (if you have an IFTA decal) is 9 cents. If you consume the whole 100 gallons in Michigan, you’d then report an additional 12 cents per gallon on your IFTA return and would be entitled to a credit of 6 cents per gallon.

The result for “tax-free” fuel buyers, as the chart below shows, is a wash once all the tax payments and credits are taken into account. The additional, intangible cost here is the elevated risk of raising a red flag to an IFTA auditor when he sees you’ve fuelled up without paying tax at the pump, thinking that maybe you’re trying to skirt the law.

CHART: Pay It Now or Pay It Later

If you file an IFTA return, you owe tax based on where you burn the fuel, regardless of whether you pay tax at the pump or not.

You Buy 100 Gallons NO TAX TAX INCLUDED

Paid @ pump $95.00 $101.00
Fuel tax @ pump — $9.00
Tax on consumption $9.00 0*
Surcharge on IFTA return $12.00 $12.00
Refund of sales tax — $6.00**

Total paid $116.00 $116.00

Retail pump price $0.95 $1.10

* The tax paid at the pump offsets the consumption charged on the IFTA return.
** You must have a receipt to claim the refund.