Alternative Fuels and IFTA – 2008 IFTA Annual Business Meeting Alternative Fuels Committee

Alternative Fuels Committee (AFC) COMMITTEE MEMBERS: Kim Craig – Ontario Ministry of Revenue (Committee Chair) Fred Alleman - Audit Committee, Pennsylvania Department of Revenue Don Boswell – Law Enforcement Committee, Virginia Department of Motor Vehicles Donna Burch – Industry Advisory Committee, Ryder Transportation Services Meg Cronk – Agreement Procedures Committee, New York Department of Taxation & Finance Gary Frohlick – ex-officio Board Member, Saskatchewan Finance Garry Hinkley – Clearinghouse Committee, Maine Bureau of Motor Vehicles Mark Osbaldeston – Attorneys Section Committee, Ontario Ministry of Revenue Robert Pitcher – Industry Advisory Committee, American Trucking Association Patricia Platt – Program Compliance Review Committee, Kansas Department of Revenue Jan Skouby – Dispute Resolution Committee, Missouri Motor Carrier Services Bill Staples – Dispute Resolution Committee, New Brunswick Department of Finance BOARD LiAISONS Scott Bryer Andrew Foster Sheila Rowan IFTA, Inc. ADVISORS Lonette Turner Jessica Eubanks

History In 2005 membership resolution ratified Several jurisdictions introduced exemptions and reduced tax rates on blends of biodiesel. January 2007- AFC formed with representation from each IFTA committee Spring 2007- AFC conducted survey At the 2007 ABM presented results from survey and received support to move forward with: developing an Alternative Fuels Database on the IFTA, Inc. website drafting ballots that incorporated the intent of the membership resolution into the Agreement and the feedback from the survey

Conclusions from survey results Incentives exist in several jurisdictions and more to come Several jurisdictions offer incentives without effecting IFTA administration. Majority(70%) of jurisdictions want detailed information on incentives offered by other jurisdictions. Split on whether fuel types: should be covered by the Agreement being added to the tax rate matrix require a membership vote Majority (76%) of jurisdictions want alternative fuels to be handled in accordance with R830 as stated in the membership resolution. Many jurisdictions have incentives for biodiesel which include: producer credit; supplier/retailer refund; distributor deductions; income tax credit on production; sales tax incentive; reported as diesel for IFTA and separate refund process; tax reduction Most of these incentives have separate reporting requirements that are outside of the IFTA return ALTERNATIVE FUELS SURVEY

Conclusions from survey results How should blended/interchangeable fuels (biodiesel/diesel, gas/ethanol) be reported for IFTA? Reported as diesel or gas and contact jurisdictions re: R830/refund In accordance with membership resolution Reported as the main/predominant fuel type purchased or higher tax rate Reported on return Jurisdiction indicate how it is taxed Diesel engine=diesel fuel/ gasoline engines= gasoline Separate line item on the IFTA return Excluded from IFTA – can’t effectively report interchangeable fuels Blends with diesel reported/taxed as diesel; blends with gas reported/taxed as gas

Ballot #6-2008 - Comments 29 in favour: Affords times to report applicable changes for new motor fuel types Proposed in response to the survey conducted by AFC, during which majority requested more timely notification Many IFTA processing systems require more time for an IT change to their system. Note re: comment from Nevada this change only effects a new motor fuel type and not a rate change

Ballot #6-2008 - Comments 5 undecided/4 opposed: Jurisdictions required to collect fuel taxes for unlimited number of new tax types Need to define “new motor fuel type” Timeframe may be tight due to other IT initiatives Additional information and discussion needed Will there be different tax rate for differing blends of biodiesel (B-5, B-10, B-15…..)? Ask - What timeframe will work? New motor fuel type: Current one month approx. to mailing returns/two months for due date of filing return Proposed four months approx. to mailing returns/five months for due date of filing return If Ballot #7 doesn’t pass – yes there could be differing tax rates for blends of biodiesel, but at least there would be more time to implement

Ballot #6 - Revisions R239 “motor fuel” is defined ‘Motor fuel type’ currently used in Procedures Manual & Audit Manual Revised to include reference to “tax matrix” rather than define “motor fuel type” Motor Fuel is defined R239 – means all fuels placed in the supply tank of QMV ‘fuel type’ and ‘motor fuel type’ currently used in Procedures Manual and Audit Manual As stated earlier survey showed split on whether fuel types should be covered by the Agreement or require a vote to add to the tax rate matrix, therefore AFC proposed at least add’ time to implement. FTPBP#6-2008

Ballot #7-2008 - Comments 19 in favor: Removes the incentive for carriers to underreport usage in other jurisdictions (i.e. NY method which reduces tax paid credits) Helpful in clarifying reporting procedures A single tax rate – are carriers not reporting this way currently? Single tax rate equal to special fuel; consistent with tax policy of majority of jurisdictions.

Ballot #7-2008 - Comments 5 undecided: Support the concept, but concerned about the possible effects of the reporting aspect Want to hear dialogue at ABM

Ballot #7-2008 - Comments 14 opposed: Creation of adjustments on IFTA return unacceptable Unclear as to how blended product will be reported – a separate schedule? Results in carriers receiving credit for tax that was not paid Undermines uniformity in IFTA returns Interferes with a jurisdiction’s ability to set tax rates

Ballot Context: Emerging alternative fuels industry 2005 membership resolution Introduction of tax rate incentives for biofuels Industry appeal for uniformity Impossible to report the use of interchangeable fuel with complete precision under IFTA Potential for further undermining of base jurisdiction reporting model

Ballot Intent: Explicitly: “To include a definition of “blended fuel”, set out reporting requirements for blended fuels and to allow the base jurisdiction to provide adjustments where there is an exemption for different tax rates for a blended fuel” Implicitly: Respects the terms of the 2005 membership resolution Respects the autonomy of jurisdictions relative to tax policy and in so doing anticipates the inevitability of administrative measures to fulfill objectives under IFTA

Option 1: Withdraw Ballot: Pros: Refer to AFC for additional study Resubmit with revisions Cons: Risk of lost momentum/opportunity (knowledge assets) Risk perception that issues cannot be addressed Extension of status quo which has been identified by membership as a pressing concern Effort abandoned

Option 2: Proceed with Revisions: Pros: Confidence level that concerns can be addressed Opportunity to establish foundation for future enhancements Cons: Subject matter is complicated Elevated risk to subsequent attempt, in event of non-supporting vote.

Option 3: Status Quo (effort abandoned): Pros: Allow for self-correcting of problems (POS incentives phase out) Cons: Inadequacy of IFTA to address present challenge of alternative fuel (perceived and real) Potential for the problem to expand Erosion of IFTA

Determining the Course of Action: Facts: As written, this ballot will not succeed In absence of acceptable revisions, the choice is between Options 1 and 3. Challenge: Can revisions be made to satisfy a majority of the membership so that the Ballot can continue? FTPBP#7-2008

The Case of New York: Consumption of B20 in NYS by a NY based IFTA taxpayer Example: Let’s assume a NY taxpayer had the following IFTA activity during the 2Q2008: Gallons of B20 purchased in NY 1,000 Gallons of diesel purchased in NY other than B20 18,000 Gallons of diesel purchased outside of NY 21,000 Total gallons of diesel purchased 40,000 Total IFTA miles 200,000 Total non-IFTA miles 0 Total miles 200,000 Taxable miles in New York 3,000

STEP 1 – CALCULATE MPG Total miles 200,000 Divide by total gallons of diesel 40,000 Average fleet MPG for diesel 5 CALCULATE TAXABLE GALLONS USED IN NY – Taxable miles in New York divided by diesel average fleet MPG: 3,000/5 = 600 taxable gallons

STEP 2 - IS B20 PURCHASED IN NY GREATER THAN NY TAXABLE GALLONS? Gallons of B20 purchased in NY 1,000 Taxable gallons for NY - 600 Excess gallons of B20 purchased in NY 400 Since the B20 gallons purchased is greater then taxable NY gallons, the taxpayer must go to Step 3

STEP 3 – COMPUTE TAX-PAID GALLONS FOR NY Excess of B20 (from step 2) 400 B20 adjustment percentage x 80% Adjusted B20 gallons 320 Other diesel gallons purchased in NY 18,000 Taxable NY gallons 600 Tax paid gallons to be entered on the 18,920 taxpayers IFTA tax return for NY

Assessing Option #2 - Possible Revisions: R945.100 – Reporting: Issue: Will result in overstatement of credits to carriers Remedy: can we resolve this with revised wording to clarify that this requirement is for purposes of calculating consumption factor (I.e. MPG/KPL) and taxable gallons/litres? R945.200 – Adjustments in base jurisdiction: Issues: Interferes with jurisdiction sovereignty in tax policy matters and Impossible to administer

Assessing Option #2 - Possible Revisions: Remedy: Firstly, keeping the NY example in mind, can we accept the following: does not impact on the actual tax rate imposed for an alternative fuel wording does not impose an obligation, but rather recognizes a situation jurisdictions will be inevitably forced into notwithstanding IFTA, when legislators introduce POS exemptions for alternative fuel. very few jurisdictions will be in this situation at any given point in time translating into a very low segment of carrier population affected

Assessing Option #2 - Possible Revisions: Secondly, Can this be viewed as an acceptable means by which IFTA can formally recognize that these situations are best addressed at the jurisdictional level? (Keeping in mind that jurisdictions are bound by the principles of IFTA when establishing administrative practices relative to reporting)? Thirdly, Would concerns be addressed if this clause is revised to clarify that adjustments may be provided to avoid underpayments (POS incentives) as well as overpayments (refunds)?

Assessing Option #2 - Possible Revisions: And finally, Must acknowledge that carriers based outside the base jurisdiction that offers the POS incentive will make purchases of bio-diesel at reduced/exempt rates. Possible remedies: Implement mandatory adjustment provision for all jurisdictions a)Introduce requirement that carriers report by jurisdiction all volumes of biodiesel purchased b) require this information to be included in transmittals so that jurisdictions can analyze materiality and exercise auditing authority where deemed necessary