IFTA – Dual Fuel Vehicle Tax Reporting    February 9, 2016 Las Vegas, NV Hugh Hughson (BC)

Overview What is a Dual Fuel Vehicle? Prerequisites for Reporting LNG Conversion issues (Ballot #5-2015) New Fuel Types for the Clearinghouse Prorating Distances Travelled An IFTA Tax Return Example Discussion

Dual Fuel Vehicles - 101 Dual fuel vehicles can use two fuels at the same time (e.g., diesel and natural gas) Can operate solely on diesel but not natural gas At idle and high load conditions the engine burns mostly diesel At low load, the engine burns up to 95% natural gas (diesel is used solely to trigger combustion) Overall the same power and performance of normal diesel engines Why is this engine technology being developed and used: Significant lower fuel cost compared to diesel Environmentally friendly (lower truck emissions) Domestic supply – less concern about future world price and availability compared to other fuels Challenges Infrastructure: Fueling stations with equipment to cool the gas; and Fuel supply availability along transportation corridors for long haul trucks Weight and space considerations (e.g., extra engine components and different fuel tanks capable of keeping LNG cool until used which reduce load-carrying capacity) Why is this important to IFTA IFTA tax return was built for reporting one fuel type per vehicle, and we need to agree on a new process to ensure a fair and consistent distribution of taxes Expect: LNG will be used more for since the energy content comparable to gasoline and diesel fuels

Dual Fuel Vehicles - 101 Why is this engine technology being developed and used: Lower fuel cost compared to diesel Environmentally friendly (lower truck emissions) Why is this important to IFTA Anticipate at least 5% of long haul vehicles will be dual fuel within the next 5 years Assume: Carriers will work to maximize savings: Will make best efforts to not run out of lower taxed fuel. Most dual fuel vehicles have less diesel storage capacity, so if they run out of LPG or CNG there are significantly higher operating costs (i.e., less engine power, and more frequent fuel stops); and Infrastructure will improve (i.e., more filling stations) so carriers are less likely to run out of LPG or CNG. Estimated savings of $300,000/year/locomotive “Think we are getting to the tipping point, where like the conversion from steam to diesel locomotives, we are about to see a significant North American shift from diesel to natural gas. Road: By the end of 2012 there were 17.25 million natural gas vehicles worldwide, led by Iran (3.3 million), Pakistan (3.1 million), Argentina (2.18 million), Brazil (1.73 million), India (1.5 million), and China (1.5 million). Rail: BSNF is also testing and some literature estimates savings of over $200,000 per year per locomotive using LNG. Marine: New Marlin-class containerships are currently under construction in San Diego. Each is a dual fuel vessel, and when burning natural gas, the ships are expected to produce 98 percent less sulfur oxides, 71 percent fewer nitric oxides, 71 percent less carbon dioxide, and a 99 percent reduction in particulate emissions, all while increasing the vessels' fuel efficiency compared to conventional diesel engines. B.C. Ferries earlier announced that a shipyard in Poland will build three 105-metre-long, intermediate-class ferries. They will also be dual-fuel ships, to run mainly on LNG. http://www.timescolonist.com/business/b-c-ferries-plans-ship-refits-terminal-upgrade-in-port-mcneill-1.1212722

Dual Fuel Vehicles - 101 At a high level: Pure Diesel Dual Fuel Diesel Purchased / Distance Dual Fuel LNG Purchased / Distance

Dual Fuel Vehicles - 101 Natural gas is sold in two physical states: Compressed Natural Gas (CNG) A high pressure gas (e.g., 3,000 to 3,600 psi) 2. Liquefied Natural Gas (LNG): A super-cooled liquid (e.g., -260°F or -170°C) Compressed Natural Gas (CNG) : Stored as a gas in high-pressure tanks (e.g., 3,000 to 3,600 psi) Often sold as a gaseous measure (e.g., ft3 or m3) Liquefied Natural Gas (LNG): Stored as a super-cooled liquid (e.g., -260°F or -170°C) Almost always sold as a liquid measure (e.g., gallons or liters) or by weight Requires greater infrastructure Units of Measure (Challenges) Liquids -40 to +40 (80 degrees swing/difference) Liquid fuel volumes vary slightly depending on temperature and pressure (e.g., a 10 degree temperature change equals 1% volume change) Considerably greater variations with gaseous fuels (LNG and CNG) with extreme temperatures and pressures ranges (e.g., -270°C or 3,200 psi)

DGE - Energy Equivalent LNG Conversion Issue CDN Jurisdictions US Jurisdictions Fuel Purchases LNG is sold three different units of measure: Gallons (3.5 lb per G) in 24 jurisdictions Diesel Gallon Equivalents (6.06 lb per DGE) in 24 jurisdictions (1) Kilograms in 10 jurisdictions Alabama, California, Colorado, Florida, Georgia, Indiana, Kansas, Kentucky, Louisiana, Michigan, Mississippi, Missouri, North Carolina, Nebraska, Nevada, New Hampshire, New Mexico, Ohio, Oklahoma, South Carolina, Tennessee, Texas, Washington, and Wyoming, Source: Brett Barry, Public Policy and Regulatory Advisor, Clean Energy Fuels Corp. (June 2015). Third question – What does a jurisdiction report to the other CH and Non-CH jurisdictions? … and will jurisdictions easily know what units of measure other jurisdictions are using (e.g., kg, straight gallon or DGE are being used) Kilograms DG - Straight Weight (3.5 lb = 1 gallon) DGE - Energy Equivalent (6.06 pounds = 1 DGE) Two Questions: What does a carrier report regarding LNG purchases to their base jurisdiction? How does the carrier convert their purchases accurately and consistently?

FT #05-2015 CDN Jurisdictions US Jurisdictions Kilograms DLE - Energy Equivalent (0.73 kg = 1 DLE) DG - Straight Weight (3.5 lb = 1 gallon) DGE – Energy Equivalent (6.06 pounds = 1 DGE)

FT #05-2015 CDN Jurisdictions US Jurisdictions Fuel Reporting Kilograms DLE (Energy Equivalent) (0.73 kg = 1 DLE) DGE (Energy Equivalent) (6.06 pounds = 1 DGE) DG (Straight Weight ) (3.5 lb = 1 gallon) Amount Purchased 100 136.99 DLE 36.19 DGE 62.657 gallons Tax Rate $0.25 CDN $0.1825 CDN $0.59 US $0.34 US Total Tax $25.00 CDN $21.50 US

FT #05-2015 Is not a dual fuel issue, the problem exists for any pure LNG vehicle Same as other conversions we used to ensure consistent reporting and disbursement of taxes between jurisdictions (e.g., distances, volumes, and currency) The Ballot is only changing how we report LNG for IFTA purposes (There is no impact to sovereignty, a jurisdiction’s tax rates and units of measure are their responsibility)

Fuel Types/Distances Dual fuel vehicles must be treated and reported separately (e.g., gasoline fleet, diesel fleet, LNG fleet, dual fuel fleet) Dual fuel vehicles must be treated and reported as two vehicles: Separately reporting the distances travelled and fuel purchased Pro-rating the distances to avoid double counting Note – This requires an additional tax return or schedule. Worst case scenario, a carrier with one diesel and one DL/DLG, and one DC/DCG will be required to submit 5 tax returns/schedule

Fuel Types/Distances At a high level: Pure Diesel Diesel Purchased “D” Dual Fuel Diesel Purchased “DL” LNG Purchased “DLG”

For Diesel / LNG vehicles New Fuel Types For Diesel / LNG vehicles DL - To report diesel used with LNG DLG - To report LNG used with diesel For Diesel / CNG vehicles DC - To report for diesel used with CNG DCG - To report CNG used with diesel DL and DC fuel types are: Diesel fuel, taxed at the diesel tax rate shown on the tax rate matrix. Simply used to report diesel fuel used in dual fuel vehicles (where LNG or CNG is the second fuel). DLG and DCG fuel types are: LNG and CNG respectively, taxed at the applicable rates shown on the tax rate matrix. Simply used to report LNG and CNG used in dual fuel vehicles (where diesel is the second fuel).

New Fuel Types DL/ DC DLG DCG No new fuel types on the IFTA’s Tax Rate Tables.

Prorating Distances Dual Fuel DL Purchased / Distance DLG Purchased / Distance Think of the dual fuel vehicle as two different trucks (or fleets) DL Purchased / Distance DLG Purchased / Distance

Prorating Distances Prorating is based on fuel purchases, and this example is based on: 1.25 gallons of diesel purchased; 7.50 DGE of LNG purchased; and 100 miles travelled. (Note - Two dual fuel vehicles/fleets requires 4 return lines/schedules)

Questions / Discussion

Simple Example - IFTA Tax Return Assumptions Total Distance * DL (gallons) DLG (gallons) Total Fuel J1 8,000 500 - J2 2,000 1,000 Total 10,000 1,500 * No exempt distances were traveled in either jurisdiction. Prorate Distances by Jurisdiction Between Fuel Types Total Fuel Fuel by Type Ratio DL 1,500 500 0.3333 DLG 1,000 0.6667 Total Distance Ratio Prorated Distance J1 8,000 0.3333 DL 0.6667 DLG 2,667 5,333 J2 2,000 667 1,333 Total 10,000

Prorating Worksheet Prorating more complicated if a carrier has exempt distances A worksheet can be used to accurately prorate the “Total Distance” and “Taxable Distance” between fuel types. Pro-Rating Worksheet   These fields auto-populate and then transfer to the appropriate DL and DLG form/return for each jurisdiction  TOTAL DISTANCE TRAVELLED EXEMPT DISTANCE TRAVELLED Total Distance DL Portion Exempt DL Distance Txbl Distance DL Portion Total Distance DLG Portion Exempt DLG Distance Txbl Distance DLG Portion J1 8,000 2,667 5,333 J2 2,000 667 1,333 Total Miles 10,000 3,333 6,667

Simple Example - IFTA Tax Return Dual Fuel Vehicles – DL   Average MPG 6.67 Fuel Type Jurisdiction Total Distance Txbl Distance Txbl Volume Tax Paid Volume Net Txbl Volume Tax Rate Tax Due DL J1 2,667 400 500 -100 0.2000 -$ 20.00 J2 667 100 0.1000 $ 10.00 Sub-total 3,333 -$ 10.00 Dual Fuel Vehicles – DLG DLG 5,333 800 0.0500 $ 40.00 1,333 200 1,000 -800 - $ 80.00 6,667 -$ 40.00 TOTAL 10,000 1,500 -$ 50.00

General Thoughts From a tax reporting/transmittal process dual fuel technology is: A significant change in how we operate and will require system changes; and Places a significant burden on carriers and auditors Reminder - IFTA is an imperfect reporting system: we accept average fuel consumption over all jurisdictions travelled (but not vehicle specific) We accept fuel purchases as a proxy for actual fuel used.

General Thoughts Jurisdictions will need: To convert and provide to IFTA their LNG tax rates in energy equivalents (IFTA will convert for volume and currency differences and post for all jurisdictions to use) Obtain LNG energy equivalent tax rates from IFTA Instruct carriers if/how convert their purchases (e.g., Kg to DLE or DGE, Gallons to DLE or DGE) More time for audit activities (e.g., a carrier with three fleets will have 5 tax lines/schedules per jurisdiction) A carrier with three different fleets (e.g., diesel, DL/DLG, and DC/DCG) will be required to submit 5 tax return lines/schedules D return DL/DLG: DL return line DLG return line DC/DCG: DC return line DCG return line (Note - Two dual fuel vehicles/fleets requires 4 return lines/schedules)

Audit Considerations Does the carrier have a dual fuel vehicle (does their tax department know)? Does the tax department, correctly: Separate all fuel purchases (e.g., D, DL, DLG, LNG)? Convert all LNG purchases to the units of the base jurisdiction (e.g., kilograms to DGE)? Separate and prorate the dual fuel distances (to avoid double counting)? Transfer all the information to the tax returns (for each fuel type)? Note the carrier/tax preparer has exactly the same challenges/additional work effort

Dual Fuel Working Group IFTA: Hugh Hughson (BC) Dawn Lietz (NV) Paul Bernander (WI) Garry Hinkley (ME) Tim Ford (CA) Chuck Ulm (MD) Industry: Robert Pitcher (ATA) Gary Bennion (Con-Way) FTA: Cindy Anders-Robb IFTA, Inc. Advisors: Lonette Turner Amanda Koeller Please feel free to ask question of any of these people.

Questions / Discussion

Thanks!

Complex Example - IFTA Tax Return Reporting Assumptions: 1 Carrier with three IFTA fleets: Pure Diesel; DL/DLG; and DC/DCG No exempt fuel purchases and no exempt distances All fuel purchases and distances have been converted into the base jurisdiction’s units of measure and currency

Example - IFTA Tax Return Reporting Pure Diesel Fuel Fleet Total Distance Exempt Distance D DL DLG DC DCG Diesel Fleet J1 1,600,000 500,000 -   J2 400,000 50,000 Total 2,000,000 550,000 MPG 3.64 DL-DLG Fleet DL/DLG Fleet 12,000 40,000 8,000 90,000 4.50 DC-DCG Fleet DC/DCG Fleet 16,000 3,000 4,000 1,000 20,000 5.00

Example – For DL/DLG Fleet Prorate the Miles by Jurisdiction Between Fuel Types Total Fuel Fuel by Type Ratio DL 20,000 12,000 0.6000 (12,000 / 20,000 = 0.60) DLG   8,000 0.4000 (8,000 / 20,000 = 0.40) Pro-Rating Worksheet ENTER BELOW FOR YOUR DL / DLG VEHICLES These Field Auto-populated Transfer these to the DL Form Transfer these to the DLG Form TOTAL DISTANCE TRAVELLED EXEMPT DISTANCE TRAVELLED Total Distance – DL Portion Exempt DL distance Txbl Distance - DL Portion Total Distance – DLG Portion Exempt DLG distance Txbl Distance - DLG Portion J1 50,000 30,000 J2 40,000 24,000 16,000 Total miles 90,000 54,000 36,000

Example – For DL/DLG Fleet Prorate the Miles by Jurisdiction Between Fuel Types Total Fuel Fuel by Type Ratio DL 20,000 12,000 0.6000 (12,000 / 20,000 = 0.60) DLG   8,000 0.4000 (8,000 / 20,000 = 0.40) Pro-Rating Worksheet ENTER BELOW FOR YOUR DL / DLG VEHICLES These Field Auto-populated Transfer these to the DL Form Transfer these to the DLG Form TOTAL DISTANCE TRAVELLED EXEMPT DISTANCE TRAVELLED Total Distance – DL Portion Exempt DL distance Txbl Distance - DL Portion Total Distance – DLG Portion Exempt DLG distance Txbl Distance - DLG Portion J1 50,000 30,000 J2 40,000 24,000 16,000 Total miles 90,000 54,000 36,000

Example – For DC/DCG Fleet Prorate the Miles by Jurisdiction Between Fuel Types Total Fuel Fuel by Type Ratio DC 4,000 3,000 0.7500 DCG   1,000 0.2500 Pro-Rating Worksheet ENTER BELOW FOR YOUR DC / DCG VEHICLES These Field Auto-populated Transfer these to the DC Form Transfer these to the DCG Form TOTAL DISTANCE TRAVELLED EXEMPT DISTANCE TRAVELLED Total Distance – DC Portion Exempt DC distance Txbl Distance – DC Portion Total Distance - DCG Portion Exempt DCG distance Txbl Distance - DCG Portion J1 16,000 12,000 J2 Total miles 20,000 15,000 5,000

Example – For DC/DCG Fleet Prorate the Miles by Jurisdiction Between Fuel Types Total Fuel Fuel by Type Ratio DC 4,000 3,000 0.7500 DCG   1,000 0.2500 Pro-Rating Worksheet ENTER BELOW FOR YOUR DC / DCG VEHICLES: These Field Auto-populated Transfer these to the DC Form Transfer these to the DCG Form TOTAL DISTANCE TRAVELLED EXEMPT DISTANCE TRAVELLED Total Distance – DC Portion Exempt DC distance Txbl Distance – DC Portion Total Distance - DCG Portion Exempt DCG distance Txbl Distance - DCG Portion J1 16,000 12,000 J2 Total miles 20,000 15,000 5,000

Result for the 3 Fleets Fuel Type Total Distance Taxable Distance Final Tax Return A B C D E F G H Fuel Type Jurisdiction Total Distance Taxable Distance Taxable Fuel Volume Tax Paid Volume Net Taxable Volume Tax Rate Tax Due Pure Diesel Fleet J1 1,600,000 440,000 500,000 (60000) 0.2000 -$ 12,000.00 J2 400,000 110,000 50,000 60000 0.1000 $ 6,000.00   Dual (DL/DLG) Fleet DL 30,000 6,667 12,000 (5333) -$ 1,066.67 24,000 5,333 - 5333 $ 533.33 DLG 20,000 4,444 4444 0.0500 $ 222.22 16,000 3,556 8,000 (4444) -$ 888.89 Dual (DC/DCG) Fleet DC 2,400 3,000 (600) -$ 120.00 600 $ 60.00 DCG 4,000 800 0.2500 $ 200.00 1,000 200 (800) 0.1500 Totals (All Fleets) 2,110,000 574,000 -$ 7,180.00

(Just a different way to display results) Results for the 3 Fleets (Just a different way to display results) Final Tax Return A B C D E F G H Jurisdiction Fuel Type Total Distance Taxable Distance Taxable Fuel Volume Tax Paid Volume Net Taxable Volume Tax Rate Tax Due All Activity in J1 J1 1,600,000 440,000 500,000 (60000) 0.2000 -$ 12,000.00 DL 30,000 6,667 12,000 (5333) -$ 1,066.60 DLG 20,000 4,444   4444 0.0500 $ 222.20 DC 2,400 3,000 (600) -$ 120.00 DCG 4,000 800 0.2500 $ 200.00 All Activity in J2 J2 400,000 110,000 50,000 60000 0.1000 $ 6,000.00 24,000 5,333 - 5333 $ 533.30 16,000 3,556 8,000 (4444) -$ 888.80 600 $ 60.00 1,000 200 (800) 0.1500 Total 2,110,000 574,000 -$ 7,179.90