While Colorado struggles to find money to update its roads, it’s doing little to monitor use of tax-free diesel — an area other states have found ripe for fraud.
Well over 220 million gallons of tax-free diesel is pumped into Colorado gas tanks each year. Since the start of 2001, that has amounted to $707 million in exempted federal and state taxes.
The fuel is meant for certain off-road vehicles, but it finds its way into trucks owned by farmers and by oil and gas workers — and, in the worst cases, is bought by criminals who resell it to make a buck.
“We need to get a handle on this, said state Rep. Don Marostica, R-Loveland, when he learned how much fuel is exempted from taxes in the state and that Colorado has no coordinated program to oversee fuel fraud.
Marostica, who served on the legislature’s transportation committee, said he was aware of diesel exemptions — and the abuses — because he grew up on a farm. But he had no idea the exemption extended to construction and the booming oil and gas fields. He also was not aware that the use is not closely monitored.
Tax-exempt diesel, dyed red to show it doesn’t include the 44.9-cent state and federal per-gallon taxes other users pay, can legally be used only off-road, mainly in farm and construction equipment. It is illegal even to drive a vehicle powered by tax-exempt diesel across the street.
The Federal Highway Administration estimates national diesel-tax evasion losses have surpassed $4 billion annually. That’s up from an estimate of $800 million in 1995. The U.S. Department of Transportation puts the losses at between $1 billion and $10 billion annually. The agencies do not break down the losses state by state.
“It’s tough to know how bad or how widespread the problem is,” said Doug Hecox, spokesman for the highway agency. “There are a lot of different hands at the till.”
Some states have organized programs to cut down on fraud and to beef up their transportation budgets through fines and tax collections.
$226,000 in penalties
In the past year, fuel-fraud officers in Arizona have pulled in $3 million in taxes that evaders had tried to avoid. Another $226,000 was collected in penalties.
While most other states are not as organized as Arizona, roadside crackdowns elsewhere have snagged drivers with red fuel in their Mercedeses or pickups. Tennessee, Minnesota, Wisconsin and Arizona have coordinated enforcement programs. Wyoming and Montana have been studying fuel-tax evasion. Texas, Louisiana and Mississippi are looking at ways to stop a surge of illegal fuel in the Gulf Coast.
A snarl of federal regulations make fuel-tax exemptions a tough set of laws to understand — and a hard set to enforce.
Vehicles driven by the American Red Cross and bloodmobiles are exempt, but the Salvation Army’s are not. Refrigerator units on semis fall under tax-free rules — but not the trucks themselves. Farmers may use tax-exempt diesel in their fields but not for mowing their lawns. Tax-exempt fuel is OK to power generators in recreational vehicles, but not the RVs’ engines.
Separate laws allow governmental entities to use tax-free gasoline in vehicles with government plates. Those can be driven on roads.
In Colorado, no one checks whether farmers or oil-and-gas workers fill their pickups from tanks marked “tax-exempt” for trips to town or commutes from oil rigs, though people who live and work in those areas say it happens regularly. Some oil and gas companies are doing internal investigations to try to stop tax-exempt diesel losses that cost the companies tens of thousands of dollars a month.
“We’re aware it’s out there. And it’s something we highlight at all of our contractor education meetings,” said EnCana spokesperson Doug Hock.
Williams Cos. uses dyed diesel to power drilling rigs, but company spokeswoman Susan Alvillar said the practice is closely monitored by an onsite consultant.
“Our people tell us in days past it has been a problem, but not now,” she said. “Some of our subcontractors I can’t speak for. We don’t monitor their diesel use.”
With dyed diesel, the Colorado Department of Revenue and the Internal Revenue Service — neither of which has agents devoted full time to fuel-tax evasion — focus their audits on fuel distributors and spot- checks on commercial trucks. Distributors are tasked with keeping their own records and are not required to reveal who they sell tax-free fuel to unless they are audited.
A fraction of commercial trucks entering and leaving the state are checked at the points-of-entry. In the past year, revenue agents dipped dye-detecting sticks into 20,608 commercial trucks and cited 23 for illegally using dyed diesel.
The revenue agencies point to the Colorado State Patrol or local law enforcement agencies as the proper authorities to be checking for illegal diesel in noncommercial vehicles.
No checks for dyed diesel
“We don’t do any checks for dyed diesel,” said patrol spokesperson Trooper David Hall. “It’s complicated and costly to prove it in court.”
Hall points back to the IRS and the state Department of Revenue. “It’s a tax-revenue issue,” he said.
“We target the things we think are most costly to state taxpayers. We don’t see the evidence that leads us to believe this is one of the high-cost areas of tax evasion,” said Mark Couch, spokesman for the state Department of Revenue.
The IRS’s last large fuel-tax evasion bust to make news in the state occurred in 2004. A Denver man was convicted of buying tax-free diesel then selling it as taxed fuel to truck stops. He had pocketed more than $14 million in taxes.
Stacey Stegman of the Colorado Department of Transportation said the discussion about how much the state might be losing because of fuel-tax evasion “has never come up” in the hand-wringing sessions over budget shortfalls.
State Rep. Bernie Buescher, D-Grand Junction, joined those who are saying it’s time the topic is raised. “If there are folks out there that are cheating, that’s unacceptable,” he said.
Erich Muehlegger, assistant professor of public policy at Harvard’s John F. Kennedy School of Government, studies fuel-tax evasion and said the dye, which was added to the gas in 1993, did a good job of cutting down evasion — for a time. His latest study shows current regulations provide access to large quantities of untaxed diesel, creating incentives for evasion schemes whether they be taking free tanks of dyed diesel from oil-rig supplies or selling large loads of dyed diesel at truck stops or distributorships.
Deliberate large-scale diesel-tax cheaters are finding new ways to stay ahead of investigators. They have figured out how to chemically remove the red dye or to monkey with dye-injection equipment so the dye doesn’t really inject into the fuel — or they simply sell the dyed fuel to nonqualified users who don’t mind that it is illegal.
Nancy Lofholm: 970-256-1957 or nlofholm@denverpost.com
