[Federal Register Volume 59, Number 125 (Thursday, June 30, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-15799]


[[Page Unknown]]

[Federal Register: June 30, 1994]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 48

[TD 8550]
RIN 1545-AP48; 1545-AS32

 

Diesel Fuel Excise Tax; Dye Color and Concentration

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations relating to dye color 
and concentration requirements for tax-exempt diesel fuel. These 
regulations implement changes made by the Omnibus Budget Reconciliation 
Act of 1993 and affect refiners, importers, terminal operators, and 
throughputters.

EFFECTIVE DATE: These regulations are effective January 1, 1994.

FOR FURTHER INFORMATION CONTACT: Frank Boland, (202) 622-3130 (not a 
toll-free number.)

SUPPLEMENTARY INFORMATION:

Background

    Section 4081 was amended to apply to diesel fuel by the Omnibus 
Budget Reconciliation Act of 1993. Temporary regulations relating to 
the diesel fuel excise tax imposed by section 4081 were published in 
the Federal Register on November 30, 1993, (58 FR 63069) along with a 
notice of proposed rulemaking (PS-52-93) cross-referencing the 
temporary regulations (58 FR 63131). Amendments to these temporary 
regulations (relating to dye color and concentration) were published in 
the Federal Register on December 27, 1993, (58 FR 68304) along with a 
notice of proposed rulemaking (PS-76-93) cross-referencing those 
amendments (58 FR 68338).
    Written comments responding to these notices were received and a 
public hearing was held on March 22, 1994. After consideration of the 
comments relating to the exemption from the diesel fuel tax imposed by 
section 4081, Sec. 48.4082-1 (as proposed in PS-52-93 and PS-76-93) is 
adopted as revised by this Treasury decision and the corresponding 
temporary regulations are removed. The comments and revisions are 
discussed below. Other sections of the proposed and temporary 
regulations remain in force until final regulations on those topics are 
issued.

Existing IRS and EPA Regulations

    Effective October 1, 1993, Environmental Protection Agency (EPA) 
regulations (40 CFR 80.29) make it unlawful for any person to 
manufacture, sell, supply, offer for sale or supply, dispense, 
transport, or introduce into commerce diesel fuel that contains a 
concentration of sulfur in excess of 0.05 percent (by weight) (high-
sulfur diesel fuel) unless the fuel contains visible evidence of the 
blue dye 1,4 dialkylamino-anthraquinone. A substantial penalty applies 
to the use of high-sulfur diesel fuel in motor vehicles.
    Effective January 1, 1994, the Federal excise tax on diesel fuel 
imposed by section 4081 does not apply to removals of diesel fuel that 
is indelibly dyed (or dyed and marked) in accordance with IRS 
regulations. Section 48.4082-1T(b) of the Manufacturers and Retailers 
Excise Tax Regulations and a transitional rule in Notice 94-21, 1994-11 
Internal Revenue Bulletin 32, provide that diesel fuel that is required 
to be dyed blue pursuant to EPA's high-sulfur diesel fuel program 
satisfies the IRS dyeing requirement only if it contains blue dye of 
the prescribed concentration level. Diesel fuel that is not required to 
be dyed blue pursuant to EPA's high-sulfur diesel fuel program 
satisfies the IRS dyeing requirement only if it contains a red dye of a 
prescribed type and concentration. In addition, the Commissioner is 
given authority to modify the dyeing requirements by approving the use 
of other dyes.

Safety Issues Regarding Aviation Gasoline

    No Federal regulations require the dyeing of aviation gasoline 
(avgas). However, avgas is dyed by refiners to differentiate various 
grades of the fuel and to distinguish avgas from clear, kerosene-based 
jet fuel. As a result of this practice, more than 90 percent of 
domestic avgas is dyed blue or green. Extensive training has been 
conducted within the aviation community to assure that pilots, 
mechanics, fuel service personnel, and vendors are thoroughly familiar 
with the meaning and use of color in fuels. This training is important 
because contamination of avgas by even small amounts of other fuel can 
cause an engine failure.
    The Federal Aviation Administration, EPA, and IRS are concerned 
that blue-dyed diesel fuel might be mistaken for blue or green avgas. 
Of particular concern is the possibility of misfuelings in remote 
locations where fuels are dispensed into nonstandard containers or 
where different fuels are stored in similar containers in close 
proximity to each other.

Public Comments

    The IRS received comments from refiners, pipeline and terminal 
operators, and others in the diesel fuel distribution system concerning 
the dye color and concentration requirements of the temporary and 
proposed regulations. In general, these comments suggested that the 
blue dye concentration level should be lower than that scheduled to go 
into effect on July 1, 1994, and the red dye concentration should be 
lower than the current requirement (3.9 pounds per thousand barrels 
(ptb) when expressed as a solid dye standard). The comments expressed 
concern that the required concentration level might cause sedimentation 
in pipelines and engines and make the petroleum industry's tests for 
cloud point and haze more difficult to conduct. A comment from a dye 
manufacturer indicated, however, that the required red dye is 
completely soluble in fuel and noted that an independent laboratory had 
no difficulty in conducting the cloud point and haze test. The IRS 
carefully considered these public comments in developing the final 
regulations.

IRS Concerns

    In addition to its concerns about aviation safety, the IRS believes 
that enforcement of the diesel fuel excise tax will be impaired unless 
the dye in fuel is visible when that fuel is diluted as part of any 
practicable plan of large-scale tax evasion. In determining the 
appropriate dye color and concentration requirements to address this 
concern, the IRS inspected numerous samples of diesel fuel containing 
various colors and concentrations of dye. Many of these samples were 
independently produced by the IRS and others were provided by the 
petroleum industry and dye manufacturers.

Explanation of Final Regulations

    In order to avoid any possible confusion with blue or green avgas, 
these final regulations provide that beginning October 1, 1994, diesel 
fuel can no longer be dyed blue for tax exemption purposes. Rather, red 
dye will be used to identify all tax-exempt diesel fuel, regardless of 
the sulfur content of that fuel. The Commissioner will retain the 
authority to modify this requirement by approving the use of other 
dyes, but will not permit the use of dyes that could cause diesel fuel 
to be mistaken for avgas. In addition, a transitional rule will permit 
tax-free removals of high-sulfur diesel fuel that was dyed blue before 
October 1, 1994.
    The red dye concentration required by the final regulations is the 
equivalent of the red dye concentration currently required by IRS for 
tax-exempt low-sulfur diesel fuel. In the final regulations, however, 
the required red dye concentration is expressed in terms of a solid dye 
standard, which is uniform among dye manufacturers, rather than in 
terms of the dye's active ingredient. This change does not impose any 
additional requirements on diesel fuel that was dyed red under the 
rules in effect before the issuance of the final regulations. Thus, 
diesel fuel that was dyed red in accordance with those rules will 
satisfy the solid dye standard in the final regulations.
    Based on its inspection of dyed diesel fuel samples, the IRS 
believes the 3.9 ptb concentration required by the final regulations is 
necessary to address its concerns regarding dilution. In many cases 
involving the diesel fuel dyed with less than 3.9 ptb, the dye was not 
visible when the fuel was diluted. Thus, a required concentration level 
of less than 3.9 ptb could result in considerable diesel fuel tax 
evasion.
    The IRS understands the petroleum industry's concerns on the 
concentration issue and will continue to monitor the effectiveness of 
the 3.9 ptb standard.

Action by EPA

    In conjunction with these IRS final regulations, EPA is issuing 
regulations in a future issue of the Federal Register that require 
high-sulfur diesel fuel to be dyed red rather than blue. The EPA rule 
and the IRS rule have the same effective dates.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in EO 12866. Therefore, a 
regulatory assessment is not required. It also has been determined that 
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) 
and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to 
these regulations, and, therefore, a Regulatory Flexibility Analysis is 
not required. Pursuant to section 7805(f) of the Internal Revenue Code, 
the notices of proposed rulemaking preceding these regulations were 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on their impact on small business.

Drafting Information

    The principal author of these regulations is Frank Boland, Office 
of Assistant Chief Counsel (Passthroughs and Special Industries). 
However, other personnel from the IRS and Treasury Department 
participated in their development.

List of Subjects in 26 CFR Part 48

    Excise taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 48 is amended as follows:

PART 48--MANUFACTURERS AND RETAILERS EXCISE TAXES

    Paragraph 1. The authority citation for part 48 is amended by 
removing the entry for ``Sections 48.4082-1T and 48.4082-2T'' and 
adding the following entry in numerical order to read as follows:

    Authority: 26 U.S.C. 7805 * * *

    Sections 48.4082-1 and 48.4082-2T also issued under 26 U.S.C. 
4082(c). * * *
    Par. 2. Section 48.4082-1T is removed and Sec. 48.4082-1 is added 
to read as follows:


Sec. 48.4082-1  Diesel fuel tax; exemption.

    (a) Exemption. Tax is not imposed by section 4081 on the removal, 
entry, or sale of any diesel fuel if--
    (1) The person otherwise liable for tax is a taxable fuel 
registrant;
    (2) In the case of a removal from a terminal, the terminal is an 
approved terminal; and
    (3) The diesel fuel satisfies the dyeing and marking requirements 
of paragraph (b) of this section.
    (b) Dyeing and marking requirements--(1) Dyeing; high sulfur fuel 
before June 28, 1994. Diesel fuel that is required to be dyed blue 
pursuant to the Environmental Protection Agency's high sulfur diesel 
fuel requirement (40 CFR 80.29) satisfies the dyeing requirement of 
this paragraph (b) only if it contains--
    (i) For periods before April 1, 1994, the blue dye 1,4 
dialkylamino-anthraquinone in a concentration of at least 1.2 pounds of 
active ingredient (exclusive of the solvent) per thousand barrels of 
diesel fuel;
    (ii) For periods after March 31, 1994, and before June 28, 1994, 
the blue dye 1,4 dialkylamino-anthraquinone (Color Index Solvent Blue 
98) in a concentration of at least 4 pounds of active ingredient 
(exclusive of the solvent) per thousand barrels of diesel fuel; or
    (iii) Any dye of a type and in a concentration that has been 
approved by the Commissioner.
    (2) Dyeing; low sulfur fuel before June 28, 1994. Before June 28, 
1994, diesel fuel that is not described in paragraph (b)(1) of this 
section satisfies the dyeing requirement of this paragraph (b) only if 
it contains--
    (i) The dye Solvent Red 164 at a concentration spectrally 
equivalent to 3.9 pounds per thousand barrels of the solid dye standard 
Solvent Red 26; or
    (ii) Any dye of a type and in a concentration that has been 
approved by the Commissioner.
    (3) Dyeing; all diesel fuel after June 27, 1994.
    (i) After June 27, 1994, and before October 1, 1994, diesel fuel 
satisfies the dyeing requirement of this paragraph (b) only if it--
    (A) Is required to be dyed pursuant to the Environmental Protection 
Agency's high-sulfur diesel fuel program (40 CFR 80.29) and contains 
the blue dye 1,4 dialkylamino-anthraquinone (Color Index Solvent Blue 
98) in a concentration of at least 4 pounds of active ingredient 
(exclusive of the solvent) per thousand barrels of diesel fuel;
    (B) Contains the dye Solvent Red 164 at a concentration spectrally 
equivalent to 3.9 pounds per thousand barrels of the solid dye standard 
Solvent Red 26;
    (C) Is a mixture of diesel fuels each of which satisfies the dyeing 
requirement described in paragraph (b)(3)(i)(A), (B), or (D) of this 
section; or
    (D) Contains any dye of a type and in a concentration that has been 
approved by the Commissioner.
    (ii) After September 30, 1994, diesel fuel (regardless of sulfur 
content) satisfies the dyeing requirement of this paragraph (b) only if 
it--
    (A) Contains the dye Solvent Red 164 at a concentration spectrally 
equivalent to 3.9 pounds per thousand barrels of the solid dye standard 
Solvent Red 26;
    (B) Is required to be dyed pursuant to the Environmental Protection 
Agency's high-sulfur diesel fuel program (40 CFR 80.29) and contains 
the blue dye 1,4 dialkylamino-anthraquinone (Color Index Solvent Blue 
98) that was added to the fuel, in a concentration of at least 4 pounds 
of active ingredient (exclusive of the solvent) per thousand barrels of 
diesel fuel, before October 1, 1994;
    (C) Is a mixture of diesel fuels each of which satisfies the dyeing 
requirement described in paragraph (b)(3)(ii) (A), (B), or (D) of this 
section; or
    (D) Contains any dye of a type and in a concentration that has been 
approved by the Commissioner.
    (4) Marking. [Reserved]
    (c) Effective date. This section is effective January 1, 1994.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
    Approved: June 17, 1994.
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 94-15799 Filed 6-28-94; 2:29 am]
BILLING CODE 4830-01-U