November 13, 2008
Tax-free Diesel Fraud Costs Colorado Taxpayers
Colorado is doing little to monitor use of tax-free diesel — an area other states have found ripe for fraud, The Denver Post reported.
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, dyed red to show it doesn’t include the 44.9-cent state and federal per-gallon taxes other users pay, is meant for certain off-road vehicles, mainly in farm and construction equipment, but finds its way into trucks owned by farmers and by oil and gas workers Colorado ’s dyed diesel enforcement focuses audits on fuel distributors, who are not required to reveal who they sell their tax-free fuel to unless audited, and spot-checks on commercial trucks. In the past year, revenue agents dipped dye-detecting sticks into 20,608 commercial trucks and cited 23 for illegally using dyed diesel.
Attempts to enforce the law have met with complications. Law enforcement authorities don’t do checks for dyed diesel as it is complicated and costly to prove in court. They believe the IRS should enforce this law, citing that it is a tax-evasion issue.
However, the revenue agencies point to back law enforcement agencies. Targeting only the topics they think are most costly to state taxpayers, they don’t see dyed diesel as one of them.
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.
Large quantities of available untaxed diesel have led to evasion schemes from criminals, who resell untaxed diesel at a taxed rate. Schemes include chemically removing the dye and making sure the dye doesn’t inject into the fuel. Others sell the dyed fuel to nonqualified users who don’t mind that it’s illegal.
In 2004, a Denver man was convicted of reselling tax-free diesel at a taxed rate, pocketing $14 million in taxes, according to The Denver Post.
Coordinated efforts in other states have been more successful in diesel tax enforcement. 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. Roadside crackdowns elsewhere have snagged drivers with red fuel in their Mercedeses or pickups.