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Sweeping Contractor Fined Over Use of Dyed Fuel

-- June 15, 2006

Washington State Patrol says sweeping company has been using untaxed 'red-dyed' diesel since 2003.

First 11 paragraphs are by Josh Farley,
IRS Information and Analysis by Ranger Kidwell-Ross, editor,

Editor's Note: The name of the sweeping company receiving this fine has been omitted from this story.

A Washington State sweeper contracting firm has been ordered to pay about $1 million in fines and gas taxes for using untaxed diesel in its fleet of trucks.

An investigation by the Washington State Patrol concluded that the company had burned about 98,000 gallons of "red-dyed" diesel -- mandated for use by non-road appliances and off-road vehicles, and thus not subject to state gas tax -- while driving around the state between 2003 and the present.

The state Department of Licensing has sent a bill to the company requiring the payment of $1.023 million in back gas taxes and fines, State Patrol spokesman Brian George said.

The investigation began April 13 when a trooper stopped a street sweeper truck owned by the company on Interstate 5 near Olympia. William Balcom, a commercial vehicle enforcement officer for the WSP, conducted a safety inspection of the truck, which included checking its fuel tank.

Red-dyed diesel, often found in construction equipment like excavators and back-hoes, was found in the truck's tank.

That spurred Officer Robert Petersen, supervisor of the patrol's Fuel Tax Investigation Unit, to begin a probe of the company.

The patrol obtained a subpoena to access the financial records of a 1,500-gallon fuel storage tank on the company's property. The records showed the company had stopped buying taxed diesel in 2003 and had purchased about 98,000 gallons of red-dyed diesel, according to WSP.

The fine is based on a $10 per gallon cost (the fine amount), plus additional charges for the storage tank and the company's fleet of 25 vehicles, George said. A timeline for payment of the fine was not made available.

The State Patrol often checks commercial vehicles for red-dyed fuel by using a long dipping straw injected deep into the fuel tank. If it is suspected that the tank contains the tax-free fuel, it is sent to a state lab for verification, George said.

In 2005, troopers and officers checked more than 25,000 vehicles for red-dyed fuel; 95 of them were found using red-dyed diesel, according to State Patrol statistics.

Washington state charges a gas tax of 31 cents on each gallon of fuel sold. About 11.5 cents of that amount goes to cities and counties for streets and roads and the remaining 19.5 cents goes to improve and maintain the state's freeways, highways, bridges and the ferry system.

The following is taken from the Internal Revenue Service's Publication 510:

IRS Logo A penalty is imposed on a person if any of the following situations apply.
1) Any dyed fuel is sold or held for sale by the person for a use the person knows or has reason to know is not a nontaxable use of the fuel.

2) Any dyed fuel is held for use or used by the person for a use other than a nontaxable use and the person knew, or had reason to know, that the fuel was dyed.

3) The person willfully alters, chemically or otherwise, or attempts to so alter, the strength or composition of any dye in dyed fuel.

4) The person has knowledge that a dyed fuel which has been altered, as described in (3) above, sells or holds for sale such fuel for any use for which the person knows or has reason to know is not a _ nontaxable use of the fuel.

The penalty is the greater of $1,OOO or $10 per gallon of the dyed diesel fuel or dyed kerosene involved. After the first violation, the $1,000 portion of the penalty increases depending on the number of violations. This penalty is in addition to any tax imposed on the fuel.

If the penalty is imposed, each officer, employee, or agent of a business entity who willfully participated in any act giving rise to the penalty is jointly and severally liable with that entity for the penalty.

As you read, the penalty is extremely severe. However, the last paragraph is the one that should send a chill into anyone who knows their company is engaging in this practice. It spells out the existence of personal liability for the fine to all who were involved in the illegal usage of the untaxed fuel. This could, theoretically, extend to any employee putting the fuel into a registered vehicle.

This article is intended to supply information on this topic, and should not be construed to be legal advice. To be sure your company is using the right criteria in any use of dyed, untaxed fuel, be sure to consult with a qualified tax professional.

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