Fuel for Thought
Fuel Taxes Explained
I received some feedback on a previous blog, Fuel and Fuel Taxes, asking for more in depth details about how IFTA (International Fuel Tax Association) works. I will try to explain it for those who are interested. Warning: This will be a bit lengthy.
IFTA collects fuel taxes from the 48 U.S. states and the Canadian Provinces. When you purchase diesel fuel, there is a tax built into the price to cover IFTA taxes. This is a separate tax from state and local taxes. Every gallon of fuel purchased includes this IFTA tax. Each state sets their own IFTA tax rate.
Since each state sets their own IFTA tax rate, the amount you actually owe to each state will vary widely depending on 3 factors.
- the state’s tax rate
- your miles per gallon (MPG)
- the number of miles you traveled in that state.
All of your IFTA taxes collected when you buy fuel are gathered in your “IFTA account”. Then at the end of each quarter, they are allocated to each state where you drove, based on your MPG and miles driven in that state. If you come up short on taxes paid, you will owe more. If you have paid more in your purchases than you owed for the quarter, you will get a refund. For leased owner operators, some carriers will figure your IFTA tax liability monthly.
Now that you know how you are charged IFTA taxes, what do you do with this information? Well, there seems to be 3 ways that drivers handle IFTA taxes.
- Some drivers do not want to have an IFTA tax bill later, so they choose to purchase their fuel in the higher taxed states. This will generally create an overage to pay the other states IFTA taxes. This way of paying IFTA taxes will most often cost a driver more at time of purchase, just to avoid paying less later.
- Then there are drivers who like to get a refund each month or quarter. This will be a similar strategy as the one above, except they are after money back, rather than just trying to avoid a bill later. This is akin to overpaying taxes in an employee payroll just to get a refund later. Obviously, this method will also cost the driver more since he/she will get a refund.
- Now this one is my personal favorite method of dealing with IFTA fuel taxes. This is also the reason I created a visual map from the IFTA website to make it easier to find tax rates rather than using an alphabetical list.
Buy the lowest net cost gallon of diesel fuel. The net cost is your pump price minus the IFTA tax rate. Once you remove the tax component from the price you pay, you can see the actual net price per gallon. Since not all states have the same tax rate, what may appear to be a cheaper (relative term these days) price, may actually be higher than a neighboring state on your route.
Just to give you an example, take IL and IN.
T/A in Effingham, IL $5.199
Petro in Brazil, IN $5.199
If you only look at the pump price, there is no difference, but remove the IFTA tax and you will see a different picture. The IFTA rate in IL is $0.627 and In is $0.55
Now you see that the net fuel cost per gallon at this location in IL is $4.572 and fuel at this location in IN is $4.649
So if you chose to purchase the lower net cost diesel fuel in IL, you would not only save on the net fuel cost (lower price) but also put more IFTA tax into your “IFTA account” to offset fuel taxes in another state. You will still pay the pump price, but you will get more bang for your buck.
Remember, whether you buy fuel in a state you drive in or not, you will owe IFTA taxes based on the state tax rate, your MPG and the miles you drove in that state. The tax will always be the same based on these factors, no matter if you pay more for the fuel or not. The only difference is when you pay it, not how much you will pay.
If your goal is to pay less IFTA tax, there are only 2 ways to accomplish this. Get better MPGs or drive less miles.
You drive 100 miles in IL and your truck averages 7 MPG. The IFTA tax in IL is $0.627 . At 7 MPG it will take roughly 14.3 gallons to go that 100 miles. 14.3 gallons at $0.627 per gallon (tax rate) equals $8.97 owed in IFTA tax.
You drive 100 miles in IL and your truck averages 9 MPG. At 9 MPG it will take roughly 11.1 gallons to go that 100 miles. 11.1 gallons at $0.627 per gallon (tax rate) equals $6.96 owed in IFTA tax.
Same trip, but in Indiana. 100 miles at 7 MPG. IFTA tax rate in Indiana is $.55 . At 7 MPG it will still take 14.3 gallons to go that 100 miles, but 14.3 gallons at $0.55 per gallon (tax rate) equals $7.87 owed in IFTA tax.
At 9 MPG it will still take 11.1 gallons to go that 100 miles, but 11.1 gallons at $0.55 per gallon (tax rate) equals $6.11 owed in IFTA tax.
Increasing your MPG average is the best way to lower your IFTA tax bill.
These examples are just 100 miles. When you consider how many hundreds and thousands of miles you travel annually, this is a substantial savings.
Not to make it any more confusing, but some states also charge a mileage tax, ad valorem tax or a surcharge. I did not refer to these above as these taxes cannot be paid at the pump no matter how much fuel you buy. This is a separate tax that is assessed based on each mile you drove in that state, or in the case of surcharges, they are collected at the pump but do not apply to your IFTA tax liability. In short, these taxes will be owed at the end of each quarter, however, if you have overpaid your IFTA taxes when you purchased fuel, the excess taxes you paid at the pump can offset these taxes.
I hope this helps some folks to better understand IFTA taxes.
See you down the road,