What Is Dyed Diesel?
Dyed diesel is diesel fuel that carries a red dye to show it was sold without the federal diesel excise tax. Under 26 U.S.C. 4082, the tax that section 4081 imposes does not apply to diesel fuel destined for a nontaxable use and indelibly dyed by mechanical injection. The one federal fuel tax that still applies is the Leaking Underground Storage Tank (LUST) tax, which IRS Publication 510 puts at $0.001 a gallon.
The dye is the signal. Red fuel was sold for a use the tax does not cover, and using it for a taxable use, such as fuelling a highway vehicle, can draw a federal penalty.
What the dye means
The Treasury regulation, 26 CFR 48.4082-1, sets three conditions for the exemption: the person otherwise liable for the tax is a taxable fuel registrant; in the case of a removal from a terminal, the terminal is an approved terminal; and the fuel meets the dyeing requirement. That requirement is the dye Solvent Red 164, and no other dye, at a concentration spectrally equivalent to at least 3.9 pounds of the solid dye standard Solvent Red 26 per thousand barrels of fuel, or another dye the IRS Commissioner has approved.
The paperwork carries the same message. Publication 510 requires the terminal operator to give anyone receiving dyed diesel at its rack the notice “DYED DIESEL FUEL, NONTAXABLE USE ONLY, PENALTY FOR TAXABLE USE”, and that notice must appear on the shipping papers and bills of lading that go with the fuel. A seller must post the same notice on any retail pump or other delivery facility where it sells dyed diesel.
Who may use it
Dyed diesel is for nontaxable uses, which 26 U.S.C. 4082(b) defines and Publication 510 lists. They include:
- On a farm for farming purposes.
- Off-highway business use: fuel used in a trade or business other than in a highway vehicle registered, or required to be registered, for use on public highways. Publication 510's examples include stationary machines such as generators and compressors, and forklift trucks, bulldozers and earthmovers.
- Use other than as fuel in the propulsion engine of a diesel-powered highway vehicle, such as home heating oil.
- Use in a train.
The list has limits. Publication 510 says dyed diesel can’t be used in certain intercity and local buses, and off-highway business use does not cover fuel in the propulsion engine of a registered highway vehicle, even when that engine also runs equipment on the vehicle.
Highway use and the penalty
26 U.S.C. 6715 imposes a penalty on any person who:
- sells or holds dyed fuel for sale for a use they know, or have reason to know, is not a nontaxable use;
- holds dyed fuel for use, or uses it, for a use other than a nontaxable use, knowing or having reason to know it was dyed;
- willfully alters, or tries to alter, the dye; or
- knowingly sells altered dyed fuel for a use that is not a nontaxable use.
The penalty for each act is the greater of $1,000 or $10 for each gallon of dyed fuel involved, and it is in addition to any tax. The $1,000 figure grows with each prior penalty under the section. When a business is penalized, each officer, employee or agent who willfully took part is jointly and severally liable with it. Publication 510 adds that a seller who fails to post the required notice is presumed to know the fuel will be used for a taxable use.
This page covers federal rules only, and it is not tax or legal advice. For state requirements, check with the state’s revenue department.
Sources
- 26 CFR 48.4082-1: the conditions for the dyed-fuel exemption and the Solvent Red 164 dyeing requirement
- 26 U.S.C. 4082: the exemption from the section 4081 tax for dyed diesel destined for a nontaxable use, and the definition of nontaxable use
- 26 U.S.C. 6715: the penalty for dyed fuel sold for, or used in, a taxable use
- IRS Publication 510, Excise Taxes: the LUST tax on dyed diesel, the required notice, the list of nontaxable uses and the penalty