IRS issues transition rules for mechanical dye injection

By | December 01, 2005
The American JOBS Creation Act contained a provision that specified tax exemption for dyed diesel fuel. The 2004 law said exemption would only apply to fuel dyed with a mechanical injection system. Earlier this year, the IRS published temporary and final regulations implementing this requirement, which took effect Oct. 24. Due to concerns of reaching compliance in time, the IRS has issued transition rules for blends up to B20.

The NBB has reviewed the biodiesel-related provisions, and the following is its understanding: (Please note-the following is for informational purposes only and should not be construed as tax advice). A mixture of diesel fuel, or kerosene and biodiesel, will be treated as being dyed by mechanical injection if all the following requirements are met:

-The blend contains at least 80 percent diesel fuel (blends up to and including B20)
-The diesel fuel or kerosene in the blend was dyed by a mechanical injection system
-The blend is created at a facility that is not a terminal
-The dye concentration of the finished blend meets the federal requirement when it is removed from the facility where it was made

If the blend does not meet the concentration requirement above, the blender must ensure it meets the federal requirement when it is removed <
from the blending facility. Please note the limitations on this transitional rule; in particular, the diesel fuel component must have been dyed by mechanical injection. This means that a jobber cannot, for example, buy clear diesel fuel at a terminal or elsewhere and dye it manually.

The transition rule doesn't specify what mechanisms are allowed for adding dye to blends greater than B20. B100 and blends containing less than 4 percent normal paraffin are considered "excluded liquids" by the IRS and do not require the addition of dye when used in tax exempt applications.

These transition rules are in effect until a date that is 180 days after the IRS publishes final regulations in the Federal Register.

The transition rules are contained in IRS Notice 05-80 (n-05-80). This notice can be found on the IRS Web site at
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