Legal Perspective

Does the biodiesel tax credit apply to foreign biodiesel sales?
By Terrance Costello | June 01, 2006
As the biodiesel marketplace matures, industry players have increasingly complex and sophisticated questions about their businesses. Producers are looking at new avenues for raising capital, new models for increasing efficiency and new markets to tap. There are many questions regarding the new Biofuels Tax Credit, including whether or not the credit applies to sales made outside the United States.

The Biofuels Tax Credit
As reported in an earlier issue of this magazine, the American JOBS Creation Act of 2004 created an income tax credit for biodiesel fuel produced-and sold or used-after Dec. 31, 2004. The biodiesel fuels credit is the sum of two credits: the "biodiesel mixture credit" and the "biodiesel credit." The Energy Tax Incentives Act of 2005 added a third component credit: the small agri-biodiesel producer credit, effective for tax years ending after August 8, 2005.

The biodiesel mixture credit is 50 cents for each gallon of biodiesel used by the taxpayer in the production of a qualified biodiesel mixture. A qualified biodiesel mixture is a combination of biodiesel and diesel fuel that is either sold by a taxpaying blender to a consumer for use as fuel-or used as a fuel by the taxpaying blender. In order to qualify for the credit, the sale or use must be in a trade or business of the taxpayer, and the biodiesel must be taken into account for the tax year in which the sale or use occurs.
The biodiesel credit is 50 cents for each gallon of biodiesel that is not mixed with diesel fuel, used either by the taxpayer as a fuel in a trade or business, or sold by the taxpayer at retail to a person and placed in the fuel tank of the retail purchaser's vehicle.

In the case of agri-biodiesel, a special rule applies, which increases the biodiesel mixture credit or the biodiesel credit to $1 per gallon. Agri-biodiesel refers to biodiesel derived from virgin vegetable oils, including esters derived from virgin vegetable oils from corn, soybeans, sunflower seeds, cottonseeds, canola, crambe, rapeseeds, safflowers, flaxseeds, rice bran and mustard seeds; and from animal fats.

Sales to foreign purchasers
Other tax credits found in the Internal Revenue Code specifically restrict the credit to transactions within the United States, but that is not the case with the biodiesel tax credit. The plain language of the legislation provides that a "qualified biodiesel mixture" means a mixture of biodiesel and diesel fuel, which "is sold by the taxpayer producing such mixture to any person for use as a fuel." This statutory language is broad and does not limit sales of a qualified biodiesel mixture only to domestic persons or entities. Nothing in the legislative history indicates that the biodiesel credit is limited to sales to domestic persons or entities. As a result, there is no prohibition against claiming the biodiesel fuels credit on sales to foreign purchasers if the transaction satisfies the other requirements necessary to claim the credit.

Terrance Costello is a tax partner and member of the Agribusiness & Energy Group at Lindquist & Vennum PLLP, a leading provider of legal assistance on renewable energy projects across the country. For more information, visit or call (612) 371-3211.
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