Bar News - February 18, 2015
Tax Law: Could a Simple Legislative Change Bring New Gas Taxes to NH?
By: Justin Finn
Note: This article was revised Jan. 29, 2016, to note ambiguity as to which party bears the direct incidence of New Hampshire’s Road Toll statute.
Like more than 30 other states, New Hampshire does not receive any motor fuel taxes on the millions of gallons of fuel purchased by the federal government in the state each year.
The reason that some states receive these funds and some do not has to do with nuances of legislative language and the United States Constitution’s Supremacy Clause. With little more than semantic changes to the relevant statutes, a state can collect and retain funds related to fuel purchased by the federal government without running afoul of the Supremacy Clause. This results in reliable annual revenue for the state, without increasing the tax or administrative burden on private citizens or businesses.
In North Dakota v. United States (1990), the Supreme Court upheld state regulations on liquor distributors, even though the costs of those regulations were being passed on to federal government purchasers of liquor in the state. The regulations did not run afoul of the Supremacy Clause because (1) the direct incidence did not fall on the federal government, and (2) the regulations applied to the distributors equally without regard to the identity of the ultimate purchaser.
When it comes to motor fuel taxes, the direct incidence of laws in states such as Maine and Massachusetts fall on the purchaser (notwithstanding that the taxes are nonetheless collected and remitted earlier in the supply chain). Even if these states did not also have an express exemption for gallons used by the federal government (each does), those taxes still could not be imposed on the federal government without running afoul of the Supremacy Clause.
By comparison, at least when it comes to gasoline, states including California, Vermont, Montana, and Idaho have transactional privilege taxes on the sale of gasoline, the direct incidence of which thus falls on the retailer (or earlier in the supply chain, depending on the state), but which is then bundled into the retail price and passed along indirectly to the consumer. Those states collect and retain taxes on each gallon of gasoline purchased by the federal government. In each scenario, it is already the fuel distributors/retailers that are responsible for collecting and remitting the taxes to the state, so the systems are functionally identical. It thus appears to be nothing more than differences in statutory language that determine where the incidence of the tax falls. The incidence of New Hampshire’s law is slightly ambiguous, as it says that the tax is “upon the sale of each gallon of motor fuel sold by distributors,” strongly indicating that the incidence is on the distributor, but also says the toll shall be “collected by the distributor from the purchaser.”
A state that uses a transactional privilege tax has a great deal of flexibility in deciding on which gallons of petroleum products the federal government gets taxed. Oregon, for example, has no exemption/refund for gasoline, but unlike the broader diesel exemptions in California and Vermont, its diesel exemption only applies to vehicles displaying United States government license plates.
Mississippi is perhaps the best example for demonstrating the flexibility of this approach. Mississippi provides a full exemption on sales of at least 4,000 gallons “for use of the Armed Forces only” - thus benefiting military installations with their own storage tanks - but only a partial exemption for all sales to the rest of the federal government.
Iowa does not exempt the federal government at the point of sale, but it does allow the federal government to file for a refund of both gasoline and diesel taxes. Interestingly, Arkansas operates almost identically to Iowa, except that retailers are required to subtract out the taxes when selling to the federal government, and it is the retailer who bears the burden of filing for a refund.
Publicly available documents indicate that the federal government acknowledges the soundness of this approach. In an attempt to alleviate the administrative burden on businesses bidding on fuel solicitations, DLA-Energy makes available to vendors a guide to fuel taxes and fees which includes information on the taxes from which DLA-Energy considers itself to be exempt. As one would expect, in states where (1) the incidence of the tax does not fall on the ultimate purchaser/consumer, and (2) there is not an explicit exemption for fuel used by the federal government, the federal government does not consider itself exempt.
As the Supreme Court stated in North Dakota v. United States,“[i]t is one thing, however, to say that the State may not pass regulations which directly obstruct federal law; it is quite another to say that they cannot pass regulations which incidentally raise the costs” on the federal government.
By making simple changes to statutory language about where the incidence of the tax falls and eliminating any explicit exemptions for the federal government, states can collect and retain fuel taxes on federal government purchases without running afoul of the Supremacy Clause or increasing the tax burden on private citizens or businesses.
This approach can also be applied to various storage tank fees, inspection fees, and environmental fees. States that collect and retain these funds on fuel used by the federal government, such as Montana, California, and Vermont are, in essence, receiving an infrastructure subsidy from the states that do not.
Justin Finn is general counsel at Boyle Energy Services & Technology Inc. in Manchester. He previously served as an assistant general counsel with the US Department of Defense and is licensed to practice in New Hampshire and Ohio.