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IMA Tax Policy Blog

Illinois tribunal determines CNG is a taxable motor fuel

RSM TAX ALERT  |  October 07, 2016

On Oct. 3, 2016, the Illinois Independent Tax Tribunal issued its decision in Waste Management of Illinois v. Illinois Department of Revenue, holding that compressed natural gas (CNG) is a taxable motor fuel under the Illinois Motor Fuels Tax Law (MFTL). The Illinois Department of Revenue denied the taxpayer’s 32 monthly refund claims for approximately $200,000 of motor fuel tax. The taxpayer appealed those denials to the Illinois Independent Tax Tribunal taking the position that CNG did not qualify as a motor fuel.

The taxpayer made various purchases of CNG from local suppliers to use in its specially designed waste-collection vehicles. CNG is a gas in its natural state and remains a gas when compressed for purposes of transmission, storage and usage as fuel in the taxpayer’s trucks. CNG only exists in a liquid state under certain circumstances involving extremely low temperatures and compression, not present through the taxpayer’s storage or use of the fuel.

On review, the tribunal’s administrative law judge (ALJ) addressed the parties’ motions for summary judgment focusing on whether CNG is a taxable motor fuel under the MFTL. The motor fuels tax is a tax on the privilege of operating motor vehicles on the state’s public highways and is calculated based on the amount of motor fuel used in a motor vehicle. Motor fuel is defined in the statute as all “volatile and inflammable liquids” used for the purpose of operating motor vehicles and, “among other things,” includes special fuel, which are volatile and inflammable liquids used in an internal combustion engine. The taxpayer contended that CNG is a gas, and not a liquid, and thus the plain and unambiguous language of the statute excluded CNG from the motor fuels tax.

The ALJ, looking to the plain language of the MFTL, determined that the phrase referencing among other things, supported a flexible reading that fuels beyond those listed, such as non-liquid fuels, could qualify as taxable motor fuels. This was further supported by the MFTL’s definition of ‘gallon’ which provided that a gallon included the equivalent capacity for measurement of substance in a gaseous state. The ALJ noted that there would be no reason to include a gaseous equivalent to a gallon if the MFTL was not also imposed on gaseous fuels. Additionally, the ALJ pointed to another instance in the MFTL referencing CNG’s natural gaseous state in requiring various monthly reports for all combustible gases as further support that motor fuels include CNG. Finally, the ALJ noted that CNG is specifically used as an example of a motor fuel in the state’s retailers’ occupation tax statutes and that those statutes must be read ‘in pari material’ — construed together as a whole, in determining what fuels are encompassed by both provisions.

The taxpayer next contended that the motor fuel regulations that treat CNG as a taxable motor fuel violated the state constitution because the support for imposing a tax on CNG was not in the statute and that therefore the regulation referencing the conversion of CNG to gallons was an impermissible delegation of legislative authority. The ALJ quickly dismissed the argument based on the ALJ’s previous findings that CNG is a motor fuel.

While the taxpayer has an opportunity to appeal the ALJ’s determination to the Illinois appellate court, consumers of CNG should review whether motor fuels tax is applied to their consumption and contact their tax advisors with questions.

Source: IMA member RSM