State cracks down on motorists using tax-free diesel fuel - East Valley Tribune: Business

State cracks down on motorists using tax-free diesel fuel

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Posted: Sunday, July 31, 2005 4:53 am | Updated: 7:39 am, Fri Oct 7, 2011.

It’s Wednesday morning outside of Queen Creek and uniformed officers are sticking long, thin plastic straws into fuel tanks to find what looks like red cherry soda pop.

A warning sign greets motorists traveling east on Hunt Highway near its intersection with Bella Vista Road: "All Diesel Cars and Pickups Must Stop." Traffic is separated by cones and officers that allow unleaded-fuel vehicles past the checkpoint.

A line of heavy construction, equipment and pickup trucks forms on Bella Vista as 20 or so authorities inspect vehicle weight and safety equipment and make sure drivers have the proper licenses.

The man with the straw is after people who are illegally saving as much as 50 cents a gallon in fuel costs by using red-dyed diesel fuel, which is used in farm or construction vehicles.

He asks drivers to remove their tank cap, pokes the straw in, puts a finger on one end to create a vacuum and pulls the tube out. Any hint of red and drivers can be fined thousands of dollars and face criminal penalties.

At a time when the cost of diesel is at record highs, there is more temptation than ever to use red-dyed fuel. Used properly, the taxfree fuel is for off-road activities such as farming and earth-moving. Authorities say more and more people are putting it in highway vehicles to save anywhere from 42 to 50 cents a gallon in taxes, depending on the size of the vehicle.

With diesel averaging $2.51 a gallon in the East Valley, evading the taxes can mean as much as a 20 percent savings in fuel costs.

"People have more and more incentive to try to find a way to save some money, and with that much tax per gallon, it can add up pretty quickly, particularly for a business that is using lots of diesel fuel in multiple diesel-powered vehicles," said Tim Lee, manager of the Arizona Motor Vehicle Division tax evasion unit.

Those who don’t pay the levy avoid contributing to the state’s Highway User Fund, set up to build and maintain roads. They also avoid paying federal taxes that are received by Washington and sent back to states to pay for highway construction and maintenance.

"The vast majority of Arizona taxpayers are paying this fuel tax every time they fuel up at the pump," Lee said. "They’re paying their fair share to build new highways and maintain the roadways and we owe it to them, the people that are honestly paying their taxes every day, to make sure those that are not paying their fair share are held accountable for that."

But no one is sure how much money state and federal coffers are losing through the misuse of red-dyed diesel fuel.

Arizona began its enforcement program three years ago. The state is part of a federal study nearing completion that officials hope will show how much revenue is lost thanks to the misuse of red fuel.

"All I can tell you . . . is what the loss is per gallon and I can tell you in the last three years, we have found over 250 violations where we found vehicles operating on highway with the dyed-diesel," Lee said.

The MVD estimates there is between 40 million and 45 million gallons of red-dyed diesel delivered to Arizona annually. But the exact amount is hard to track because some of the fuel that is to be distributed here can wind up in neighboring states. The current reporting system does not track the fuel all the way through the distribution system.

By contrast, clear diesel fuel is easy to track because of the tax collections associated with it. In the fiscal year ending June 30, 2004, Arizona received 740 million gallons of tax-paid diesel.

A recent high-profile case involving an East Valley company shows how the red-dyed scam can work.

At the end of June, an East Valley man pleaded guilty to attempting to evade fuel taxes by selling and using the fuel.

John J. Vollaro, 59, owner of Gilbert-based Custom Towing, used the dyed fuel in his on-road vehicles, the Arizona Attorney General’s Office said. He was sentenced to two years probation and 75 hours of community service. In conjunction with a plea agreement, Vollaro paid approximately $60,000 in back taxes and penalties to the Arizona Department of Transportation and the Internal Revenue Service.

Between March 2000 and October 2002, Vollaro purchased more than 82,000 gallons of dyed diesel that was stored at Custom Towing and used by its trucks, the attorney general’s office said.

Vollaro could not be reached for comment.

This case was the result of a joint investigation by both the MVD and Arizona Attorney General Terry Goddard’s office. The two agencies hope to make more busts, said Goddard spokeswoman Andrea Esquer.

"They’re (MVD) very excited about this because it has been a black hole for them," she said. "We have an attorney in our criminal division that works with MVD on these types of cases. We’re hoping we’re able to do more of this now that we have the partnership down and they know how to work with our office and we know how to work with their office."

WHEN DYE IS GOOD

The IRS sets the rules of how diesel is to be dyed and how much dye is to be present when fuel terminals add it to fuel. Once it is dyed, it is only allowed to be used for nontaxable purposes such as in farm tractors or irrigation equipment that uses pumps and generators that run on diesel fuel. Red-dyed fuel also can legally be used for construction machinery or mining operations.

Under the rules, dyed diesel can be used to build housing subdivisions but its against the law for construction workers to use the fuel in trucks that run on the roads between the subdivision and a storage yard.

Lee said his department sees the most violations at businesses that have a legitimate use for dyed diesel. For example, a construction company might have one or more bulk fuel tanks at a company yard where equipment and vehicles are stored. One tank may be filled with clear diesel and the other with dyed.

"Theoretically, they’re supposed to be using the clear diesel in their on-road vehicles and the dyed-diesel in their off-road equipment but the temptation is there to pull the on-road trucks up to the dyed tank and fill up with the dye to save some taxes."

Sometimes employees will fill up their own or company pickups, he said.

WHAT’S THE PENALTY

Illegally using dyed diesel can result in severe penalties because it violates state and federal statutes. Both laws have provisions that amount to a potential civil penalty of $1,000 or $10 per gallon for the amount of diesel involved, whichever is greater.

"A civil penalty will always apply," Lee said. "In the most egregious situations, whichever agency decides to pursue it, if we believe we have evidence of a willful intentional violation involving a substantial amount of fuel, then there are separate criminal statutes which can be pursued in addition to the civil penalties."

The federal government began allowing tax-free diesel use in 1993 and Arizona began its use in 2001.

At the inspection station Wednesday in northern Pinal County, uniformed MVD officers explained the straw test to drivers and obtained permission from them to check the tank. A pink or red color results in a sample being pumped from the tank into a glass bottle. A liquid fuel analyzer is used to tell if the dye is present and at what amounts. The sample is bagged and a report taken.

Sometimes inspectors will follow offenders back to their facility or yard to ensure the tank is purged. If the fine is challenged, the sample is sent to an independent lab.

When the state began policing the fuel three years ago, truckers and others weren’t familiar with the law, said Sgt. Charles Remer, who was running the inspection detail Wednesday.

"The word is getting around that we are doing inspections," he said. "We try to be on the road someplace three weeks out of the month, either around the state or locally. We do find dyed diesel at most of the details we set up."

Paul Pfauser, general manager of Brown Evans Distributing Co. in Mesa, said when his company delivers red-dyed diesel it has to be put into a tank marked for the product. If it is not marked, the company will add a decal to the tank explaining what the fuel is for and the penalties for misuse.

"Then, and only then, if that tank is properly marked, will we fill it up," Pfauser said. "Once we leave that site, we have no idea what they might put it into. We can’t be in the position of taking on that liability. We have done everything that we can do from our standpoint to make sure that the tank is marked properly.

Once the delivery is complete, the customer is given an invoice that shows how much dyed fuel was purchased and a description of what the fuel is for. The invoice tells the customer it’s against the law to use the fuel for on-road purposes and the warning is in bold so it can’t be missed, Pfauser said.

He suspects abuse is rare because the fines are so heavy.

"There’s a fairly good amount of people out there that have been caught over the last five years or 10 years since they’ve had red diesel available," he said. "They’ve kind of made some examples out of those people and I don’t think people are really doing it for any large amount."

Inspections are done at ports-of-entry, on and off interstates and on local streets.

"Most of our details are on state highways or other public roads where you’re likely to see, percentagewise, fewer of the big tractor-trailers but more of the other types of vehicles like pickup trucks," Lee said.

It’s likely the underground use of red-dyed diesel has been going on for years, he said.

"The fact that we did not have an on-road enforcement program until three years ago, I’m sure that people who were cheating were confident they could get away with it," he said. "We’ve begun to send the message . . . that you have a reasonable chance of being caught."

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