A Fuel Tax Bond is a surety bond that guarantees the payment of taxes, including penalties and interest that are owed to a state or federal government. These bonds are often a licensing requirement for every party in the fuel selling supply chain, including fuel suppliers, mixers and retail sellers of gasoline, diesel and aircraft fuels. Other parties such as those involved in kerosene, and natural gas fuels may also be required to have fuel tax bonds.
The fuel seller is referred to as the principal on the bond. The principal pays a bond premium and provides indemnity to a third-party bond company known as the surety. The surety provides a financial guarantee to the government, which is known as the obligee. The surety’s guarantee, or fuel tax bond, promises to pay taxes, interest and penalties owed by the principal, if the principal cannot.
The bond protects the government and taxpayers because the surety can easily pay these amounts if they become due and it will be easier and faster to collect the money from the surety than having to pursue the principal. However, the surety can seek reimbursement from the principal if they pay a claim.
While there are many different types of Fuel Tax Bonds, they fall into a few major categories including State, Federal Excise Tax and IFTA.
The U.S. government levies fuel taxes on diesel fuels, gasoline and other fuels. The law on excise tax for federal fuels and fuel tax credits is very complicated. In general, many parties may need fuel tax bonds on the federal level including any party selling gasoline, diesel fuels, kerosene and other fuels.
Most states also required fuel tax bonds or alternatives to guarantee the payment of fuel taxes. Like federal bonds, these bonds usually include the payment of penalties and interest along with the fuel tax.
Many trucking companies and other motor carriers pass through a number of states. The International Fuel Tax Agreement (IFTA) allows members to post a bond to cover fuel use taxes that they used while in each state and Canada. The company uses their home state as a means of calculating the IFTA tax bond amount.
“The total amount of the bond shall be fixed by the base jurisdiction and shall be equivalent to at least twice the estimated average tax liability for the tax reporting period for which the licensee will be required to file a tax return.”
Even with an IFTA fuel tax bond, state bonds may be needed as IFTA only covers highways and many states have requirements for other roads.
Fuel Tax Bonds are easy to obtain for most. Depending on the amount, a simple credit check may be all that is needed to obtain a bond. For larger bonds or those that need bonds in multiple states, an application and company financial statements will likely be required.
Fuel Tax Bonds cost less than 1% of the bond amount annually for most applicants. For example, a $30,000 federal gasoline tax bond can be purchased online for $225 a year. Keep in mind that the bond premium will be due for each year that the bond is in place. Companies with strong financial statements may pay even less. Additionally, some bond companies will provide discounts to companies willing to purchase multiple years in advance.
In general, any party that is selling, supplying, blending, mixing, importing, exporting fuel, will likely need a fuel tax bond. This includes gasoline, diesel, kerosene, liquified natural gas (LNG), compressed natural gas (CNP), biofuels and other alternative fuels.
Additionally, most heavy trucks having three or more axles and over certain weights will need fuel tax bonds for highway use.
Many states will allow companies to post alternatives to fuel tax bonds. These alternatives generally include cash and escrow, or irrevocable letters of credit (ILOC). Fuel tax surety bonds are usually a preferred method over both of these options. Cash and ILOCs tie up a business's resources that could be used for operations and growth. Alternatively, surety bond companies generally do not make UCC or lien filings unless a claim occurs. Therefore, the business does not have its borrowing tied up and can use its assets for other purposes.
Fuel Tax Bonds are considered a risky type of surety bond. This is because they are a straight financial guarantee. If the claim occurs, the entire bond penalty is often forfeited. Additionally, many fuel tax bonds are written for more than the actual taxes owed. Each state has their own requirements.
Another reason these bonds are considered risky is because of the long tail period. While these bonds can usually be canceled by the surety, their liability may remain for a long period of time. For example, Missouri allows the surety to cancel a fuel tax bond by giving a sixty day written notice to the state. However, the state can still make a claim to demand payment for three years following the cancellation. If a company’s financial condition deteriorates, the bond company may be able to cancel the bond, but they may be unable to get rid of the liability.
Fuel Tax Bonds should not be mistaken for insurance. Fuel tax bonds protect the public against non-payment of taxes. Unlike insurance, they are not written for the benefit of the company. Claims against the bonds should be avoided as the surety company will seek reimbursement from the company and other indemnitors.
Those needing fuel tax bonds will likely need other surety solutions such as BMC-84 Bonds, license bonds, energy bonds, transportation bonds and other. The experts at Axcess Surety are standing by to help you with all your surety needs and solutions. Contact us today.
Axcess Surety is the premier provider of surety bonds nationally. We work individuals and businesses across the country to provide the best surety bond programs at the best price.
