Ansari Tax Law Firm
Phone: (888) 577-1482
Overview of Biodiesel Audits
A sales tax audit on biodiesel can be very confusing for both the auditor and the owner of a gas station. Most importantly, the mixing of soy is a questionable process whereby the output of biodiesel can vary as a result of degumming.
Role of Oil Degumming
Oil degumming creates variations in the soy that is used to blend biodiesel fuel.
The actual percentage of error in determining the correct amount is 27% of the soy, which may seem like a large percentage.
Degumming fluctuates with temperature, which changes the amount of soy needed when using a machine programmed to blend fuels. The storage temperature of soy is the primary issue:
- Colder temperatures → Less soy used
- Preprogrammed blending machines do not account for these fluctuations
Audit Implications for Gas Station Owners
In the event that you are audited by the state for sales tax on fuel, your biodiesel sales must be justified by your soy purchase records.
If you have not purchased enough soy to justify the total amount of biodiesel sold, then the remaining amount of sales will be deemed as regular gasoline sales subject to sales tax.
Notes on Biodiesel Blends
Blends of biodiesel and conventional hydrocarbon-based diesel are the most commonly distributed fuels in the retail diesel market.
The world uses a “B” factor system to indicate the amount of biodiesel in any fuel mix:
- B100 – 100% biodiesel
- B20 – 20% biodiesel, 80% petrodiesel
- B5 – 5% biodiesel, 95% petrodiesel
- B2 – 2% biodiesel, 98% petrodiesel
Frequently Asked Questions
What is biodiesel degumming, and why does it matter for audits?
Answer:
Degumming is a process that removes impurities from soy oil before it is blended into biodiesel. This process affects how much soy is used, as fluctuations in temperature can alter the amount needed. These variations matter during audits because inconsistent soy usage can make your biodiesel sales appear inaccurate if not properly documented.
How can temperature impact biodiesel blending?
Answer:
Temperature directly affects the quantity of soy used in blending biodiesel. Colder storage temperatures reduce the amount of soy needed, but pre-programmed blending machines typically do not account for these variations. This discrepancy can create issues during audits if soy purchase records don’t align with reported biodiesel sales.
What records are essential for surviving a biodiesel sales tax audit?
Answer:
You need detailed soy purchase records that align with your biodiesel sales. If the state audit finds your biodiesel sales exceed what your soy purchases justify, they may reclassify the excess as taxable gasoline sales. Proper documentation is critical for defense.How does the “B” factor system affect my compliance?
Answer:
The “B” factor system (e.g., B100, B20, B5, B2) specifies the percentage of biodiesel in your fuel blends. Understanding and documenting these blends helps ensure your reported sales match your actual inventory and supports your compliance during an audit.
Why are biodiesel audits particularly complex for gas station owners?
Answer:
Biodiesel audits are complicated because they involve verifying precise fuel blends and the corresponding soy purchases, which can be affected by factors like degumming and temperature. Gas station owners often face scrutiny because discrepancies are common, and the tax implications are significant.