Federal Tax Incentives: VEETC

The Volumetric Ethanol Excise Tax Credit (“VEETC”), also known as the “blender’s credit”, is the primary federal tax incentive for the use of ethanol.  The tax credit, which was created by the American Jobs Creation Act of 2004, provides blenders and marketers of fuel with a federal tax credit of 45 cents on each gallon of ethanol blended with their gasoline.  Through a market-based approach, VEETC enhances the sustained, cost competitiveness of ethanol with gasoline, and provides long-term protection against a volatile petroleum fuel market.  As such, VEETC has been a major factor behind the spectacular increase in ethanol use, production and continued innovation in the industry.  This tax credit is scheduled to expire on December 31, 2010

Together with the Renewable Fuel Standard, which requires a certain amount of biofuel to be blended  into the nation’s existing transportation fuel supply, VEETC helps ensure that the goals of energy security and job creation are met with the production of clean, renewable, home grown alternatives to foreign oil.  While the RFS requires the use and consumption of ethanol by mandating certain volumes by blended into the fuel supply, VEETC ensures that those volumes are met with domestically produced ethanol, rather than imported ethanol.  By ensuring that U.S. ethanol is used to satisfy the volumes mandated by RFS, VEETC allows our nation to achieve the intended goals of energy independence and domestic economic development.

Also, by providing a sustained, demand enhancement for ethanol as compared to petroleum based fuel, VEETC provides important risk mitigation for potential investors needed to raise the capital necessary for the development of new technologies and greater efficiencies.  With VEETC, investors are provided assurances that there will be continued market support for ethanol, and thereby, provide a safety net for further capital investment.

Because VEETC does not distinguish between feedstocks, it provides a tax benefit for all types of ethanol, including ethanol produced from new cellulosic and other second generation feedstocks, such as sorghum, energy cane, switchgrass, etc.  Therefore, VEETC provides market-based, demand enhancement for not only the more traditional corn and sugar cane-based ethanol, but also new and innovative types of ethanol that are becoming more and more commercially available. 

Finally, due to the fact that all ethanol is eligible for the credit, to the extent that foreign ethanol receives a tax benefit from VEETC, a secondary tariff is imposed on imported ethanol to offset that benefit.   The secondary tariff is currently set at 54 cents per gallon.

Click HERE for a detailed discussion on the importance of VEETC.  For a follow up study identifying job loss estimates for individual states if VEETC is not renewed, click HERE.

As noted above, VEETC is scheduled to expire on December 31, 2010.  The RFA, however, is working closely with its friends and supporters in Congress secure passage of a multi-year extension of VEETC, and other important tax incentives that help support the industry. 

With help of the RFA, legislation has been introduced in the House and Senate extending key tax incentives for the use and production of all forms of ethanol. On March 24, 2010, Representatives Earl Pomeroy (D-ND) and John Shimkus (R-IL) introduced H.R. 4940, the Renewable Fuels Reinvestment Act of 2010, which calls for a 5 year extension of the 45 cent VEETC, the Small Ethanol Producer Tax Credit and the Secondary Tariff on Ethanol. The bill also extends the Cellulosic Biofuel Producer Tax Credit through 2015.

Most recently, on April 20, 2010, Senators Charles Grassley (R-IA) and Kent Conrad (D-NE) introduced the Growing Renewable Energy through Ethanol Naturally (GREEN) Jobs Act of 2010. The bill, identified as S. 3231, is the companion legislation to H.R. 4940. Like the House bill, the GREEN Jobs Act of 2010 extends through 2015 the VEETC, the offsetting tariff on foreign ethanol, the Small Producers Tax Credit, and the Cellulosic Ethanol Producer Tax Credit.

Click here for detailed information on what H.R. 4940 would do. Click here to view the GREEN Jobs Act of 2010.

Importance of the Ethanol Tax Incentive in Driving the Growth of Biofuels
John Urbanchuk
April 22, 2010
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Legislative Background

On October 22, 2004, President Bush signed into law H.R. 4520, the American Jobs Creation Act of 2004 (P.L. 108-357), which created the Volumetric Ethanol Excise Tax Credit (VEETC). 

Through the passage of VEETC, Congress significantly changed the way taxes are collected on gasohol and other ethanol blends.  By establishing a new excise tax credit system for all ethanol blends, this law affords greater flexibility and new market opportunities for the use of E-10 and E-85.  In brief, VEETC provides that gasoline suppliers and marketers who blend ethanol with gasoline are eligible for a refundable tax credit of 45 cents per gallon of ethanol.  (Note: the credit was reduced from 51 cents, to 45 cents, under the 2008 Farm Bill).  The credit is scheduled to expire on December 31, 2010.

Frequently Asked Questions

What is the Rate of the Ethanol Tax Credit?
Currently, the rate of the ethanol tax credit is $0.45 per gallon for ethanol with a proof of 190 or greater.  As part of the 2008 Farm Bill, Congress reduced the ethanol tax incentive by 6 cents, down from the $0.51 per gallon originally established in the 2004 Jobs Bill.

How Does the Ethanol Excise Tax Credit Work?
The law allows a credit against the excise tax imposed on the sale of gasoline, diesel, or kerosene.  The credit is allowed to the person that blends the alcohol and gasoline mixture for sale or use in their trade or business.

Under the excise tax credit structure, gasoline refiners and marketers are required to pay the full rate of tax (18.4 cents per gallon) on the total gasoline-ethanol mixture (including the ethanol portion), but are able to claim a $0.45 per gallon tax credit or refund for each gallon of ethanol used in the mixture.  The credit is paid on the amount of alcohol added to the fuel mixture.  Gasohol blended at the terminal is taxed at 18.4 cents per gallon on the total mixture.  Gasohol blended below the rack is taxed at the full rate of 18.4 cents per gallon as well.  Persons producing taxable fuel are required to report excise taxes on Form 720, “Quarterly Federal Excise Tax Return”.  The blender may claim the tax credit as either a credit against  the excise tax imposed on the sale of gasoline, or a refund (payment) from the IRS.  Under the Code’s coordination rules, a claim may be taken only one with respect to any particular gallon of alcohol or biodiesel.

Who is Eligible for the Credit?
Any person that produces an “alcohol fuel mixture” for sale or use in the producer’s trade or business is eligible to claim the excise tax credit.  For purposes of the credit, an “alcohol fuel mixture” is defined as a mixture of alcohol and taxable fuel that (1) is sold by the taxpayer producing such mixture to any person for use as a fuel or (2) is used as a fuel by the taxpayer producing  the mixture.  A mixture that includes ETBE or other ethers produced from alcohol produced by any person at a refinery prior to a taxable event is treated as sold at the time of its removes from the refinery (and only at such time) to other persons for use as fuel.

How Do Blenders Claim the Ethanol Excise Tax Credit?
Blenders of ethanol and gasoline may claim the excise tax credit on Form 720, “Quarterly Federal Excise Tax Return” in accordance with the instructions for that Form, Schedule C, “Claims”, included in Form 720, may be used if one is reporting liability in Part I or II of the Form.

The credit is treated as a payment of the taxpayer’s tax liability received at the time of the taxable event.  A credit may be taken against the blenders excise tax liability equal to the number of gallons of ethanol blended with gasoline.  In lieu of the reduced excise tax rates (which applied prior to January 1, 2005), the alcohol mixture credit may be applied against one’s excise tax liability.  For gasoline ethanol blenders who remit excise taxes semimonthly, a credit may be taken against the blenders excise tax liability equal to the number of gallons of ethanol blended with gasoline.

Form 720, “Quarterly Federal Excise Tax Return” is required to be filed 30 days after the end of each quarter.  Form 720 can be found at http://www.irs.gov/pub/irs-pdf/f720.pdf.

To the extent that the alcohol fuel mixture credit exceeds one’s tax liability (under Section 4081), or if the person has no Section 4081 liability, ethanol blenders may file for a refund equal to the credit.  The refund may be claimed on Form 8849, “Claim for Refund of Excise Taxes”, in accordance with instruction for this Form.  YOU MUST FILE THE FORM 720 FIRST AND OBTAIN A CREDIT AGAINST YOUR TAXABLE LIABILITY.   ONLY IF YOU EXCEED THE TAX LIABILITY ON THE FORM 720 DO YOU FILE FOR THE REFUND ON FORM 8849.  THE FORM 8849 IS ONLY THAT AMOUNT OVER AND ABOVE YOUR CREDIT ON THE FORM 720.

The law requires IRS to pay non-electronic claims within 45 days.  If such a claim is not paid within the required time frame, the IRS is required to pay the claim with interest.  For electronic claims, IRS is required to pay the claim within 20 days, or the claim must be paid with interest.  Form 8849 can be found at http://www.irs.gov/pub/irs-pdf/f8849.pdf

Who Needs to Register with the IRS?
The IRS requires that any producer or importer of ethanol or biodiesel must be registered with the agency.  The IRS also requires that any person that produces blended taxable fuel must be registered with the IRS prior to blending such taxable fuel.

Parties may apply for registration on Form 637, “Application for Registration (For Certain Excise Tax Activities) (Revised October 2006)” in accordance with the instructions for that Form.  Form 637 can be found at http://www.irs.gov/pub/irs-pdf/f637.pdf

Producers & Importers of Ethanol & Biodiesel -- Under the American Jobs Creation Act of 2004, a registration requirement has been established for all ethanol producers and importers.  Under the law, every person producing or importing alcohol (other than alcohol with a proof of less than 190) or biodiesel must be registered by the IRS.  Penalties are imposed for failure to register as required.

In order to be registered by the IRS as an alcohol or biodiesel producer, the IRS has to determine that the applicant is (1) engaged as a producer or importer of alcohol or biodiesel, or is likely to become a producer or importer within a reasonable time after being registered; and (2) is satisfied with the filing, deposit, payment, reporting, and claim history for all federal taxes of the applicant and any related person.

Blenders of Ethanol & Biodiesel -- IRS requires that any person producing blended taxable fuel must be registered by the IRS prior to blending.  Under the tax law, any ethanol blender or E85 blender who is not registered, and seeks to blend alcohol and gasoline and claim the excise tax credit for the amount of ethanol used must be registered with the IRS prior to blending.  Application for registration is made on Form 637, “Application for Registration (For Certain Excise Tax Activities)”.  Part II of Form 637 requires applications to enter an “Activity Letter” for each activity being applied for.  Persons applying to blend gasoline and ethanol (or biodiesel) should mark the letter “M”, which is a “blender of taxable fuel outside the bulk transfer/terminal system”.

Gasoline marketers who blend ethanol inside the terminal (and other taxable fuel) and are currently operating as a “registered blender” under Activity Letter “M”, keep their original “M” registration.  Marketers registered under Activity Letter “T” (buyer of gasoline for blending into gasohol outside the bulk transfer/terminal system) should have changed their registration to activity “M”, a blender of taxable fuel outside the bulk transfer/terminal system.  There is no longer a “T” designation.

What General Requirements are Imposed on the Alcohol?
In order to qualify for the excise tax credit, the alcohol may not be produced from petroleum, natural gas, or coal (including peat).  For purposes of claiming the 45 cents per gallon credit, the alcohol is required to have a proof of at least 190 (determined without regard to any added denaturants).

Does Imported or CBI Ethanol Qualify for the Tax Credit?
Yes.  Both imported ethanol and ethanol produced or imported from a CBI beneficiary country qualify for the ethanol tax credit.  No restrictions are imposed on the use of imported ethanol.

While VEETC does not restrict the use of imported or CBI ethanol from qualifying for the credit, ethanol imported from a non-CBI beneficiary country is subject to U.S. Customs duties at the time of importation.

Important Resources:

For more detailed information concerning this and other fuel tax credits and refunds, please see IRS Publication 510, Chapter 2, Fuel Tax Credits and Refunds:  www.irs.gov/publications/p510/ch02.html.