By Neal Morris
Recently, an Illinois tax tribunal ruled that compressed natural gas (CNG) is taxable under the state’s eighty-seven year old Motor Fuel Tax Law (MFTL).[i] The tribunal decided that CNG was taxable under the statute because it was left intentionally ambiguous as to what fuel was taxable by prefacing a non-exhaustive list with ‘among other things.’[ii] By ignoring the distinction between traditional fuels and alternative fuels, the tax tribunal could extend the MFTL to any fuel usable by a vehicle. This tax is extended to CNG without any mention of that fuel in the statute.
By comparison, the statute has multiple sections to clearly define how certain fuels should be treated, including sections for kerosene, diesel (regular, dyed, and nondyed), and biodiesel.[iii] These sections provide for exemptions and exceptions to the MFTL, for example ships engaging in interstate commerce who use diesel do not have to pay tax on the fuel.[iv] Meanwhile, all vehicles that use CNG must pay the standard tax rate.
This disincentivizes the companies that would be the most likely to use CNG, commercial companies that use light duty trucks, delivery vehicles, and heavy duty vehicles like street sweepers and busses.[v] Illinois should be doing the opposite of what it’s done so far and instead subsidize CNG while taxing diesel at a more punitive rate. CNG is a much more environmentally friendly fuel when used and if there were a spill or an accidental release, CNG would pose no threat to land or water, because it is nontoxic.[vi]
Illinois is creating bad public policy that flies in the face of current incentives to implement CNG.[vii] While the federal government has not created any incentives for states to implement CNG, many state legislatures, including Illinois’, have..[viii] The Illinois tax tribunal’s decision to include CNG as taxable under the MFTL could negatively affect CNG implementation across the state.
Instead Illinois should look to Kentucky for how to treat CNG, along with other alternative fuels.[ix] Kentucky currently has a special tax rate for alternative fuels, including CNG, of nine percent per gallon compared to the standard fuel tax of twenty-six cents per gallon.[x] Additionally, Kentucky incentivizes CNG research and has legislated that CNG receive favorable treatment by many of the state’s departments.[xi]
The emergence of CNG as a viable alternative fuel has led Illinois to try to monetize the fuel at the expense of the environment by applying an archaic and complex tax law. While the tax tribunal may have ruled correctly due to a poorly worded statute, the Illinois legislature should look to Kentucky’s work on making CNG more available and affordable.
[i] Dorothy Atkins, Natural Gas Is A Taxable Motor Fuel, Ill. Tribunal Says, Law 360 (October 4, 2016, 6:19 PM), http://www.law360.com.ezproxy.law.uky.edu/energy/articles/848003/natural-gas-is-a-taxable-motor-fuel-ill-tribunal-says.
[iii] 35 Ill. Comp. Stat. Ann. 505/1.13A (West, WestLaw through P.A. 99-904 of the 2016 Reg. Sess.); 35 Ill. Comp. Stat. Ann. 505/1.13 (West, WestLaw through P.A. 99-904 of the 2016 Reg. Sess.); 35 Ill. Comp. Stat. Ann. 505/2d (West, WestLawthrough P.A. 99-904 of the 2016 Reg. Sess.)
[iv] 35 Ill. Comp. Stat. Ann. 505/2a. (West, WestLawthrough P.A. 99-904 of the 2016 Reg. Sess.)
[v] Compressed Natural Gas (CNG) as a Transportation Fuel, Consumer Energy Center, http://www.consumerenergycenter.org/transportation/afvs/cng.html (last visited Oct. 31, 2016).
[vi] What is CNG?, CNG Now, http://www.cngnow.com/what-is-cng/Pages/default.aspx (last visited Oct. 31, 2016).
[vii] Illinois, CNG Now, http://www.cngnow.com/State/illinois# (last visited Oct. 31, 2016).
[ix] Karla Ward, Lexington acquiring garbage trucks and buses that run on compressed natural gas, Lexington Herald Leader (Aug. 12, 2014), http://www.kentucky.com/news/business/article44502525.html.
[x] Kentucky Laws and Incentives for Natural Gas, Alternative Fuels Data Center, http://www.afdc.energy.gov/fuels/laws/NG/KY (last visited Nov. 11, 2016); Colby Pastre, See, How High Are Gas Taxes in Your State, Tax Foundation (July 23, 2015), http://taxfoundation.org/blog/how-high-are-gas-taxes-your-state.