Living with the burden of complex motor fuel excise taxes has been the norm for suppliers, wholesalers, distributors, and retailers of motor fuels for many years. Recently, a new requirement called ExSTARS has resulted in terminal operators and bulk carriers becoming subject to many of these same compliance burdens. While not truly a tax return since it is used for information gathering purposes only, it brings with it nearly all of the requirements and many of the headaches those in the rest of the downstream petroleum business have "enjoyed" for so long.
Where is all this headed and where are we today? You have probably heard about ExSTARS by now, and hopefully many of you are already successfully filing the required reports. With the grace period for filing expiring at the end of October of this year, it may pay to get a quick primer of the facts and to spend a few minutes thinking about what else could be accomplished while we are meeting these new requirements.
What is ExSTARS?
The Excise Summary Terminal Activity Reporting System (ExSTARS) is a reporting system developed by the Internal Revenue Service with assistance from a team of consultants, software developers, petroleum tax industry members and the Federation of Tax Administrators (representing state governments). ExSTARS tracks all petroleum product movements, both receipts and disbursements, through approved terminals and captures destination state information when the product is disbursed through the terminal rack.
What is the Point?
Basically, the ExSTARS data will be used to close the information gap in the reporting of petroleum product movements that has traditionally existed within the industry. Initially, widespread reports of tax evasion in 1980’s and early 90’s led both the IRS, as well as the industry itself, to look for a way to plug some of the holes in the information pipeline covering the movements of motor fuels. While those of us in the industry are always quick to complain about the burden of motor fuels excise tax compliance, what we loathe far more is a competitor with an unfair advantage due to tax avoidance.
With taxes representing such a significant percentage of the final product price, a distributor, wholesaler, or retailer that cheats, even a little, can have a big impact on the competitors in their local market. While this activity has certainly lessened in recent years with the very stiff penalties that have been imposed on anyone who is caught, closing the final holes could only help level the playing field further. So, in a rare show of mutual cooperation, the motor fuel industry teamed up with the government to analyze and find solutions to the problem – the ExSTARS idea was born. Congress granted funding to the IRS in 1997 for ExSTARS.
It has taken a while to get rolling and many in the industry felt that ExSTARS was not really going to happen. Quite frankly, faced with the burden of one more return to file many hoped it never would. But momentum started building last year, and as of April 30th 2001, ending inventory positions representing the final balances as of March 31st were to be filed by all terminals. From there forward, the inventories are to be balanced by terminal and by product against reported receipts and disbursements to reconcile reported movements.
Who Must Report?
All terminal operators, including refineries with a loading rack, must file a Form 720-TO to report their monthly receipts and disbursements of liquid products. Technically, a terminal operator is a person or company who owns, operates, or controls, a terminal which is registered with the IRS and that, has been assigned a "terminal control number" (TCN). Registered with the IRS means having a 637 registration number (handles excise taxable fuels). Terminal operators handling dyed heating fuel or dyed kerosene, Number 4 oil, or any of the 24 blend stocks listed in 26 CFR 48.4081 (c)(3), including MTBE, TAME, and ETBE are supposed to be registered with the IRS. You are required to report receipts of “liquid products” by product and all inventories and disbursements by position holder and by product.
Barge, vessel, and pipeline carriers must file Form 720-CS to report their monthly receipts from terminals and deliveries to terminals of all liquid products to serve as third-party verification of what is being reported by terminal operators. A bulk carrier is a pipeline company, or a vessel or barge operator that makes deliveries of reportable products into or out of an approved terminal. Pipeline companies and vessel or barge operators are required to report fuel deliveries into and out of approved terminals. The bulk carrier is the person who was hired by the owner of the product to transport such product. This will generally be the carrier as shown on the shipping papers.
How is the Data Used?
Each position holder’s data will be crosschecked against information reported by bulk carriers, and Non-bulk “removals” from all terminals. The data will be summarized and compared with the position holder’s Form 720 to see if they have paid approximately the correct amount of tax. Any ending inventories reported by terminal operators that exceed the total terminal capacity as determined by the IRS are a red-flag item, and are likely to result in an investigation. The destination state information will be distributed to state agencies for their use in compliance efforts through the Excise Tax On-Line Exchange (ExTOLE). Depending on the point of taxation within a specific state, this data may be used for direct reconciliation or simply as a reference check on overall fuel movements.
Do You Have to File Electronically?
No. It has certainly been intended that all reports will be filed electronically, but it is not currently mandated. However, before you think about filling out paper forms, one should consider the magnitude of what we are talking about. An operator of 50 terminals for example is likely to have over 1 million transactions each month. Even smaller operators are looking at a significant amount of manual labor to file paper returns. Unless you have extra staff sitting around looking for something to do, who is going to have the time to manually file paper returns? Therefore, the sheer magnitude of the data to be filed makes it desirable for most to file electronically rather than on paper.
On top of that, it is likely that electronic filing will be mandated soon since paper filing creates at least as great an amount of manual labor on the IRS side of the equation. Evidence of savings with Electronic Data Interchange (EDI) filing, from the government’s point of view, is growing. A recent implementation of an electronic filing mandate by the state of Tennessee resulted in expected savings of over $750,000 per year. Consider that the whole purpose is to reconcile the movements of fuel throughout the country. Not having the data in an electronic form and a data warehouse, so the data is easy to manipulate, would likely make the whole exercise pointless.
The current grace period gives companies a valuable timeframe to gain electronic filing capabilities. Implementing EDI filing for ExSTARS reporting is likely to take several weeks if not months to complete, so unless you have extra staff to prepare manual reports, getting started yesterday is a good idea. The upside to going through the exercise to file EDI with the IRS for ExSTARS is with more and more states moving towards EDI filing mandates, your effort is likely to pay off in other areas.
If you are designing and building your own system or looking to buy one there are some important points to consider when evaluating system requirements. First, direct import from terminal automation systems should be supported to eliminate re-keying of electronic data. Second, exact representation of Carrier Summary and Terminal Operator Reports should be provided by your system. Also, having terminal inventory management features, with perpetual inventory by terminal and product code, will be very helpful in checking balances. Finally, any system should allow for easy product code conversion rules that your company controls, and that are used automatically when your data is imported into the system. This will allow you to avoid any product code changes within your existing systems that would likely cause extensive work in other areas.
If you are doing a build vs. buy analysis one important point to consider is that buying a system that is certified by the IRS can save substantial time and money due in some part to the testing process put in place by the IRS to gain approval for EDI filing. Filing with an approved software package allows filers to skip the first three steps of the testing process and should save upwards of eight weeks of time and hundreds of hours of labor and programming.
What Products have to be Reported?
Generally, any product delivered to or from an approved terminal will be reported. A complete listing of reported products is contained in the EDI Implementation Guide available on the web at www.taxadmin.org.
What are the reporting requirements for Terminal Operators?
Terminal operators will be required to report various product inventories, receipts, disbursements, and destination information. The bulk disbursements report includes shipping date, document number, net gallons, and the identity of the pipeline or vessel/barge removing the product. The non-bulk disbursement report includes the shipping date, FEIN of the carrier that removed the product, document number, gross and net gallons, the position holder, and the state of destination of each transaction.
What are the reporting requirements for Carriers?
Pipeline companies and vessel or barge operators will be required to report fuel deliveries into and out of terminals. These reports will contain the terminal control number (TCN), date of delivery, document number, product type, and net gallons shipped.
Where Can I Get More Information?
Forms 720-TO and 720-CS and instructions, together with Publication 3536 “Excise Tax EDI Guide” can be found at the Federation of Tax Administrators ExSTARS site. The web address is http://www.taxadmin.org/fta/mf/exstars.ssi .
Visit http://www.irs.gov/bus_info/excise/index.html for the latest information and links to forms that are currently available.
Questions and Answers (Q&As) are currently posted on the FTA motor fuel web site at http://www.taxadmin.org/fta/mf/
Where is All of This Headed?
With more and more states requiring electronic filing of motor fuel excise reports, a viable national repository of bulk motor fuel movements with ExSTARS, and a structure in place for states to exchange data via ExTOLE, it seems likely that the creation of a data warehouse that tracks and stores all fuel movements nationally will be likely in the future. In addition to the obvious objectives of revenue departments across the country it is possible that this could also create value for the entire industry in other ways. Having a much more accurate picture of fuel movements, consumption, and inventory would provide tremendous benefits to the industry, and consumers. We have all seen the tremendous turmoil cased in recent months due to what would likely have been only minor supply disruptions in the past.
It is clear that the American Petroleum Institute and the Energy Information Administration have been improving the accuracy and timeliness of their estimates in recent years. Taking the next step and having a live data warehouse that would allow the industry to have real time insight into these statistics on a regional or rack city basis would still maintain proprietary company positions while allowing everyone to improve their planning.
This is all still a few years off but the groundwork is being laid today in many small pieces. ExSTARS and similar initiatives are going to continue to drive more and more data and reporting into the electronic medium. What we do with it other than pay taxes remains to be seen. But what is almost certain is that as our industry continues to become more efficient in the use of capital, resources, and labor, we will find many ways to leverage any new sources of information to add value to our shareholders and vitality to the economy.
