Bandit Fuel'

• Facebook
• Twitter
• LinkedIn

NEW YORK -- Presidential candidates John McCain, Hillary Clinton and Barack Obama are bickering over whether to suspend the 18.4-cent-a-gallon federal gasoline tax to ease the impact of rising prices. Some people are increasingly taking matters into their own hands, according to a Reuters report.

For two years, Larry West's company trucked fuel directly from Mississippi River barges to convenience stores between Houston and Corpus Christi, Texas. He didn't pay a penny in tax, claiming he was distributing "petroleum distillates," not gasoline. A state jury rejected his explanation and in 2005 [image-nocss] convicted him of evading Texas fuel taxes; investigators are now focusing on some of his associates, who they suspect have continued to dodge legal requirements.

With gasoline prices rising to $4 per gallon, investigators from Louisiana to Hawaii are reporting a surge in fuel-tax fraud, said the report. Estimates of the cost of such cheating to federal and state governments range as high as $10 billion a year.

"For every Larry West out there who gets busted, there's 10 others who get away," William Warden, a sergeant for the Harris County environmental-crimes unit who helped put West, 56, in prison on five concurrent 20-year terms, told Reuters.

Fuel-tax evasion steals funds needed for transportation projects at a time when the American Society of Civil Engineers estimates it will cost $1.6 trillion over five years to repair the highways, bridges and the rest of the nation's infrastructure. Lawmakers and regulators say tax-evasion schemes involving illicit blending of fuels also damage engines and poison the environment.

The increase in cases comes more than a decade after Congress toughened enforcement and after conspiracies led by the so-called Russian mafia prompted federal authorities to prosecute two-dozen people in New Jersey. "With the price of fuel going up and people getting more desperate for it, everything we've been finding since the mafia days, we're going to see that again," Cindy Anders-Robb, a motor-fuels tax associate at the Federation of Tax Administrators, which represents state revenue agencies in Washington, told the news agency.

Authorities say Texas, Louisiana, Mississippi and other states along the Gulf of Mexico are hotbeds of fuel-tax fraud because the region's refineries and inland waterways make illicit deliveries easy, said the report.

"This kind of thing is getting worse," Wayne Rhoads, chief fuel-tax investigator for Mississippi's Department of Transportation, told Reuters. "It's going to continue to get worse because there's more money involved in it."

Rhoads said photographs he took outside Vicksburg of tractor-trailer tire tracks near abandoned storage tanks on the Mississippi River's banks are evidence of the problem. He said he suspects that barges, each hauling supplies with a tax liability of about $1 million, are offloading "bandit fuel" into trucks or into the tanks before it can be taxed at terminals. Such fuel often ends up at independent gas stations and c-stores, he said.

Fuel-tax schemes take many forms, from simply failing to file tax returns—as in charges brought by Hawaii against a distributor in April—to more elaborate operations. Investigators in North Carolina recently discovered untaxed ethanol being sold from train cars to distributors via portable pumps.

In Seattle, five people face federal charges of stealing fuel from depots that serve companies including Exxon Mobil Corp. and Chevron Corp. and distributing it, untaxed, in western Washington for more than five years. In Miami, prosecutions continue in a case where 19 airport workers were accused of reclassifying almost 3 million gallons of lower-taxed jet fuel and selling it for use in diesel trucks.

No one knows just how much fuel-tax fraud drains from government coffers each year; the U.S. Department of Transportation cites estimates ranging from $1 billion to $10 billion annually. In any event, it's clear that federal authorities can't keep up with the fraud, Rhoads said.

The Internal Revenue Service (IRS) has 92 fuel-compliance officers to monitor all border crossings, 1,300 terminals and thousands of wholesalers and retailers. The agency says it maintains a "vigorous enforcement program" that assessed $152 million in additional taxes and $12.6 million in penalties last year.

Congress has taken steps to shore up federal fuel-tax laws, such as requiring that tax-free diesel used for off-road purposes be dyed red.

One provision would broadly define taxable fuel so the levy can't be avoided by calling deliveries "distillates"—-the trick West unsuccessfully employed to avoid state taxes. Another would simplify collection by shifting the point of taxation to the 149 U.S. refiners, instead of at terminals. The measures were attached to a bill reauthorizing the Federal Aviation Administration (FAA), which Senate Republicans blocked last month for unrelated reasons.

"Fuel fraud was a multibillion-dollar problem before the current spike in fuel prices," Senator Charles Grassley (R-Iowa), who tracks the issue as the Finance Committee's top Republican, said. "Legislators and regulators have to stay ahead of the criminals. Public safety is at risk when thugs move large amounts of fuel around the country in fly-by-night ways. Funding for highways and bridges suffers."

Mark Kibbe, a senior tax analyst at the American Petroleum Institute (API), said oil companies oppose moving the point of taxation to refineries because that would force them to pay taxes before they sold the fuel. He said fuel- tax fraud is "relatively small" compared to the volume of gasoline sold annually.

Not all fuel-tax avoidance is intentional. Consumer advocates estimate that 250,000 Americans have converted cars to run on vegetable oil, and most don't pay required state taxes, The Los Angeles Times reported. They include California Governor Arnold Schwarzenegger, who learned last month that he owed the state 18 cents on each gallon of cooking oil he pumped into his Hummer. Spokesperson Aaron McLear told Reuters that Schwarzenegger is working with the state Board of Equalization to determine his liability.

With retail prices of gasoline up 20% and diesel fuel up nearly 32% since January 1, Senators Clinton (D-N.Y.) and McCain (R-Ariz.) are calling for a federal "gas-tax holiday" this summer. Senator Obama (D-Ill.) dismisses the idea as a gimmick.

Members help make our journalism possible. Become a CSP member today and unlock exclusive benefits, including unlimited access to all of our content. Sign up here.