If a business operates a fleet of vehicles in the United States and Canada, it may be subject to the International Fuel Tax Agreement (IFTA). What does this law entail, and how does it work?
In this article, we’ll answer those questions so managers and finance leaders understand how to keep their businesses compliant.
Table Of Contents
- What Is The International Fuel Tax Agreement?
- How Does The IFTA Work?
- Benefits Of The International Fuel Tax Agreement
What Is The International Fuel Tax Agreement?
The International Fuel Tax Agreement is a set of rules and regulations that govern fuel tax reporting for motor carriers operating in multiple jurisdictions (i.e., wide geographic areas) within North America.
The IFTA applies to all vehicles above a certain weight (more on this later) that move goods through the lower 48 states of the United States and all 10 provinces in Canada.
While the three Canadian territories (Yukon, the Northwest Territories, and Nunavut) and Alaska are not a part of the IFTA, Alaska does participate of its own accord.
Before the IFTA went into effect in 1983, motor carrier businesses operating across multiple jurisdictions (e.g., states and provinces) had to file separate fuel tax reports and pay taxes to each area they traveled through.
For businesses whose fleets traveled across multiple states, the process was cumbersome, difficult to execute, and prone to errors and inconsistencies.
The International Fuel Tax Agreement eliminated these issues and established a uniform reporting system for all businesses that qualify.
Essentially, the IFTA serves as a bridge between fleet-based businesses with one or more qualifying vehicles and the various states through which they operate.
How Does The IFTA Work?
Qualifications
Not every vehicle qualifies for IFTA reporting.
The IFTA applies to a motor vehicle used, designed, or maintained for transportation of persons or property (other than a recreational vehicle) that:
- Has two axles and a gross vehicle weight or registered gross vehicle weight greater than 26,000 pounds
- Has three or more axles regardless of weight
- Has a combined weight of tractor and trailer that exceeds 26,000 pounds (gross vehicle weight or registered gross vehicle weight)
If such a vehicle operates in two or more member jurisdictions, the business must apply for an IFTA license.
If such a vehicle operates in only one jurisdiction but makes an occasional trip outside that area, the business may elect to purchase a single-trip (one-time) permit in order to maintain compliance.
License And Decals
Once a vehicle is registered in its base jurisdiction, the IFTA will send a license and two decals that must be displayed on both the left and right door of the qualifying vehicle.
Here’s a basic example of the decal for a motor vehicle in the Indiana jurisdiction:
Source: iftach.org
A base jurisdiction is considered the business’s home state, province, or place where the operational control and operational records are maintained or can be made available.
The registration process typically involves submitting an application form, providing required documentation, and paying a fee.
Total Miles Driven In Each Jurisdiction
As drivers of qualifying vehicles move through a jurisdiction, they should keep track of the odometer readings every time they cross a state line.
These readings can then be used to calculate the total miles driven in each state (jurisdiction). Drivers can do this manually, but the process is tedious and time-consuming.
On the other hand, Global Positioning Systems (GPS) or electronic logging devices (ELDs) can provide a simple report that summarizes the necessary information and dramatically streamlines the process.
Total Gallons Of Fuel Purchased In Each Jurisdiction
In addition to miles traveled in each jurisdiction, drivers must track the gallons of fuel purchased in those same jurisdictions.
This is typically done by collecting original receipts or by referencing a qualified fuel card invoice.
However the business chooses to track fuel purchased, documentation should include:
- Date of the fuel purchase
- Seller’s name and location
- Type of fuel that was purchased
- Vehicle plate number
- Number of gallons of fuel purchased
- Price for each gallon
- Driver name
Average MPG Calculation
This calculation uses the total miles driven in each jurisdiction and the total gallons of fuel purchased in each jurisdiction and looks like this:
Average Miles Per Gallon (MPG) = Total Miles Driven ÷ Total Gallons Purchased
For example, if a vehicle drove 2,000 miles and purchased a total of 300 gallons of fuel, the average mile per gallon is almost 7 (2,000 ÷ 300 = 6.66 mpg).
It’s important to note that the miles per gallon should be rounded to two decimal points.
Gallons Of Fuel Used In Each Jurisdiction
Businesses must also determine the number of gallons of fuel used in each jurisdiction with the following formula:
Fuel Consumed In A State = Total Miles Driven In The Jurisdiction / Average MPG
So, if a vehicle drives across Indiana on I-80 (about 150 miles), it would use 22.52 gallons of fuel in that jurisdiction.
Fuel Tax Liability In Each Jurisdiction
To figure the fuel tax liability in each jurisdiction, first calculate the net taxable gallons with the following formula:
Net Taxable Gallons = Gallons Consumed – Gallons Purchased
So, for example, if the vehicle in the previous step traveled across Indiana without purchasing fuel, the net taxable gallons would be 22.52.
With that number, businesses can calculate the tax owed with the following formula:
Tax Owed = Net Taxable Gallons x Tax Rate For The Jurisdiction
Continuing with the previous example, a business would calculate its tax liability as:
Tax Owed = 22.52 x $0.57 (current Indiana fuel tax)
Tax Owed = $12.84
Quarterly Reports
Every quarter, businesses with qualifying vehicles must file a fuel tax report with their base jurisdiction.
These reports detail all trip information, including miles traveled in each member jurisdiction and fuel gallons purchased during the quarter.
Currently, the IFTA has set the quarterly reporting periods at:
- For January through March, the due date is April 30
- For April through June, the due date is July 31
- For July through September, the due date is October 31
- For October through December, the due date is January 31
Payment And Reconciliation
In conjunction with submitting quarterly reports, fleet-based businesses also pay any outstanding fuel taxes to their base jurisdiction.
The base jurisdiction then distributes the taxes owed to the other jurisdiction(s) based on the reported miles traveled within said borders.
Benefits Of The International Fuel Tax Agreement
Reduced Administrative Burden
A major benefit of the International Fuel Tax Agreement (IFTA) is that it allows fleet-based businesses and managers to spend less time and resources filing multiple reports to multiple jurisdictions.
Instead, they submit a single report (and any payments owed) to their base jurisdiction. The base jurisdiction then distributes the funds as necessary.
Improved Accuracy
Another major benefit of the International Fuel Tax Agreement is the streamlined nature of the system which improves accuracy and minimizes the risk of errors that could come with filing separate reports for each jurisdiction.
Enhanced Compliance
Similarly, the IFTA ensures that fleet-based businesses with a qualifying vehicle (or vehicles) comply with all federal, state, and local laws and regulations in all of its member jurisdictions.
Increased Efficiency
From a jurisdictional point of view, the IFTA facilitates the efficient collection and distribution of fuel tax from one jurisdiction to another.
Before the International Fuel Tax Agreement went into effect, carriers and drivers had to physically get fuel permits when they entered a new state and report fuel taxes directly to each state they drove through on their routes.
Fairness
The IFTA ensures that fleet-based businesses with qualifying vehicles only pay fuel taxes proportionate to the miles they travel in each jurisdiction.
This helps to eliminate the tax burden on many businesses and reinforces the fairness of the system.
Controlling Fleet Fuel Costs With Coast
Whether business vehicles move through just two states or from New York to Los Angeles, Coast can help managers and finance leaders control the costs associated with filing and paying fuel taxes.
Coast makes it easier to compile fuel-purchase records with a simple four-step process:
- Select all eligible vehicles
- Filter quarterly transactions
- Export IFTA transactions
- Import the data into your telematics provider
With just a few clicks, Coast can help busy managers stay compliant and gather all the necessary information for a quarterly IFTA report.
To learn more and see how Coast stands out from the many fleet card options available, visit CoastPay.com today.
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