The recently enacted Tax Relief and Health Care Act of 2006 (the 2006 Act) includes a provision which allows an ultimate purchaser of aviation-grade kerosene used for certain exempt purposes (including use in foreign trade, such as carrying passengers for hire on international flights) to directly claim refunds of federal excise taxes previously collected and paid to the IRS on the fuel. This provision resolves a problem created by legislation enacted in 2005 which generally provided that only the ultimate vendor of such fuel could claim the refund, leaving exempt purchasers with no remedy if the vendor was unwilling to claim the refund on their behalf.
Prior to October 1, 2005, if aviation-grade kerosene that was previously taxed under the federal fuel excise tax provisions of the Internal Revenue Code of 1986, as amended (the Code) was used for certain nontaxable uses, including use in foreign trade, the ultimate purchaser of such fuel generally could claim a refund from the IRS for the tax that was previously paid. The Safe, Accountable, Flexible, Efficient, Transportation Equity Act: A Legacy for Users (Safetea), enacted in 2005, made substantial changes to the excise tax provisions of the Code. Among these changes was a provision which eliminated the ability of a purchaser to file a refund claim with respect to fuel used in nontaxable uses. Instead, the ultimate vendor had the exclusive right to claim the refund, and only if the vendor registered with the IRS.
It was brought to the attention of Congress that some ultimate vendors were refusing to register with the IRS and to file for refunds on behalf of their customers who otherwise would be entitled to a full refund of the aviation fuel excise tax. Instead, the vendors were passing along the full amount of the tax to the purchasers. This was particularly the case for smaller purchasers who may not purchase significant quantities to influence the vendor to file on their behalf. Congress recognized that, because the ultimate vendor was the only person allowed to file a refund claim, these purchasers were left without a method for obtaining a refund of the excise tax to which they were entitled. Accordingly, the 2006 Act permits purchasers that use aviation-grade kerosene for an exempt purpose to make a claim for refund of the tax that was paid on such fuel (or waive the right to their vendors). This provision of the 2006 Act applies retroactively to aviation-grade kerosene sold after September 30, 2005 (i.e., the effective date of the Safetea provision which initially prohibited purchasers from directly claiming refunds). Thus, purchasers who used aviation-grade kerosene in non-taxable uses but were unable to claim refunds as a result of the Safetea provisions described above should be able to retroactively claim such refunds. As of the date of this memorandum the IRS has not provided any special procedures for claiming excise tax refunds as a result of the 2006 Act Provisions.