On May 26, 2011, Iowa Governor Terry Branstad signed comprehensive renewable fuels legislation into law. The new law creates additional tax credits and extends and increases prior incentives to promote biofuel sales and production in Iowa. Specifically, the bill enhances the ethanol promotion tax credit, replaces the current E85 credit, creates a new tax credit for certain ethanol blends, establishes a biodiesel production incentive, and liberalizes the biodiesel tax credit. This alert contains a brief summary of these developments.
Ethanol Promotion Tax Credit
The Ethanol Promotion Tax Credit (EPTC) applies to the current Iowa Renewable Fuels Standard (RFS), which provides tax incentives for retailers selling renewable fuels as a certain percentage of their total gasoline sales. Retailers qualify for this credit based on their sales of biodiesel and ethanol. In claiming this credit, retailers may elect to compute their Iowa RFS threshold on a company-wide or site-by-site basis.
The new law increases the EPTC at each level of compliance. Retailers that meet the RFS Schedule are now eligible for a tax credit of $0.08 per gallon of ethanol sold (up from the prior rate of $0.065 per gallon). For retailers within 2 percent of the RFS Schedule, the new law increases the available tax credit from $0.045 to $0.06 per gallon of ethanol sold. For retailers beyond 2 percent, but within 4 percent of the RFS Schedule, the new law increases the $0.025 tax credit to $0.04 for years beginning after 2011.
E85 Promotion Tax Credit
The E85 Promotion Tax Credit allows a retailer to claim a tax credit based on the total gallons of E85 fuel sold in a given tax year. For 2011, the tax credit is $0.10 per gallon. Under the new law, the E85 credit has been raised to $0.16 per gallon for 2012 through 2017.
E15 Tax Credit
With the 2011 bill, Iowa became the first state to incentivize E15-specific production by creating an E-15 Gasoline Tax Credit. The E15 credit allows retailers to claim a tax credit for ethanol-blended gasoline classified as E15 or higher, excluding gasoline classified as E85. The credit is effective beginning on July 1, 2011. From that date through 2014, the tax credit is $0.03 cents per gallon. For 2015 through 2017, the tax credit will be $0.02 per gallon. The credit is currently effective through December 31, 2017.
Multiple Credit Eligibility
With the addition of the E15 tax credit to Iowa law, the 2011 bill clarifies that a retailer may claim any or all of the EPTC, the E85 Promotion Tax Credit, and the E15 Tax Credit, if eligible.
Biodiesel Tax Credit
The Iowa Biodiesel Tax Credit is available for retail dealers of diesel fuel who operate motor fuel pumps at a retail motor fuel site in Iowa. The 2011 bill liberalizes the eligibility requirements for that tax credit by eliminating the requirement that a retailer's biodiesel sales represent at least 50% of total fuel sales.
Current Iowa law provides for a tax credit of $0.03 per gallon for B2 and higher biodiesel blends in 2011. Under the new law, the tax credit for B2-B4 biodiesel blends will drop to $0.02 per gallon in 2012, while the tax credit will be $0.045 per gallon for B5 or higher biodiesel blends. For 2013 through 2017, the biodiesel blended fuel must be classified as B5 or higher to qualify for the credit and the credit will be $0.045 per gallon.
Retailer Misfueling Liability
The new law also provides some protection for retailers of biofuels by providing relief from liability for damages caused by the use of incompatible motor fuel dispensed at the retailer's motor fuel site. To be afforded that protection, three conditions must be met: (1) the incompatible motor fuel must comply with the fuel specifications as provided by Iowa Code, (2) the incompatible motor fuel must be selected by a person other than the retailer, including an employee or agent of the retailer, and (3) the motor fuel pump must be correctly labeled.