Organization is the key to success for a busy trucking company. It’s important to stay on top of every last detail. You need to know everything there is to know about the daily orders that stream into your warehouse. And you also need to be aware of your drivers’ on-road schedules.
This is especially true when it comes to tax reporting. Financial reporting errors can lead to a long list of headaches, including audits, penalties, and unhappy stakeholders. As such, it’s vital to avoid these kinds of complications at all costs.
Suffice it to say that this is one area where it pays to remain in compliance.
Trucking taxes can certainly be difficult. But they are nothing like what trucking companies were dealing with before the International Fuel Tax Agreement (IFTA). The IFTA has truly been a game-changer for the trucking industry. To many, it’s one of the most important pieces of trucking legislation from the 20th century.
With that in mind, let’s take a closer look at the agreement and what it means for trucking companies across the United States and Canada.
In the not-so-distant past, carriers with operations in more than one jurisdiction faced a variety of barriers when it came time to report motor fuel taxes.
Motor carriers were dealing with multiple states when filing fuel taxes. Filing periods, record-keeping requirements, and even definitions varied from state to state, making it very difficult for carriers to stay in compliance. And when crossing international borders, it became even more tricky. It was clear that the trucking industry needed a faster and more efficient way to process taxes for everyone in the process.
Some states in New England—including New Hampshire, Maine, and Vermont — decided to form a cooperative system called the Regional Fuel Tax Agreement (RFTA) to streamline the tax collection and reporting process. Many people across the industry saw the RFTA as a success. So, other states eventually did the same thing.
In 1983, Washington, Iowa, and Arizona formed the IFTA as a regional model, basing it off the program that was proving to be a success in northern New England. The agreement eventually expanded to 16 states and incorporated as an Arizona-based nonprofit—the International Fuel Tax Association—in 1991.
At this point, the message was loud and clear: The United States needed a single system to govern how carriers pay taxes. So, in 1996, Congress passed legislation 49 USC 31701–31707, requiring all lower 48 states to conform with IFTA before administering and enforcing any tax regulation.
This piece of legislation also provided specific rules governing fuel taxes among member states.
Today, all 48 lower states and all 10 Canadian provinces are members of IFTA. However, Hawaii and Alaska are exempt, which makes sense with respect to geographical considerations. (For example, Hawaiian carriers aren’t necessarily known for driving to California.)
Now that you understand where IFTA came from, let's discuss what it means for you.
IFTA is designed to simplify tax reporting for fleets by eliminating the need to file with multiple states at the end of each fiscal quarter.
Under IFTA, the carrier files a single quarterly fuel tax report. This information helps determine the net tax. And, if applicable, it also helps determine whether a refund is due. Carriers then pay dues to the jurisdiction where the IFTA license applies. After that, member jurisdictions then receive distributions.
IFTA is mandatory for vehicles that transport goods or people. It also applies to these type of vehicles:
However, IFTA doesn't apply to recreational motor vehicles or vehicles used in connection with a business. In other words, IFTA wouldn't apply to a company-owned car or small truck that transports employees to and from job sites. It strictly applies to large motor vehicles that people and companies use for commercial purposes.
These qualifications apply to vehicles that operate in a qualifying U.S. state or Canadian province.
Carriers receive official IFTA decals (two for each qualifying vehicle) and a license after registering with IFTA.
IFTA gives fleets the ability to pay taxes at the pump or in a lump sum at the end of the fiscal quarter. When carriers pay at the pump, the tax credits automatically go to the licensee’s account.
Carriers need to keep careful records to prove that they paid taxes in full and on time. Receipts must contain this information:
In its quarterly IFTA report, the carrier then lists the total miles traveled and gallons of fuel purchased in participating areas. You can calculate tax liability by combining the average fuel mileage with total miles traveled.
New York, Kentucky, and New Mexico each apply additional “weight-mile” taxes. These taxes come on top of fuel tax that’s already part of the quarterly filing report.
What happens if you don't comply with IFTA standards?
If a carrier doesn't meet its requirements, that carrier can lose its IFTA license. What are some examples of failure to meet requirements?
There are other reasons, too, but the ones listed above are some of the most common.
What happens if your IFTA license is suspended or revoked? All member jurisdictions receive notice. And the vehicle in question is no longer able to use an IFTA license.
Carriers have the right to cancel IFTA at any time. To do this, they can submit a request by checking a cancellation box on the final quarterly return. They can also submit a letter requesting cancellation of the license.
Cancellation may result in an audit from any participating IFTA member jurisdiction. Cancelling an IFTA license is not grounds for avoiding an IFTA audit.
It's possible to get your IFTA license reinstated by paying outstanding taxes that are due and filing late tax returns, however.
Carriers often want to know which state they should file IFTA reports through.
Carriers that operate in multiple states need to file only one quarterly fuel tax return. Submit this return to the state where your base jurisdiction is located. For example, carriers that operate primarily out of Florida should file through the state of Florida.
In most cases, carriers have the option to submit IFTA reports online or through the mail. However, each state has its own system.
At this point, you’re probably wondering which state should be the “base.” Unfortunately, there's no clear answer for trucking companies that operate in multiple jurisdictions. Contact individual registers for guidance. Also, keep strict mileage records to help determine where to pay taxes. When an IFTA audit occurs, the base jurisdiction leads the charge.
Companies such as Vector can help you streamline and digitize your paperwork. To learn more about how Vector can help your company streamline tax documentation to boost profitability and ensure compliance, contact the Vector team today.
This post was written by Justin Reynolds. Justin is a freelance writer who enjoys telling stories about how technology, science, and creativity can help workers be more productive. In his spare time, he likes seeing or playing live music, hiking, and traveling.