Fuel Tax Swap – Frequently Asked Questions (FAQ)

The following questions and answers pertain to the Fuel Tax Swap provisions enacted by Assembly Bill x8-6 (Chapter 11, Statutes of 2010), Senate Bill 70 (Chapter 9, Statutes of 2010), and Assembly Bill 105 (Chapter 6, Statutes of 2011).

Note: Senate Bill 1 (SB 1) (Stats. 2017, Ch. 5), The Road Repair and Accountability Act of 2017, was enacted on April 28, 2017. SB 1 immediately eliminated the annual revenue neutrality adjustment calculation for diesel fuel and changed the base excise tax rate to 16 cents ($0.16) per gallon. For motor vehicle fuel, the Board of Equalization (Board) is required to determine the revenue neutrality adjustment calculation one more time for the fiscal year beginning July 1, 2018. Assembly Bill 102 (Statutes 2017, Ch. 16), The Taxpayer Transparency and Fairness Act of 2017, California Department of Tax and Fee Administration: Office of Tax Appeals: State Board of Equalization, specifically states that the Board retains this responsibility.

For further information regarding SB 1 impacts to motor vehicle fuel and diesel fuel taxes, please see the SB 1 Tax Rate Increases and Storage Tax FAQs.

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General Information

What is the Fuel Tax Swap?

Effective July 1, 2010, the Fuel Tax Swap provided for a combination of lowering the sales and use tax rate applicable to sales of motor vehicle fuel, excluding aviation gasoline, and simultaneously raised the state excise motor vehicle fuel tax rate.

In addition, effective July 1, 2011, the Fuel Tax Swap raised the sales tax rate applicable to sales of diesel fuel and simultaneously lowered the state excise tax rate on diesel fuel.

Is there a summary of the rate changes that occurred as a result of the Fuel Tax Swap?

A summary of the tax rates on fuel can be found on the Sales Tax Rates for Fuels page.

How does the Fuel Tax Swap apply to motor vehicle fuel?

Effective July 1, 2010, the retail sale of motor vehicle fuel is partially exempt from sales and use tax. The partial exemption applies to the statewide portion of the sales and use tax rate. Therefore, retail sales of motor vehicle fuel are subject to sales and use tax at a rate of 2.25 percent plus applicable district taxes.

Also, on July 1, 2010, the state excise tax on motor vehicle fuel increased by 17.3 cents ($0.173) per gallon. The increased state motor vehicle fuel excise tax does not apply to aviation gasoline. Aviation gasoline is subject to the motor vehicle fuel excise tax rate of 18 cents ($0.18) per gallon. Retail sales of aviation gasoline continue to be exempt from sales and use tax (Revenue and Taxation Code section 6357).

The 17.3 cents ($0.173) per gallon rate is a "price-based" rate, also referred to as the "fuel tax swap rate." It is a "price-based" rate in that since July 1, 2011, it is subject to annual adjustment to maintain revenue neutrality. For California's fiscal year 2017-18, the adjusted "fuel tax swap" rate is 11.7 cents ($0.117) per gallon.

Note: Due to enactment of Senate Bill 1 (SB 1) (Stats. 2017, Ch. 5), The Road Repair and Accountability Act of 2017, the fuel tax swap portion of the excise tax rate will be adjusted for the final time on July 1, 2018. Effective July 1, 2019, the full 17.3 cents ($0.173) will be effective, plus the base excise tax rate of 18 cents ($0.18), plus the SB 1 rate of 12 cents ($0.12) for a total rate of 47.3 cents ($0.473) per gallon.

For further information regarding SB 1 impacts to motor vehicle fuel and diesel fuel, please see the SB 1 Tax Rate Increases and Storage Tax FAQs.

A summary of the tax rates on fuel can be found on the Sales Tax Rates for Fuels page.

What is motor vehicle fuel?

Revenue and Taxation Code section 7326 defines motor vehicle fuel to mean gasoline and aviation gasoline. The term motor vehicle fuel does not include jet fuel, diesel fuel, kerosene, liquefied petroleum gas, natural gas in liquid or gaseous form, alcohol, or racing fuel.

Who is affected by the partial sales and use tax exemption for sales of motor vehicle fuel?

Any person who sells motor vehicle fuel at wholesale or at retail is affected by the partial tax exemption. Retailers will need to keep track of motor vehicle fuel sales to report the sales at the lower rate. Wholesalers are responsible for collecting the prepaid sales tax on sales of motor vehicle fuel to other wholesalers or to retailers. Wholesalers and retailers of motor vehicle fuel need to make sure they are using the most up-to-date forms when reporting motor vehicle fuel sales. The partial sales and use tax exemption for sales of motor vehicle fuel was not impacted by SB 1.

Does the motor vehicle fuel partial sales and use tax exemption apply to sales of diesel fuel or aircraft jet fuel as well?

No. The partial exemption only applies to retail sales of motor vehicle fuel, excluding aviation gasoline, and does not apply to retail sales of diesel fuel or aircraft jet fuel.

How does the sales and use tax component of the Fuel Tax Swap apply to diesel fuel?

Under the Fuel Tax Swap retail sales of diesel fuel are taxed at a higher sales and use tax rate. Therefore, sales of diesel fuel are subject to the statewide rate of 7.25%, any applicable district tax rates, plus the additional sales and use tax rate applicable to diesel fuel. Due to the enactment of SB 1 (Stats. 2017, Ch. 5), the additional sales and use tax rate for diesel fuel increased by four percent (4.00%), to a total additional sales and use tax rate of 5.75.

Additionally, beginning July 1, 2011, the Fuel Tax Swap provided that the state excise tax on diesel fuel decreased by 5 cents ($0.05) per gallon resulting in a state diesel fuel excise tax rate of 13 cents ($0.13) per gallon. This rate was adjusted annually to maintain revenue neutrality until the enactment of SB 1 eliminated the annual rate adjustment, and made the current excise tax rate of 16 cents ($0.16) per gallon the permanent base excise tax rate, effective April 28, 2017.

For further information regarding SB 1 impacts to diesel fuel tax, please see the SB 1 Tax Rate Increases and Storage Tax FAQs.

A summary of the tax rates on fuel can be found on the Sales Tax Rates for Fuels page.

What is diesel fuel?

Revenue and Taxation Code section 60022 defines "diesel fuel" as any liquid that is commonly or commercially known or sold as a fuel that is suitable for use in a diesel-powered highway vehicle. A liquid meets this requirement if, without further processing or blending, the liquid has practical and commercial fitness for use in the engine of a diesel-powered highway vehicle. This includes biofuels used as alternatives to petroleum-based diesel fuel. The most common are biodiesel, straight vegetable oil, waste vegetable oil, and renewable diesel.

"Diesel fuel" does not include kerosene, gasoline, liquefied petroleum gas, natural gas in liquid or gaseous form, or alcohol.

Motor Vehicle Fuel Tax

Where can I find the state excise tax rate applicable to motor vehicle fuel?

The current and historical motor vehicle fuel tax rate, sales tax rate, and sales tax prepayment amounts are available on the Sales Tax Rates for Fuels webpage.

The rate may change on July 1 of each year so you should check the website for the most current rate. If you have a motor vehicle fuel account with the CDTFA, the CDTFA will notify you by email when the rate changes so it's important to keep a current email address on file.

Are there any exemptions from the state motor vehicle fuel excise tax rate increase?

Aviation gasoline is not subject to the increase in the state motor vehicle fuel excise tax. Aviation gasoline continues to be subject to the state motor vehicle fuel excise tax base rate of $0.18 per gallon.

Diesel Fuel Tax

Where can I find the state excise tax rate applicable to diesel fuel?

The current and historical diesel fuel excise tax rate, sales tax rate, and sales tax prepayment amount are available on the Sales Tax Rates for Fuels webpage.

The rate may change on July 1 of each year so you should check the webpage for the most current rate. If you have a diesel fuel tax account with the CDTFA, the CDTFA will notify you by email when the rate changes so it's important to keep a current email address on file.

Sales and Use Tax

Where can I find the sales and use tax rate for retail sales of diesel fuel?

The current and historical diesel fuel excise tax rate, sales tax rate, and sales tax prepayment amount are available on the Sales Tax Rates for Fuels webpage.

Is the additional diesel fuel sales and use tax a state, local, county, or district tax?

The additional sales tax on retail sales of diesel fuel is a statewide tax.

Are there any exemptions from the sales and use tax on retail sales of diesel fuel?

Yes. There are two types of partial exemptions from the sales and use tax on retail sales of diesel fuel. Purchasers that qualify as exempt bus operators and train operators and other users who use diesel fuel off-highway or in any other exempt manner are exempt from the additional sales and use tax imposed under Revenue and Taxation Code (R&TC) section 6051.8 and R&TC section 6201.8 on purchases of diesel fuel for use in these exempt activities. Qualified purchasers must provide the seller with an exemption certificate completed in accordance with Regulation 1598.

Qualified persons who use diesel fuel in qualified farming activities or qualified food processing are exempt from the increased sales and use tax rate on diesel fuel purchases for use in the qualified activity. The purchaser must provide the seller with a partial exemption certificate in accordance with Sales and Use Tax Regulation 1533.2. Please see Regulation 1533.2 for more information regarding this exemption.

Are sales of motor vehicle fuel exempt from sales and use tax?

Retail sales of motor vehicle fuel are exempt from the statewide portion of the sales and use tax rate. The sales and use tax exemption for sales of motor vehicle fuel is not a full sales and use tax exemption.

What is the rate of the partial sales and use tax exemption for sales of motor vehicle fuel?

As of July 1, 2010, a sales and use tax rate of 2.25 percent applies to sales of motor vehicle fuel. This is subject to change. The current and historical motor vehicle fuel tax rate, sales tax rate, and sales tax prepayment amount are available on the Sales Tax Rates for Fuels webpage.

Since the sales and use tax exemption for sales of motor vehicle fuel is only a partial tax exemption, which sales and use taxes apply when motor vehicle fuel is sold at retail?

The following sales and use tax allocations still apply to retail sales of motor vehicle fuel:

  • Local Revenue Fund (Revenue and Taxation Code sections 6051.2 and 6201.2): 0.50 percent state tax
  • Fiscal Recovery Fund (Revenue and Taxation Code sections 6051.5 and 6201.5): 0.25 percent state tax
  • Local Public Safety Fund (Section 35 of Article XIII of the California Constitution): 0.50 percent state tax
  • Local cities and/or counties (Part 1.5 of Division 2 of the Revenue and Taxation Code): 1.0 percent tax
  • Any applicable district taxes imposed by a special taxing jurisdiction (Part 1.6 of Division 2 of the Revenue and Taxation Code)

What is the prepaid sales tax on motor vehicle fuel that I pay to my supplier?

The current and historical sales tax prepayment amounts on motor vehicle fuel are available on the CDTFA's website under Sales Tax Rates for Fuels.

You will want to review your purchase invoices to ensure that your supplier is collecting the proper amount of prepaid sales tax.

Suppliers, wholesalers, and retailers of motor vehicle fuel (gasoline), diesel fuel, and aircraft jet fuel are notified of the new rates by Special Notice, after the rates are determined. The rates will generally remain in effect from July 1 to June 30 of the following year. However, the CDTFA may adjust the rates if the prices of these fuels increase or decrease after the rates have been set for the year, resulting in prepayments that consistently exceed or are significantly lower than the fuel retailer's sales tax liability.

What is the prepaid sales tax on diesel fuel that I pay to my supplier?

The current and historical sales tax prepayment amounts on diesel fuel are available on the CDTFA's website under Sales Tax Rates for Fuels. You will want to review your purchase invoices to ensure that your supplier is collecting the proper amount of prepaid sales tax.

Suppliers, wholesalers, and retailers of motor vehicle fuel (gasoline), diesel fuel, and aircraft jet fuel are notified of the new rates by Special Notice, after the rates are determined. As of January 1, 2013 the rates generally remain in effect from July 1 to June 30 of the following year. However, the CDTFA may adjust the rates if the prices of these fuels increase or decrease after the rates have been set for the year, resulting in prepayments that consistently exceed or are significantly lower than the fuel retailer's sales tax liability.

Note: Due to the enactment of SB 1 the sales and use tax rate and the prepayment of sales tax rate on retail sales and purchases of diesel fuel will increase November 1, 2017.

Can motor vehicle fuel and diesel fuel sold at the pump be sold at a tax-included price?

Yes, none of the provisions of the Fuel Tax Swap should prevent a retailer from selling motor vehicle fuel or diesel fuel at a tax-included price. Therefore, retailers may sell motor vehicle fuel and diesel fuel at the retail level for a price that includes sales tax reimbursement.

Sales and Use Tax Reporting

Also see: Motor Fuels Tax Electronic Filing Information – Frequently Asked Questions (FAQ)

Can I deduct motor vehicle fuel excise tax from the retail selling price at which sales tax is calculated?

No. There is no deduction from the price of motor vehicle fuel for the state excise tax portion when calculating the sales tax included in the selling price.

Can I deduct the state diesel fuel excise tax from the retail selling price when calculating the sales tax included in my taxable diesel fuel sales?

Yes. The state excise tax is an allowable deduction when calculating the taxable selling price of tax-included diesel fuel sales. Please refer to publication 25, Auto Repair Garages and Service Stations, for an example of the computation.

What form should I use to report my partially exempt sales of motor vehicle fuel and my diesel fuel sales subject to the additional tax?

You should file your sales and use tax return online. The On-line Services program is designed to accurately calculate your tax liability by eliminating the possibility for calculation errors. However, if you are not eligible to file online, a paper return must be completed.

Do I have to secure a partial exemption certificate from my customer (similar to other partial exemptions) for my sale of motor vehicle fuel to be exempt from sales or use tax?

No. Generally, sales of tangible personal property, other than motor vehicle fuel, that are subject to a partial exemption qualify for the partial exemption due to the purpose and manner in which the property will be used by the purchaser. The partial exemption for sales of motor vehicle fuel applies to all retail sales of motor vehicle fuel. Therefore, the retailer is not required to obtain an exemption certificate at the time of sale.

How do I report the partial exemption for motor vehicle fuel sales when filing a sales tax return?

Using the CDTFA's Online Services, you report all motor vehicle fuel sales as gross receipts. You should then claim the net taxable motor vehicle fuel sales subject to the partial exemption on the "exemptions" page. The online services system will automatically calculate the partial exemption applicable to sales of motor vehicle fuel. It is important to remember that retail sales of motor vehicle fuel are subject to local and district taxes. Therefore, if you are required to allocate local tax or report district tax, you will need to include the motor vehicle fuel sales on the appropriate local tax and district tax schedules.

When reporting motor vehicle fuel sales on a paper return (BOE-401-GS), motor vehicle fuel sales should be included in the gross receipts reported on line 1. The partial exemption for retail sales of motor vehicle fuel should be claimed under Section C. Partial Exemptions. Net taxable motor vehicle fuel sales subject to the partial exemption should be entered in the appropriate box and multiplied by the factor on the return to calculate the measure of the partial exemption. Please be aware that you must include the motor vehicle fuel sales in the taxable measure when computing the county, local, and district taxes (the instructions on the return indicate how to do this).

How do I calculate the net taxable sales subject to the transactions and sales tax included in my motor vehicle fuel sales?

For this calculation, assume the following facts: $10,000 in motor vehicle fuel sales, tax included, at a rate of 2.75 percent (2.25 percent statewide rate plus an additional 0.50 percent district tax). Net motor vehicle fuel sales, rounded to the nearest dollar, are $9,732 (10,000 / 1.0275 = 9,732). The tax included deduction is $268 (10,000 - 9,732 = 268).

How do I calculate the net taxable sales subject to the transactions and sales tax included in my diesel fuel sales?

For this calculation, assume the following facts: on or after November 1, 2017, $10,000 in tax-included diesel fuel sales, at a rate of 13.50 percent (13.0 percent statewide rate plus an additional 0.50 percent district tax). Also assume that the $10,000 was from the sale of 2,500 gallons of diesel.

First, compute the amount of state excise tax that may be excluded from sales tax: State excise tax of $0.36 x 2500 gallons = $900

Next, subtract the total state excise tax from the total gross receipts: $10,000 - $900 = $9,100

Then, divide the difference by 1.135 (1.00 plus the tax rate of 0.135) to compute net taxable transactions: $9,100 / 1.135 = $8,018 (rounded to the nearest whole dollar)

To compute the sales tax included, compute the difference of the two amounts in the calculation above: $9,100 - $8,018 = $1,082

How do I claim a bad debt loss for taxable sales of motor vehicle fuel or diesel fuel?

If you have reported taxable retail sales of motor vehicle fuel on or after July 1, 2010, at the partial tax rate or retail sales of diesel fuel on or after July 1, 2011, that you later find to be bad debts, you may claim a bad debt deduction on the return for the period in which the retail sale is found to be uncollectible. Currently, the return (BOE-401-GS) will not allow for calculating the bad debt deduction at the partial tax rate, only at the regular statewide rate. Therefore, if you need to claim a bad debt deduction for sales of motor vehicle fuel originally reported as subject to the partial exemption, a separate schedule will be required to accurately report the bad debt deduction. Similarly, if you need to claim a bad debt deduction for sales of diesel fuel reported at the increased rate, a separate schedule(s) should be created by you and attached to your tax return to accurately report the bad debt deduction for these claims.

Utilize the CDTFA's online filing program to calculate the bad debt from sales of motor vehicle fuel or diesel fuel at the proper rate. If you are a seller of motor vehicle fuel or diesel fuel and you enter an amount for bad debts, the program will request additional information from you to ensure the bad debt deduction is claimed at the proper rate.

How do I claim a tax-paid purchases resold deduction for motor vehicle fuel or diesel fuel?

Often times a taxpayer may sell property that includes motor vehicle fuel or diesel fuel as part of the sale (sale of vehicle with a full tank of gas, wet rental of equipment, etc.). If you purchase tax-paid fuel and subsequently sell the fuel at retail along with the sale of other property, you are generally entitled to claim a "cost of tax-paid purchases resold" deduction. The current tax return will not allow for calculating the tax-paid purchases resold deduction at the partial tax rate applicable to motor vehicle fuel, only at the full tax rate. The tax return will also not calculate the tax-paid purchase resold deduction at the increased rate applicable to diesel fuel. However, the instructions to the BOE-401-GS provide a spreadsheet on how to calculate "cost of tax-paid purchases resold prior to use" for motor vehicle fuel and diesel fuel. Therefore, if you have purchased tax-paid motor vehicle fuel or diesel fuel from another retailer and then subsequently sold the fuel at retail and wish to claim a cost of tax-paid purchases resold deduction, you may use the spreadsheet in the BOE-401-GS and attach it to your tax return to accurately report the tax-paid purchases resold deduction.

The CDTFA's Online Services is set up to calculate the tax-paid purchases resold deduction for motor vehicle fuel or diesel at the proper rate. If you are a seller of motor vehicle fuel or diesel fuel and you enter an amount for tax-paid purchases resold, the program will request additional information from you to ensure the tax-paid purchases resold deduction is claimed at the proper rate.

How do sales and use tax and motor vehicle fuel excise tax apply to unleaded racing fuel?

Unleaded racing fuel, which has an octane rating of 100 or higher and does not meet the California Air Resources Board specifications for gasoline, generally is not subject to the motor vehicle fuel tax and would not qualify for the partial sales tax exemption. However, when unleaded racing fuel is sold for use on the highway, it is subject to the motor vehicle fuel tax and would qualify for the sales tax partial exemption.