During the 1980's, Congress and the states dramatically increased
the tax rates on motor fuels. In an industry where profits are
measured in pennies per gallons anyone stealing 40 to 50 cents per
gallon in federal and state taxes can destroy the honest
businessperson.
Federal and state tax agencies were not prepared to deal with this
situation. A lack of resources, a complicated federal tax law with a
myriad of taxing points and exemptions and 50 different state
jurisdictions with the same type of complicated taxing structure made
it easy for criminals to steal the excise tax.
After a network television documentary on the widespread problem in this area, Congress held hearings on the matter. The IRS was requested to increase the staffing devoted to this program. In addition, the IRS was pressured by industry and Congress to increase the use of technology in the excise tax area. The IRS was directed to investigate the possibility of creating a fuel tracking system that would monitor the movement of motor fuel through the distribution chain until the tax was paid.
To assist in the formulation and testing of an automated system, the IRS and representatives from the motor fuel industry coalition, formed a work group to assist in a study of the flow of the fuel, paper, and computer data from the refineries to fuel terminals. During the same time, IRS Excise worked as a member of the Federation of Tax Administrators Uniformity effort to ensure compatibility with the states' efforts to develop uniform standards to facilitate future sharing of electronic excise tax information.
IRS Excise developed and demonstrated to the industry workgroup in August 1995, a working proof of "concept" prototype system that IRS would use to process the motor fuel industry information when received.
With the passage of ISTEA, Congress authorized the Secretary of
Transportation to fund the development of these systems from the
Highway Trust Fund. The highway bill signed on June 10, 1998, does
provide for the funding of the development of a fuel tracking system.
Part of the funds received have gone into the development of
components of the Excise Files Information Retrieval System (ExFIRS),
an integrated system that will be needed to track the movement of
fuel and determine if the proper tax is being paid.
Excise Files Information Retrieval System (ExFIRS) is the
overall system made up of the following components:
ExSTARS (Excise Summary Terminal Activity Reporting
System):
A system that will gather and analyze motor fuel industry records to
determine where, and by which entity, federal and state motor fuel
taxes are not being remitted.
ExCIS (Excise Classification Information System):
A system that gathers information on return filings.
ExACT (Excise Automated Claims Tracking System):
A system for scanning claims as a method to improve compliance.
ExCAT (Excise Customs Activity Tracking):
A system to enhance use of imports/exports information received from
Customs.
ExFON (Excise Fuel Online Network):
A system to integrate case processing and tracking.
ExTRAS (Excise Tax Registration Authorization System):
A system to control the 637 registration program.
BTRIS (Below-the-Rack Information System):
A system that contains the fuel finger-printing library and other
information on below-the-rack activities.
ExTOLE (Excise Tax Online Exchange):
A system for exchange of state information not related to IRS tax
matters.
The priority system that must be developed is ExSTARS. This is the
core component of the overall ExFIRS strategy. The ExTOLE component
provides an information-sharing system to the states that will
enhance every state system presently in operation.
Design and Development of the ExSTARS System
The IRS recognized the need to design a system that could pull out
of the distribution system the minimum information needed, since fuel
tax administration is complicated by a series of exemptions. These
exemptions are granted to farmers, state and local governments, fuel
used for home heating and the taxing regime for aviation grade
kerosene.
The IRS formed a working group with the various stakeholders
associated with the implementation of such a system. The working
group consisted of representatives of industry and the Federation of
Tax Administrators (FTA) representing state governments. The working
group met for the first time in May 1992 and set the framework for
how such a system should work if it was to be successful. The working
group established that a system that focused on the terminal delivery
portion of the distribution system would be the most effective. The
reporting system will focus on the delivery of fuel into each of
approximately 1300 terminals nationwide.
At present, the working group is meeting on a monthly basis, with
Florida and Wisconsin piloting the prototype for the IRS, to achieve
the target date for full implementation by September 30, 2000.
The ExSTARS system will track all fuel products through terminals
and capture destination state information when the fuel is disbursed
through the terminal rack. Using a concept similar to the federal
1099 process for reporting income, ExSTARS will collect fuel
information through Electronic Data Interchange.
ExSTARS will provide the states with the following information:
( All information reported by terminals located within the state,
including receipts, inventories and disbursements.
( Disbursement information reported by terminals located outside the
state, if the state is shown as the "Destination State" on the
out-of-state terminal's disbursement report.
( Bulk carrier reports of deliveries to terminals within the state
and pick-ups from terminals within the state.
( "Entity" information (name, address, FEIN, contact persons, etc) as
reported to ExSTARS, for all companies showing a primary address in
the state, whether or not that company has activity within the
state.
The information received from ExSTARS will be subject to disclosure
restrictions unless the company has executed a consent agreement
under section 6103 (c) of the Internal Revenue Code. These consent
agreements will be included in the trading partner agreements for
each company that will be required to report information to
ExSTARS.
How states can use the ExSTARS data depends on several factors:
The ExTOLE system is a data exchange for use between states to
exclusively share state information that will improve compliance,
enforcement, and investigation efforts &endash; especially with
interstate taxpayers. No IRS taxpayer data will be included in the
ExTOLE database.
Compliance
ExTOLE enables the states to access the registration information
of all participating states quickly, easily, and inexpensively. The
states can do more thorough background checks before issuing a
registration, or use it as an added resource when attempting to
locate entities or assets. Improved compliance saves the states
organization time and money.
Enforcement
ExTOLE allows the states to quickly and easily determine where a
taxpayer operates. It also allows the states to analyze activities in
their state for evasive or questionable transactions through review
of the Truck Sightings, Diversions, and Investigations. ExTOLE also
provides a convenient means to coordinate enforcement efforts with
other states.
Investigation
ExTOLE can provide the states with immediate access to view
registration and other activity records from participating states, as
well as information on identified evasion schemes and trends.
Audit
ExTOLE information regarding tax evasion and problem licensees
in other states can assist the states in focusing on entities, which
may also be underreporting fuel taxes.
ExTOLE is being developed through a working partnership of the IRS
and the states. A stakeholder group comprised of 12 state
representatives, consultants and the IRS has met regularly to develop
an information-sharing system that will enhance every state system
presently in operation.
FTA Staff Contact
Cindy Anders-Robb, (307) 632-4144, <cindy.anders-robb@taxadmin.com>.