Sales Tax Retention on Off-Road Fuel Will Trigger Pandemonium in Michigan's Fuel Distribution Network

Part I

Let’s walk through the numbers and consequences of the most disastrous aspect of Proposal 2015-01: the retention of the sales tax on fuels used almost everywhere but on the roads. Most disastrous because this will be enshrined in our Constitution if Proposal 2015-01 passes. No act of our Legislature or sleight of hand by our Governor can correct the Michigan Constitution if Proposal 2015-01 passes. They can only decide to impose astronomical costs on the petroleum distribution network, create a lot of new criminals, spawn a black market in fuels, forego sales tax revenues, or some combination thereof. The Michigan Constitution gets its first intractable dilemma.

HCJR UU contains the actual language amending the Michigan Constitution. Sales and use tax rates go from 6% to 7%, and the sales tax is no longer permitted on “gasoline or diesel fuel used to operate a motor vehicle on the public roads or highways of this state”. So the plain language of HCJR UU authorizes continued sales tax collection on all gasoline and diesel oil which is not used to operate a motor vehicle on the public roads or highways of this state, at the new 7% rate.

This 7% ‘ORV’ fuel sales tax will be over and above the motor vehicle fuel tax, which continues to be applied to recreational off-road vehicle and marine fuels as a ‘privilege tax’ under PA 451 of 1994. To make things even more confusing for fuel suppliers and consumers, there will be a third category of fuel subject to the sales tax, but not the motor vehicle or privilege tax: fuel used industrially, for construction, for farming, for lawn care, generators, and other miscellaneous purposes.

Less noticed, the 7% sales tax is also authorized on fuels other than gasoline and diesel oil used to operate vehicles on the public roads or highways of this state. This is quite a surprise since PA 468 of 2014, the motor vehicles fuels tax law of the road tax package, goes to great lengths to bring alternate transportation fuels such as liquid or compressed natural gas and lighter alternative petroleum products (LPG, propane, etc.) into the general road fuels tax regimen. This is significant; the U.S. Energy Information Agency estimates that these alternate transportation fuels currently account for about 6% of ground vehicle propulsion on the public roads in 2009 and their usage is increasing sharply. The sales tax liability on these ‘green fuels’ will put them at a serious economic disadvantage to gasoline and diesel fuel. But this did not deter the Sierra Club and their fellow environmental wackos from endorsing Proposal 2015-01. David Holtz and the Michigan Sierra Club board would appear to have a ‘Common Core’ reading comprehension level.

Now let’s take a look at the costs and consequences of the peculiar status of off-road fuels under Proposal 2015-01. Aviation and railroad fuels have their own unique distribution systems, so sales tax can continue to be collected on them without much difficulty. Marine fuels are purchased from marinas in the case of larger boats, but smaller recreational craft owners often purchase their fuel from road vehicle gas stations as they trailer their boats to launches. Then you have land based ORVs, snowmobiles, generators, lawnmowers, snowblowers, and other users of gasoline and diesel fuel which are not motor vehicles operated on the public roads or highways. With very few exceptions, their fuel all comes from the road vehicle fuel distribution system.

Public Act 167 of 1933, as amended (MCL 205.51 et seq.) is Michigan’s sales tax law. It currently requires retailers to pay 6% of their sales to the Michigan Treasury, subject to exemptions. Fuel is not exempted today, except for sales to government units and nonprofits. If Proposal 2015-01 passes, retailers will be required to pay 7% of their sales to the Michigan Treasury, with the notable new exception of gasoline and diesel fuel (MCL 205.54 dd[1].added) “used to operate a motor vehicle on the public roads or highways of this state”. It does not exempt any other fuel from the 7% sales tax.

How big is the off road fuel market in Michigan? Oak Ridge National Laboratory estimated off-road fuel usage on land to be about 11% of fuels sold through the transportation fuels distribution system in 2001, the latest year for which data are available. About 3.75% of transportation fuel distributed is actually gasoline that goes to off-road land vehicles and other non vehicular usage. The balance of the 11%, 7.25%, is dyed diesel fuel and other types of fuels used in mostly agricultural, construction, and industrial applications. The U.S. Census says that Michigan’s population today has just about recovered to its level in 2001, and Michigan DTMB just announced that Michigan’s unemployment rate in February 2015 is down to the levels of October 2001. So the ORNL off-road fuel numbers for 2001 are probably pretty close to today’s numbers.

The U.S. Energy Information Administration says that Michigan consumed 4.6 billion gallons of gasoline through its transportation fuels distribution system in 2013. The 3.75% land-based off-road vehicle gasoline share is 172 million gallons. Applying a 7% sales tax to the current $ 2.40 per gallon price for this gasoline indicates that Michigan Treasury revenue would be $ 28.9 million, were it to be collected, after Proposal 2015-01 comes into effect.

The most recent data on recreational boating fuel usage in Michigan is found in the 1994 Michigan Boat Survey, which was conducted to provide data for PA 451 of 1994. At that time, the Michigan recreational boat fleet was about 770,000 craft, with each used about 24 days a year on average. The 2012 U.S. Coast Guard National Recreational Boating Survey (warning: 12 MB file) finds that Michigan’s recreational boat fleet has increased to 1,182,000 craft, but average usage has fallen to 12.5 days per boat, per year. So marine fuel consumption in the crappy 2012 economy should have been about 80% of the fuel consumption in the much stronger 1994 economy.

Now some boating fuel is purchased at marinas where it is easy to collect the sales tax, but the remainder comes from gas stations catering to road vehicles. The 1994 Michigan Boat Survey finds boats not kept at marinas purchased 25.6 million gallons of fuel during the survey year. Using the 2012 USCG NRBS multiplier of 80%, we can attribute 20.5 million gallons of marine fuel to gas stations catering to road vehicles. At the 7% sales tax rate and the same $ 2.40 gallon price used for land ORV fuels, the Michigan Treasury sales tax collection would be $ 3.44 million, were it to actually be collected after Proposal 2015-01 comes into effect. Actual numbers are almost certainly higher due to the large number of tourists coming to Michigan from other states, trailering in their boats. Thus the $ 3.44 million number is really a rock bottom estimate.

The land and marine off-road vehicle fuel sales tax liability of fuels now being purchased from the road vehicle fuel distribution system will remain something above $ 32.3 million if Proposal 2015-01 passes. But if ORV fuels continue to be purchased through today’s road vehicle distribution network, this revenue stream will go to zero when the sales tax is removed from road vehicle fuel.

In Part II we will demonstrate why this ‘glitch’, as some have called it, is not amenable to any simple Legislative or Executive correction.

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