On the Road to Your Tax Refund

Is truck tax uniformity too much to expect? It seems so to many fleet operators traversing an elaborate maze to get across state lines.

By Debra R. Levin

Debra R. Levin is director of environment, trade and transportation and assistant counsel for the Institute of Scrap Recycling Industries, Washington, D.C.

To understand how great the need is for administrative uniformity, one must appreciate the elaborate maze run by companies operating trucks that cross state lines. Contrast the situation for an automobile owner and a truck fleet operator. The car owner files a vehicle registration form and sends a single check to the motor vehicle department of one state. A license plate goes on the car and the motorist carries a proof of registration. The driver pays any fuel and sales tax at the gas pump. For these and other fees, if any, the owner need not file any forms or proofs of payment. The driver can operate the vehicle in all 50 states without doing anything more.

A truck owner exists in a totally different environment. The vehicle must be registered in each state in which it will be operated. However, about one-third of the states grant full registration fee reciprocity through interstate agreements. If operating between states without a reciprocity arrangement, the motor carrier must file a form and make a payment to both states.

The next difference is the fuel-use tax. Because the capacity of many truck fuel tanks allows such vehicles to cross states without stopping to buy fuel and because states want to tax all fuel actually used on the state's highways, operators must report on fuel use. Reporting lets the state reconcile the tax already paid on fuel purchases with the fuel used in a state.

Thus far, for-hire truckers have been assessed a tax on filing their operating authority granted by the state public utility or public service commission, the state version of the Interstate Commerce Commission. Since private carriers historically have not needed to obtain operating authority from the agency regulating compensated carrier entry and rates, they have not been assessed this fee. However, a disturbing new trend is developing, one that would require even private carriers to get this authority and pay a filing fee. Indiana, Missouri, Texas, and Louisiana have added this requirement to the burden private truckers bear.

Any additional taxes that are not based on registration or fuel are called "third structure" or "third tier" taxes. They are a most unwelcome feature of the trucker's distinctive niche. Nearly a dozen states impose a weight-distance tax, a ton-mile tax, or an axle-mile tax--some type of levy based on mileage. Other jurisdictions assess a gross receipt tax, axle taxes, or retaliatory taxes. A retaliatory tax is what its name suggests: When one state levies taxes against carriers based in a second state, the second state retaliates by creating a tax applicable to carriers from the first state.

A trucker envies the motorist for his taxpaying ease. Although to a great extent, the administrative burden of the pure registration tax 'has been lightened by a reciprocity agreement known as the International Registration Plan or IRP, the fuel-use tax system remains complex. Only two regional agreements have been established for fuel taxes and only six states are included. Though many states use the same reporting form, the quarterly exercise of filing is time-consuming, and carriers are involved with that many more government agencies.

The fuel-use tax situation is encumbered further with differing requirements for proof of registration or "indicia." Some states expect a state sticker on a door or windshield, and others expect a cab card inside the vehicle. A background paper of the National Governors' Association (NGA) illustrates the labyrinthine requirements:

23 require an external decal;

32 require a cab card;

44 of the fuel-use tax states mandate either of the two proofs, while 11 require both; and

28 collect a fee for the decal or cab card.

The basic unit of taxation is not uniform. For some states the fee does not vary with the number of trucks operated. Some jurisdictions sell bulk stickers that let the operator attach any decal to any power unit; others insist on a specific decal for a specific vehicle. In some states, a payment registers the vehicle permanently, and elsewhere, the fuel-use registration is renewed every two years. Decal fees range from $1 to $50. The state of Maryland raises $11 million from the $25 fuel-use indicia fee and only $5 million from the fuel tax. In 17 states, the fleet operator cannot exit the maze without posting a bond to guarantee payment of the fuel tax liability.

Attempts at Uniformity

So, who thinks there is need for uniformity in administering truck tax programs? For one, the U.S. Congress. After unsuccessfully trying to take from the states the power to raise the revenues needed to maintain the highway system, the Congress settled on a study of the problem. Section 19 of the Motor Carrier Act of 1980 directed the Department of Transportation (DOT) along with the Interstate Commerce Commission to examine the plight of the interstate carrier. Not surprisingly, the study found that licensing, registration, and reporting procedures lacked uniformity and were burdensome.

Under a recurring threat of federal preemption, the states developed an interest in uniformity as a way to preserve their control over taxation and disbursement. In 1984, the National Governors' Association adopted a policy resolution on state taxation and regulation of the interstate carriers. This position was the catalyst for a voluntary effort among the states to achieve uniformity. Under the leadership of NGA and with DOT financial assistance, a Working Group on State Motor Carrier Procedures was created. Largely because of the states' willingness to take a serious look and the interstate carriers' cooperation, the pressure for federal preemption is gone for now.

The NGA Working Group's consensus agenda includes eight points:

Establish state motor carrier advisory committees.

Join the international registration plan.

Adopt the uniform fuel-use tax reporting form.

Follow the six-point plan for fuel-use reporting.

Join the base state agreement for fuel-use tax reporting.

Develop increased uniformity in mileage-based tax procedures.

Eliminate retaliatory taxes.

Simplify state procedures.

Both the strength and the potential weakness of this approach is its noncoercive nature. Each state must act for itself to produce a harmonious interstate trucking regulatory system.

Equal Treatment Sacrificed

Another concern with this approach is the unfairness of the whole experiment, the unequal treatment. Discriminatory taxes include flat taxes imposed on interstate trucks and retaliatory taxes.

Since 1981, these levies have been under intense legal attack on constitutional grounds. Two associations, the Private Truck Council of America (PTCA) and the American Trucking Association (ATA), have scored in virtually every contest they have entered, with victory meaning at least a determination of unconstitutionality, and at most an order directing refunds.

The case that has received the most national publicity involved flat taxes. In June 1987, the U.S. Supreme Court declared Pennsylvania's $36-per-axle tax and $25 annual decal fee to be unconstitutional. The tax applied to all 26,000+ pound vehicles operated over 2000 miles annually in Pennsylvania, whether registered in Pennsylvania or out-of-state. The Supreme Court of Pennsylvania upheld the tax on the theory that the U.S. Constitution only prohibits state taxes that discriminate against interstate commerce or out-of-state companies. However, the U.S. Supreme Court found that the tax was not neutral in its effect; discrimination does, in fact, result.

The U.S. Supreme Court noted that when Pennsylvania enacted the axle tax in April 1983, it reduced registration fees for Pennsylvania-registered vehicles with the effect of shifting the real burden to out-of-state trucks. And because the amount of the tax did not vary with road use and out-of-state trucks travel fewer miles in the state than Pennsylvania vehicles, out-of-state trucks paid more per mile. The U.S. Supreme Court thus held the tax unconstitutional because it imposed a higher cost-per-mile on out-of-state trucking operations.

A number of thought-provoking issues remain in the aftermath of this favorable ruling. Separate litigation is ongoing on the question of refunds. (Tax collections have ended, and the state is making an effort to recover lost revenue by raising the fuel tax by six cents and increasing truck registration fees.) There is the question of the difference between an administrative fee and a flat tax. A $3 fee for a fuel decal would appear to cover administrative costs. But a $50 fee for the decal looks more like a revenue measure of the flat tax type.

The pyrrhic victory syndrome may be the ultimate result: have interstate truckers won the battle but lost the war? Is what legislatures are doing to replace lost revenues as bad as or worse than the invalidated tax? Legislators, highway officials, motorists, and the rail industry all believe trucks are not yet paying their fair share of highway user fees to compensate for pavement damage allegedly attributable to heavy vehicles.

In the short term, the principal benefit of the Pennsylvania case may be the elimination of similar taxes in other states and the placing of revenues in escrow accounts as pending legal challenges are resolved. For example, the nation's highest court returned a challenge to Arkansas's highway use equalization (HUE) fee to that state's supreme court for reconsideration in the light of its Pennsylvania decision.

The Arkansas HUE assessment was $175 per vehicle or $0.05 per mile. On the U.S. Supreme Court's remand, the Arkansas court felled the HUE. Under a separate order mandating the creation of an escrow fund, collections were segregated for possible refund. In a special legislative session, Arkansas subsequently passed a weight-distance tax of $0.025 per mile on vehicles weighing more than 73,280 pounds to replace the estimated $25-30 million raised by the unconstitutional levy. There is reason to believe that the replacement tax, too, is subject to constitutional challenge because it exempts certain unprocessed natural resources. The issue of refunds is not yet settled.

Indiana truck taxes have been the target of successful challenges. In the first case, interstate trucking interests attacked the "Indefinite Situs Tax," an ad valorem property tax assessed only against interstate carriers. The state's supreme court invalidated that tax in August 1984. The result was a refund of over $19 million to 24,000 taxpayers. The second Indiana tax to be challenged was its $50-per-truck Supplemental Highway User Tax. Those funds are currently being placed in a court-ordered escrow account pending the outcome of the case. On January 7, 1988, the first court to hear the case, and likely not the last, ruled against the state.

A flat tax costing truckers an estimated $70 million annually was overturned by ATA’s suit in Kentucky. An October 6, 1987 decision agreed with ATA and enjoined further collection of the unconstitutional assessment from out-of-staters. Refunds will be handled as a separate matter. None, however, will be made while the case is pending. Carriers were paying between $150 and $200 per vehicle depending on Kentucky mileage.

This past autumn, flat taxes fell like leaves. Vermont officials stopped collecting their $50 decal tax as a direct result of the Pennsylvania decision. Also, the Vermont Superior Court issued a permanent injunction proscribing further collection of the tax. As much as $7 million is being held in escrow; ATA is seeking the return of monies to taxpayers. A state circuit court in Maryland labeled the Free State's $25-per-truck decal fee unconstitutional but, strangely, allowed the state to continue collections through June 30, 1988. ATA is appealing the decision but was unsuccessful in seeking an order preventing the further collections. Although the effort to obtain Maryland refunds is unresolved, the state does have a statute that requires refunds if ATA’s appeal succeeds.

Retaliatory Tax and Refunds

The situation in New Jersey has stirred controversy because, while there is no doubt that the state's $25-per-truck decal fee fails to meet the criteria of constitutionality, its officials have vacillated on rebating fees. On August 19, New Jersey officials reportedly agreed to stop collecting the retaliatory fee and stated publicly that taxpayers would recover fees collected after June 23, the day the U.S. Supreme Court condemned Pennsylvania's tax. ATA is planning to file suit over the state's refusal to return the pre-June 23 impost. No procedure has been announced for reclaiming payments made between June 23 and August 19.

The states are faring badly in defense of retaliatory taxes. For example, the New Jersey tax is a mirror image retaliatory tax adopted in 1969 and imposed on trucks operating in those other states, numbering 18, which impose some form of third-tier taxes on New-Jersey-registered vehicles operating in those states. The tax is worth $4-5 million a year to New Jersey. On March 31, 1987, the state court's appellate division struck down the tax and ordered refunds for collections since December 1984, when the original suit was filed. According to PTCA, post-suit refunds amount to $10 million. The state is attacking the appellate division's refund order and PTCA is pursuing relief on pre-suit collections via a cross appeal.

The basic issue in the New Jersey retaliatory tax case is identical to those raised in a series of cases filed simultaneously with the Jersey suit in December 1984 by PTCA. These legal actions affect similar taxes in Maine, New Hampshire, Georgia, Florida, Oklahoma, and Nebraska.

The Maine tax was invalidated in January 1986. According to PTCA, the court awarded refunds, and the state returned escrowed taxes amounting to over $360,000. These refunds, however, were limited to taxes collected after the suit was filed. The Supreme Court of Maine refused to issue a refund order covering pre-suit collections, relying on the common law doctrine that, absent a state statute allowing refunds, a person is not entitled to the return of taxes "voluntarily" paid. (Only those paid under duress or compulsion are refundable.)

The retaliatory tax in New Hampshire was declared unconstitutional in August 1986. That court, too, awarded escrowed taxes of approximately $150,000 to taxpayers who now have been paid. Again, the awarded refunds were limited to post-suit payments because New Hampshire lacked the necessary statute covering tax refunds.

Litigation against Georgia is still pending, though a state trial court in July of 1987 did invalidate the tax and award refunds of taxes paid after January 4, 1985. The state is appealing. For taxes paid between December 14, 1981 and January 4, 1985, individual claims for refund may be required. However, no claims for refund will be honored and no collections from carriers will be made pending the appeal. Monies collected after the January date and held in an interest-bearing escrow account are estimated to exceed $5 million.

Florida litigation affects $3 million placed in escrow. On September 1, 1987, the Second Judicial Circuit Court of Leon County found Florida's retaliatory motor carrier fee to be unconstitutional. The judge ordered refunds of all such taxes collected since March 21, 1985. But the tax had been in effect since 1981 as an "equalization" fee on vehicles from 21 states imposing third-tier taxes; the type of equalization fee reflects the tax imposed by the other state. Individual claims for payments between 1981 and March 1985 will be necessary if the appellate court confirms the lower court's ruling. PTCA will ask the Florida Department of Revenue to send a letter and refund form to all taxpayers of record prior to March 21, 1985 to simplify the refund process.

Prior to the decision of the appellate division in New Jersey, the Oklahoma County Court upheld Oklahoma's levy. The judge ruled on February 6, 1987 that Oklahoma's retaliatory tax is not unconstitutional, as had the lower court in New Jersey. PTCA is appealing the ruling and is optimistic: a clear line of case law is emerging.

Nebraska is the seventh state pursued in PTCA’s litigation program focused on retaliatory taxes. In October 1987, a Nebraska court ended another unconstitutional tax and required refunds to out-of-state carriers. The state is awaiting the outcome on a PTCA motion before deciding whether to appeal the order. Although the carrier organization was victorious, PTCA has requested a new trial or else clarification of how to make refunds under the court's order. Also, PTCA will request the Nebraska Department of Administrative Services to notify taxpayers and distribute a refund form.

The Birth of MCACs

Interstate truckers' greatest fear is the expanding size of the tax bite. At the state level, the motorists' and railroad lobbies have taken on a less organized trucking industry. But that is changing. The NGA has spurred creation of the so-called Motor Carrier Advisory Committee (MCAC) in the states. A state MCAC consists of state government and motor carrier representatives. NGA’s Working Group on State Motor Carrier Procedures notes, "It's important to include representatives from each state agency that administers programs associated with the motor carrier industry. It's equally important to include representatives from all sectors of the motor carrier industry."

About 30 states have established MCACs thus far. According to PTCA, "In some states a formal nomination is required to participate in committee meetings, in other states the meetings are open to all interested parties. In all states, whether or not there is a committee established, there is a state liaison who is supposed to respond to industry concerns and advise the governor on issues affecting motor carriers."

Is truck tax uniformity too much to expect? It seems so to many fleet operators traversing an elaborate maze to get across state lines.