B&O Tax Pyramiding on Petroleum Products

In 2008, The Washington Oil Marketers Association (WOMA) commissioned a study to be done on the affects B&O tax pyramiding has on the price of fuel.  The results were interesting, and much like we expected.  We would like to share that report with you in hopes it provides a better understanding on the forbidding factors B&O tax plays on fuel distribution in the state of Washington.  WOMA is working with the State Legislature to reform the model used to tax petroleum products in an effort to break down competitive barriers and stabilize market prices in a time of volatility.
The following report was published by the Washington Research Council in 2008.
This report examines the Business and Occupation (B&O) taxes charged during the petroleum distribution process and presents a modified B&O tax structure that is revenue neutral.

In 2008, over 3.4 billion gallons of motor fuel were distributed and sold in Washington state. There are several methods of distributing fuel, as outlined in this report, but the current tax system is structured in a way that favors a vertically-integrated distribution system over one that has multiple tiers. The B&O tax is collected at every level of the distribution process, unless a single entity maintains control of the product. In comparing different tax scenarios, vertically-integrated companies were found to have significant competitive advantages over a distribution process that used several independent businesses. A scenario following
the distribution of one million gallons of fuel found that the tax required of a vertically-integrated business was approximately $14,000 while a multi-business scenario had a tax obligation of nearly $56,000. The reasons include: multiple levels of taxation, tax inequity among competitors, unnecessary layers of regulatory compliance and tax collections, and the creation of a barrier for entry of new fuel storage capacity.

A modified B&O tax on petroleum is outlined in the report in which the tax would only be charged once at the beginning of the distribution process. To maintain a revenue neutral modification, the rate would be set at 1.54 percent and charged at the “terminal rack”—the same location the gas tax is currently collected. It would be paid by the party that sells the refined product over the “terminal rack” and the costs of the tax would trickle down through the distribution system in an equitable manner. The benefits of a B&O tax being collected just once at a single point in the process are: tax efficiency, preservation of state revenue, the creation a level playing field and the potential for minimized gas price spikes in the future.

This report examines the Business and Occupation (B&O) taxes charged during the petroleum distribution process and presents a modified B&O tax structure that is revenue neutral.In 2008, over 3.4 billion gallons of motor fuel were distributed and sold in Washington state. There are several methods of distributing fuel, as outlined in this report, but the current tax system is structured in a way that favors a vertically-integrated distribution system over one that has multiple tiers. The B&O tax is collected at every level of the distribution process, unless a single entity maintains control of the product. In comparing different tax scenarios, vertically-integrated companies were found to have significant competitive advantages over a distribution process that used several independent businesses. A scenario following the distribution of one million gallons of fuel found that the tax required of a vertically-integrated business was approximately $14,000 while a multi-business scenario had a tax obligation of nearly $56,000. The reasons include: multiple levels of taxation, tax inequity among competitors, unnecessary layers of regulatory compliance and tax collections, and the creation of a barrier for entry of new fuel storage capacity.A modified B&O tax on petroleum is outlined in the report in which the tax would only be charged once at the beginning of the distribution process. To maintain a revenue neutral modification, the rate would be set at 1.54 percent and charged at the “terminal rack”—the same location the gas tax is currently collected. It would be paid by the party that sells the refined product over the “terminal rack” and the costs of the tax would trickle down through the distribution system in an equitable manner. The benefits of a B&O tax being collected just once at a single point in the process are: tax efficiency, preservation of state revenue, the creation a level playing field and the potential for minimized gas price spikes in the future.

Click here to read the entire study.

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