Internal Revenue Service Regulation of Dyed-Diesel Use in Public School Buses

Earlier this month the PMCI office received several phone calls from PMCI members and state school district officials inquiring about a change in IRS policy regarding the use of dyed-diesel fuel in school buses.  The calls came in because of an IRS field agent questioning whether dyed-diesel fuel used in a school bus for the transportation of students met the requirement that dyed-diesel fuel be used for off-highway use.

As described in Internal Revenue Service regulation 26 CFR Part 48.4082.4(c) off-road use is not the sole determining factor when considering the use of dyed-diesel fuel.  48.4082.4(c) reads as follows:

(c) Exemptions. The taxes imposed under paragraphs (a) and (b) of this section do not apply to a delivery of any liquid for-

1. Use on a farm for farming purposes as that term and related terms are defined in §48.6420-4 (a) through (g);

2. The exclusive use of a State;

3. Use described in section 4041(h) (relating to use in a vehicle owned by an aircraft museum);

4. Use in a bus while the bus is engaged in the transportation of students and employees of schools (as defined in the last sentence of section 4221(d)(7)(c)).

Based in part on the exemption from taxation for use in a bus while the bus is engaged in the transportation of students and employees of schools, the IRS has stated verbally that no enforcement action will be taken against school districts using dyed-diesel fuel in their buses under the exemption listed above.