Tucked into the sweeping tax package the House Ways and Means Committee approved Wednesday is a $4 million tax break sought by a Wisconsin fuel distributor with friends on both sides of the aisle.
It’s the kind of legislating that on its face sounds like a corporate giveaway on the taxpayer’s dime. But the provision actually seeks to provide permanent tax relief for an unintended consequence of the nation’s complex tax code that the IRS has unilaterally corrected for four years.
And despite being included in Democrats’ partisan $3.5 trillion reconciliation package, the tax break benefiting U.S. Venture Inc. has bipartisan support from the entire Wisconsin congressional delegation.
The issue stems from the 2016 closure of the Milwaukee-Green Bay segment of the West Shore pipeline — which carries petroleum from northern Illinois to the most populated areas of Wisconsin — due to disrepair.
West Shore is the only gasoline and diesel fuel pipeline serving northeastern Wisconsin, so the segment’s closure threatened to create supply issues for that area. To avoid that, then-Wisconsin GOP Gov. Scott Walker declared an energy emergency that enabled tanker truck drivers to work overtime to transport fuel from the pipeline’s terminals in Milwaukee and Madison to Green Bay.
The West Shore Pipe Line Co. decided it was not financially advantageous to repair or replace the broken segment of the pipeline — costs would have been passed down to consumers who purchase the fuel, raising prices in the area — so the fuel has since continued to be transported to Green Bay by truck and rail.
U.S. Venture steps in
U.S. Venture, based in Appleton, Wis., stepped in once the pipeline shut down to ship fuel to the Green Bay terminal. The company also transports fuel from the Green Bay terminal to end-use consumers.
Under U.S. tax code section 4081, motor fuel is subject to tax once it leaves the terminal. But the tax only applies to clear fuel intended for on-road use. Dyed fuel, intended for off-road use like construction or agriculture, is tax-exempt.
Before the pipeline segment closed, U.S. Venture was only taxed when it removed fuel from the Green Bay terminal. Now it’s subject to a duplicative tax for removing the fuel from other terminals to transport to Green Bay.
Existing laws and regulations allow U.S. Venture to get refunds on the taxes charged for removing clear fuel from the terminals because they’re identical and clearly duplicative.
The problem occurs on dyed fuel. All the fuel U.S. Venture transports to Green Bay is clear, but it dyes some at the Green Bay terminal to disburse to consumers for off-road use. Because dyed fuel is tax-exempt, U.S. venture doesn’t qualify for a refund for the portion of clear fuel it paid taxes on in Milwaukee that it dyes in Green Bay. This tax, however, never would have occurred if the West Shore pipeline remained operational.
Wisconsin GOP Rep. Mike Gallagher, who represents the Green Bay area, wrote to the Treasury Department in February 2017 to alert them to the issue and request emergency relief.
The IRS acknowledged that U.S. Venture’s conundrum was never envisioned under current tax law, and it provided the temporary relief by granting a refund for the duplicative tax starting October 31, 2017. The relief was extended four times on an annual basis, but the IRS said in a notice on the latest extension, which expires at the end of 2021, that it would be the final one.
“The temporary administrative relief provided during the years following the permanent shutdown of the segment of the West Shore Pipeline between Milwaukee and Green Bay has provided the affected position holders time to renegotiate relevant contracts, otherwise adopt business solutions pertaining to the shipment of fuel by vessel to Green Bay or by truck or rail from the Milwaukee and Madison terminals to the Green Bay terminals, and pursue legislative solutions,” the IRS wrote.
The IRS provides temporary tax relief for a variety of unforeseen circumstances, like natural disasters. For example, on Wednesday it issued a notice providing expanded relief from penalties imposed on dyed fuel sold for highway use due to shortages of undyed fuel caused by hurricanes Ida and Nicholas. But permanent tax relief has to come from laws enacted by Congress.
Wisconsin lawmakers knew the IRS would not extend the dyed fuel tax relief to U.S. Venture in perpetuity. When Gallagher wrote to Treasury in November 2017 — this time joined by Wisconsin Rep. Glenn Grothman and Sen. Ron Johnson, both Republicans, and Democratic Sen. Tammy Baldwin — requesting the first extension he said “legislative efforts are currently underway” to provide a permanent solution.
Republicans passed a sweeping tax overhaul a month later but the provision to provide permanent relief was not included, even though much of the bill was crafted by then-Speaker Paul D. Ryan, who is from Wisconsin.
Congress does not often pass tax laws, even small tweaks, so there has been no vehicle for the legislative fix to move until now since Democrats are planning their own major tax overhaul, in part to finance trillions of dollars in spending on social programs.
Wisconsin Rep. Gwen Moore, a Milwaukee Democrat who sits on the tax-writing Ways and Means Committee, had introduced a standalone bill to provide the permanent fix in August and it was included in the reconciliation package the committee approved on Wednesday.
The provision could be removed as the legislation moves through the House and the Senate, but with bipartisan support from every member of the Wisconsin delegation it’s probably safe.
The attempt to include the provision in reconciliation comes after Johnson and Baldwin introduced it as an amendment to the Senate’s bipartisan infrastructure bill, but that did not get a vote.
Johnson said if U.S. Venture has to pay the tax for providing an alternative transportation solution when the pipeline broke down it would ultimately increase Wisconsinites’ fuel prices “for really no reason.”
“It's just a craziness of our complex system that if you transport by pipeline — which they can no longer do and they're not going to rebuild the pipeline — Wisconsin consumers get hit by another tax,” he said. “So we're just trying to take it back to what it was, irrespective of the mode of transportation.”
It wasn't immediately clear whether U.S. Venture would be the only beneficiary of the new tax break moving through Congress, though Gallagher's letters only mention that company.
U.S. Venture spokeswoman Mercedes Bereza said in a statement that the temporary waiver the IRS provided to allow for a refund of the extra tax charged on fuel transported from the Milwaukee and Madison terminals to Green Bay has prevented Wisconsin consumers from having to pay for the pipeline disruption.
"The provision approved by the House Ways and Means Committee would eliminate the need for the IRS to issue temporary waivers to any fuel supplier in America and continue to ensure that this tax is not imposed Wisconsin consumers," she said.
The Joint Committee on Taxation estimates the provision, appearing on page 732 of the 881-page tax subtitle, would cost less than $500,000 a year for the next decade, ultimately adding up to $4 million.
It wouldn't be the first time U.S. Venture needed some help from the IRS and Congress. On another recent occasion, they were out of luck, however.
The Wisconsin firm was one of several that sought alternative fuel tax credit refunds for mixing gasoline with butane, a routine process that helps reduce emissions and helps engines run smoother in cold weather.
The IRS disagreed that butane mixtures qualified for the credit, and Congress ultimately took away that option in December 2019. U.S. Venture sued for $33 million in prior claims, which so far have been unsuccessful.
Peter Cohn contributed to this report.