Chairman ARCHER. Thank you, Mr. Metz.

I have only a couple of minutes to go vote. Hopefully, there will be another Member of the Committee who will arrive shortly who will share the continuation of the hearing for this panel.

I would ask you if you would keep your seats, and we will recommence just as soon as we can.

Thank you.

[Recess.]

Ms. DUNN [presiding]. The Committee will reconvene.

Mr. Huber, I apologize for our break for votes, but please do continue with your testimony.

STATEMENT OF JOHN HUBER, PETROLEUM MARKETERS ASSOCIATION OF AMERICA

Mr. HUBER. Thank you.

On behalf of the PMAA, Petroleum Marketers Association of America, I would like to express our support to this Committee in its examination of many tax issues affecting small businessmen and petroleum marketers.

PMAA has two primary concerns with the present tax system. The first involves the excise tax collection system for motor fuels. The second involves the efforts of the Internal Revenue Service to restrict access to depreciation schedules for marketers.

First, we would like to congratulate and express our thanks to Congressmen McCrery, Jacobs, Herger, and English for their efforts to resolve many of the outstanding issues relating to motor fuel excise taxes.

As you know, in 1993, the collection point for diesel tax collection was changed in an effort to reduce evasion and increase revenues. Unfortunately, these changes have had a direct and substantial impact on the marketers that PMAA represents.

We believe that these impacts were not anticipated by the Congress and that it is appropriate to reexamine the tax collection system to mitigate the impact of these changes on petroleum marketers. We believe the modest changes that are included in H.R. 1947 can improve the tax collection system without compromising the

tax.

PMAA's primary concern with the tax is its impact on marketers selling gasoline to State and local governments. These entities are entitled to purchase gasoline tax free. Unfortunately, marketers selling to them purchase the gasoline tax paid and sell it to them tax free and then apply for a refund of taxes from the IRS. These refunds take from 45 days to 4 months to process. The result is that marketers are floating interest-free loans to the government for a substantial period of time. H.R. 1947 would mandate that the IRS pay claims within 20 days or pay interest on the claim.

Additionally, H.R. 1947 would improve the refund situation for many classes of diesel users who must apply for their own refunds, including construction companies, loggers, and all the other miscellaneous users.

Intercity buses have also had a difficult time with refunds over the past year. H.R. 1947 would provide them with a method to buy diesel at the legal rate and eliminate their need to file claims with the IRS.

This bill would also improve the tax collection system for sales of diesel to noncommercial vessels. Under current law, these vessels must only buy undyed diesel fuel which is not available at many marinas.

PMAA would also encourage the Committee to consider two other areas of the excise tax collection system which need to be remedied. We would like to direct the attention of the Committee to the expiration of 26 U.S. Code 6427(f) which allows marketers to file claims for refunds on gasoline which is blended with ethanol. We would encourage the Committee to take action to ensure that this provision does not expire October 1.

We would also like to direct the Committee's attention to a conflict between IRS regulations and how the industry does business. At this time, both gasoline and diesel are taxed upon removal from the terminal. The IRS has instituted a policy that the person owning the fuel immediately prior to its removal from the tank is a taxpayer and must remit the tax.

Under current regulations, the following transactions cannot occur. A marketer may not sell diesel tax free to a State and local government with an oil company credit card. A marketer who is licensed as an ethanol blender cannot buy gasoline at a tax-reduced rate at an exchange terminal. We believe that the position holder concept rule adopted by the IRS could be greatly improved by providing necessary flexibility.

PMAA would now like to draw your attention to an issue regarding depreciation of facilities used to market petroleum products. Under the modified accelerated cost recovery system, petroleum marketing facilities are entitled to depreciate the real property over 15 years. This schedule is reflective of actual practice in the industry and the typical useful life of a gasoline station.

However, the IRS has issued audit guidelines which indicate that if over 50 percent of the floor space of a gasoline convenience store sells nonautomotive items, then the building must be depreciated over 39 years. Such a policy has been established even though the majority of revenues from these buildings comes from gasoline or diesel sales and even though the appearance of the building and property clearly indicates that it is a service station. This policy will be particularly hard on small business petroleum marketers. Again, we thank the Chairwoman and the Members of this Committee for their concern and interest in resolving many outstanding issues. We will gladly respond to any questions that you may have. [The prepared statement follows:]

TESTIMONY OF JOHN HUBER

PETROLEUM MARKETERS ASSOCIATION OF AMERICA

On behalf of the Petroleum Marketers Association of America, I would like to express our support to this committee and its examination of many tax issues affecting small businessmen and petroleum marketers. PMAA is a federation of 41 state and regional trade associations representing more than 10,000 independent petroleum marketers throughout the United States. These marketers sell in excess of 40 percent of the gasoline, 75 percent of the home heating oil and 60 percent of the diesel fuel consumed in this country. Eighty-nine percent of PMAA's membership is classified as small business under size categories established by the Small Business Administration.

The

The

PMAA has two primary concerns with the present tax system. first involves the excise tax collection system for motor fuels. second involves the efforts of the Internal Revenue Service to restrict access to depreciation schedules for marketers that are more attractive and more reflective of actual business practices.

First, we would like to congratulate and express our thanks to Congressmen McCrery, Jacobs and Herger for their efforts to resolve many of the outstanding issues relating to motor fuel excise taxes. As you know, in 1993 the collection point for diesel tax collection was changed in an effort to reduce evasion and increase revenues. Unfortunately, these changes have had a direct and substantial impact on the marketers that PMAA represents. We believe that these impacts were not anticipated by the Congress and that it is appropriate to reexamine the tax collection system to mitigate the impact of these changes on petroleum marketers. We believe the modest changes that are included in H.R. 1947 can improve the tax collection system without compromising the tax.

PMAA's first and primary concern with the tax is its impact on marketers who are selling gasoline to state and local governments and non-profit educational organizations. These entities are entitled to purchase gasoline tax free. Unfortunately, marketers selling to them must purchase the gasoline tax paid and then sell it to them tax free and apply for a refund of taxes from the Internal Revenue Service. These refunds may take from 45 days to four months to process. The result is that marketers are floating interest free loans to the government for a substantial period of time. H. R. 1947 would mandate that the IRS pay claims within 20 days or pay interest on the claim. This would encourage the IRS to pay the claims more quickly, and have no impact on taxes collected.

Additionally, H.R. 1947 would improve the refund situation for the many classes of diesel users who must apply for their own refunds. Construction companies must often buy diesel tax paid, even though they use it in a tax free manner. Under current law they can only apply quarterly for these refunds, and the Service is under no obligation to process their claims rapidly. H.R. 1947 would ensure that these small businesses recover their excess tax payments quickly. Intercity buses have also had a difficult time with refunds over the past year. H.R. 1947 would provide them with a method to buy diesel at the legal rate, and eliminate their need to file claims with the IRS.

This bill would also improve the tax collection system for sales of diesel to non-commercial vessels. Under current law, these vessels must only buy undyed diesel fuel, which is not available at many marinas. This provision would allow marinas to sell to all classes of diesel powered boats without having to install a second diesel pump.

PMAA would also like to direct the committee's attention to two other areas of the excise tax collection system which need to be remedied. First, we would like to direct the attention of the committee to the expiration of 26 U.S.C. 6427 (f), which allows marketers to file claims for refund on gasoline which is blended with ethanol. We would encourage the committee to take action to ensure that this provision does not expire.

We would also like to direct the committee's attention to a conflict between IRS regulations and how the industry does business. At this time, both gasoline and diesel are taxed upon removal from the terminal. The IRS has instituted a policy that the person owning the fuel immediately prior to its removal from the tank is the taxpayer and must remit the tax. Unfortunately, this policy makes it impossible for many transactions to occur efficiently. Under current regulations, the following transactions cannot occur. A marketer may not sell diesel tax free to a state and local government with an oil company credit card. A marketer who is licensed as an ethanol blender cannot buy gasoline at a tax reduced rate at an exchange terminal. We believe that the position holder concept rule adopted by the Service could be greatly improved by providing flexibility and utilizing the tracking systems already in place in the private sector.

PMAA would now like to direct the attention of the committee to an issue regarding depreciation of facilities used to market petroleum products. Under the Modified Accelerated Cost Recovery System (MACRS), petroleum marketing facilities are entitled to depreciate the real property over fifteen years. This schedule is reflective of actual practice in the industry and the typical useful life of gasoline stations. However, the IRS has issued audit guidelines which indicate that if over fifty percent of the floor space of a gasoline/convenience store sells non-automotive items then the building must be depreciated over 39 years. Such a policy has been established even though the majority of revenues from these buildings comes from gasoline or diesel sales, and even though the appearance of the building and property clearly indicates that it is a service station. This policy will be particularly hard on small business and petroleum marketers. We would encourage the Committee to examine this issue and encourage the Service to develop guidelines which are more appropriate to the gasoline retail industry.

Again, we thank the Chairman and the members of this committee for their concern and interest in resolving many outstanding issues. We will gladly respond to any questions that you may have.

Ms. DUNN. Thank you very much, Mr. Huber.

Does anyone on the Ways and Means Committee wish to question the witnesses?

Apparently there are no questions. You did such a great job. We thank you all for coming and for your testimony.

Mr. Harper.

Mr. HARPER. Yes, may I make a statement?

Ms. DUNN. Oh, I am sorry. You haven't testified. I am very sorry, Mr. Harper. Of course, we would love to hear what you have to say. STATEMENT OF EDWIN L. HARPER, PRESIDENT AND CHIEF EXECUTIVE OFFICER, ASSOCIATION OF AMERICAN RAILROADS

Mr. HARPER. Thank you very much, Madam Chairman.

I know it is kind of confusing taking the hand-off. Madam Chairman, Members of the Committee, I am Edwin L. Harper, president and chief executive officer of the Association of American Railroads. I appreciate this opportunity to address a threatened tax inequity against the Nation's freight railroads.

Unless the Congress acts before October 1, 1995, the railroads will be singled out as the only transportation mode paying 1.25 cents per gallon deficit reduction fuel tax. It simply is discriminatory to require the railroads to pay 1.25 cents more per gallon toward deficit reduction than their major competitors.

To avoid putting the railroads at a competitive disadvantage, the Association of American Railroads respectfully urges that all modes of transportation contribute equally to deficit reduction. This can be done fairly and with no revenue impact.

Prior to 1990, the sole purpose of the transportation fuels tax was to finance the Highway Trust Fund. Therefore, railroads, like other-nonhighway users, did not pay this tax. The 1990 Reconciliation Act extended the fuel tax beyond its historical role as the highway user fee by introducing a 2.5-cent-per-gallon deficit reduction tax on transportation fuels.

The original 2.5-cent tax was payable by most transportation modes into the General Fund of the Treasury. The 1993 Reconciliation Act imposed an additional 4.3-cent-per-gallon deficit reduction rate on all surface transportation modes. At present, and until October 1, 1995, both railroads and trucks pay a combined deficit reduction rate of 6.8 cents; that is the 4.3- plus 2.5-cent-per-gallon deficit reduction rate of transportation fuel.

Under the 1993 Reconciliation Act, the 2.5 cents paid by highway users will be redirected into the Highway Trust Fund instead of being dedicated to deficit reduction. Thus, on October 1, 1995, the railroads will be left as the only payers of the original deficit reduction tax at a rate of 1.25 cents per gallon. Highway users will pay only 4.3 cents per gallon into the Treasury's General Fund, while railroads will pay 5.55; that is, the 4.3 plus the 1.25 cents per gallon for deficit reduction.

Unless the deficit reduction rate levied on the railroads is reduced to the level of its competitors, the railroad industry will be subjected to tax discrimination, as we have shown in a chart in the record that we have submitted. Currently, the railroads and the trucking industry both pay 6.8 cents. As of October 1, 1995, unless