Inland Waterways Fuel Use Tax: The Complete Guide

The Inland Waterways Fuel Use Tax is a federal excise tax imposed on fuel used in the operation of vessels engaged in commercial transportation on the U.S. inland waterways. The tax is designed to generate revenue for the maintenance and development of the U.S. inland waterways infrastructure, which includes vital assets like locks, dams, and navigation systems.

This tax is specifically authorized under Section 4042 of the Internal Revenue Code (IRC) and 26 CFR 48.4042-1. It applies to fuel used for propulsion purposes on vessels engaged in the transportation of goods on navigable waterways. These waterways include rivers, canals, and lakes used for commerce.

The Inland Waterways Fuel Use Tax is primarily paid by operators of commercial vessels that use fuel for transporting goods along the inland waterways. This includes operators of:

• Towboats

• Barges

• Cargo vessels

• Other commercial vessels engaged in moving goods through inland waterways.

Vessel operators are responsible for filing and paying the tax, and they must report their fuel usage to the IRS quarterly. This tax applies to fuel used for propulsion, but fuel used for non-propulsion purposes like heating, lighting, or other auxiliary functions is generally exempt from the tax.

The tax rates applicable to inland waterways fuel usage are as follows:

• IRS Number 64: Inland waterways fuel use tax - $0.29 per gallon. This rate applies to the fuel consumed for propulsion purposes on commercial vessels operating on inland waterways.

• IRS Number 125: LUST (Leaking Underground Storage Tank) tax on inland waterways fuel use - $0.001 per gallon. The LUST tax is applied to the same fuel used for propulsion, as part of the environmental funding for leaking storage tanks.

There are a few exemptions available under the Inland Waterways Fuel Use Tax:

1. Fuel Used for Non-Propulsion Purposes: Fuel that is used on a vessel for non-propulsion purposes (such as heating or auxiliary machinery) is generally exempt from the tax. If the fuel is not used directly for propulsion, it may not be subject to the Inland Waterways Fuel Use Tax.

2. Fuel Used in Certain Types of Vessels: Certain vessels that meet specific criteria may be exempt from the tax. This includes vessels that operate exclusively in non-navigable waterways or those that do not carry goods for commercial purposes. However, these exemptions require verification, and operators must ensure compliance with IRS regulations.

It’s important for operators to maintain accurate records of fuel usage to ensure compliance with IRS guidelines and take advantage of available exemptions when applicable.

There are two primary methods to pay the Inland Waterways Fuel Use Tax:

Paper Method:

The paper method involves filling out the IRS Form 720 manually, submitting it along with the required payment to the IRS. This process can take longer due to mailing and processing times. Filing manually also increases the risk of errors, as any mistakes could result in delays or penalties.

Online Method Using IRS-Authorized Portal:

The online method is far more efficient and reliable. The IRS-authorized portals, such as Simple720, allow vessel operators to file their returns electronically, making the process quicker and more secure. This method ensures that operators can file returns on time and makes it easier to track and manage fuel tax liabilities. 

Why Online Filing is Better:

1. Speed and Efficiency: Online filing is much faster compared to the paper method. Returns are processed quickly, and there’s no waiting for mailing or paperwork to be handled by the IRS.

2. Accuracy: Online portals like Simple720 have built-in validation checks, reducing the chances of errors or missing information. This can help avoid penalties that may arise from incorrect filings.

3. Convenience: Filing online is available 24/7, which makes it easier for operators to meet deadlines and track their filings. The system also allows for easier management of fuel use records, and payments can be made electronically, reducing the need for checks or cash.

4. Timely Compliance: Filing online ensures timely compliance with IRS regulations and reduces the risk of late fees or penalties for missing deadlines.

5. Data Security: Unlike manual filing, online filing systems reduce the risk of losing important data due to misplacement or administrative errors, ensuring that your records are safely stored and easily accessible.

The IRS requires Form 720 to be filed online to streamline processing, improve accuracy, and ensure timely compliance with regulations. Online filing also reduces the risk of errors and penalties.

Conclusion

The Inland Waterways Fuel Use Tax is a critical tax that helps fund the maintenance and development of the U.S. inland waterways infrastructure, ensuring safe and efficient transportation of goods. Commercial vessel operators must understand the tax rates, exemptions, and the best filing methods to comply with IRS regulations.