A Penny Saved Is a Penny Earned, Understanding IFTA and Fuel Taxes | Episode 29
Ben Franklin made the phrase, “a penny saved is a penny earned” popular, and there is no industry where that saying holds more true than the trucking industry. A savings of 6 cents a gallon of fuel is like saving 1 cent per mile. When you are driving over 500 miles a day, 1 cent a mile adds up to thousands of dollars a year.
Purchasing fuel smartly is one of the easiest ways to save money. In the past I have talked about how fuel planning and a good fuel card can save you lots of money. I want to take it one step further and show you how understanding fuel taxes can help you save even more.
Understanding IFTA to Save on Fuel
Most people don’t understand how the International Fuel Tax Agreement (IFTA) and fuel taxes work. Those who do will save money on their fuel. I had an experience recently that illustrates this point. Listen to this episode for a full explanation.
What Are Fuel Taxes?
Fuel taxes are used to build and maintain roads. You pay the tax every time you purchase a gallon of fuel. Most pumps will have a sticker on them that shows how much on taxes you are paying for every gallon you purchase. The tax rate is different in every state.
Here is the official IFTA Tax Rate Table. The second column is the tax rate for a gallon of diesel for each state and Canadian province. At the time I am writing this the cheapest state is Missouri at $0.17 per gallon, and the most expensive state is California, at $0.76, which is $7.60 in taxes for every 10 gallons of fuel you purchase. That’s nuts.
How you pay the tax depends on the type of vehicle you drive. If you drive a vehicle with less than a 26,000 lbs. gross vehicle weight rating (GVWR), you just pay the tax when you fuel up, and that is that.
If you have a vehicle over that weight, you pay the tax at the pump, but you also have to purchase an IFTA license and file an IFTA return each quarter.
How Does Understanding IFTA Help You Save On Fuel?
If you have to file an IFTA return, you pay the tax no matter where you buy the fuel. In this episode, I go into a big, long explanation about why that is, and I don’t think my fingers will survive typing it all out, so you’ll have to listen to the episode.
It boils down to this: When you are comparing the price of fuel in one state to the price of fuel in another state, you need to subtract the state fuel tax from the price you pay for the fuel to get an apples to apples comparison.
I was recently running a load from Salt Lake City, UT to Florence, KY. I left SLC with a full tank and fueled in York, NE. When I was trying to decide where to fuel next I was shocked by two things:
- The cheapest fuel was at a Loves, which rarely happens.
- It was in Illinois, which had the highest retail prices.
So, I did a little research.
Come to find out, Illinois had increased their fuel tax from 38 cents a gallon to 62 cents a gallon over about a six-month period. That’s a 24 cent per gallon increase. There are several states that have a fuel tax of less than 24 cents.
Because of that fuel tax increase, the truck stops in Illinois went from having a retail price that was close to the other states around them to being about 30 cents more expensive than most of the states around them. Since most truckers don’t understand fuel taxes they are just going to look at the retail price and say, “Wow, fuel is expensive in Illinois, I’m not fueling there.” That obviously hurts the Illinois truck stops.
I think to make it so the difference wasn’t even higher the Illinois truck stops are eating some of the tax increase and taking a bit of a hit themselves so truckers will still stop there and fuel.
How to Calculate How Much You Save on Fuel
Check out the table below to illustrate the savings. When I did my fuel planning, I found that the retail price of fuel in Illinois was $2.94 and their tax rate is $0.616. I rounded up to 62 cents. If you subtract that ($2.94-0.616) the net price after the tax is taken out is $2.324 per gallon.
The cheapest fuel in Missouri was $2.60 a gallon, which looks cheaper, but their tax rate is only 17 cents. When you subtract that ($2.60-0.17), you get a net price of $2.43 or almost 11 cents higher than Illinois.
The bottom line is that you actually save 11 cents a gallon purchasing the fuel in Illinois versus Missouri.
As I explain in greater detail during the podcast episode, you are paying that Illinois tax of 62 cents a gallon whether you purchase the fuel in Illinois or somewhere else because of the IFTA return you file each quarter.
You need to purchase fuel in the state that has the cheapest net price after you take out the fuel tax. In the Illinois versus Missouri savings of 11 cents a gallon, that’s $11 for every 100 gallons you purchase. You can’t afford not to get that kind of savings. All the big trucking companies you are competing against are taking fuel taxes into account when they purchase fuel and if you want to be able to compete against them, you need to too.
I compared the prices for all the states surrounding Illinois, check out the chart below. Illinois was 2 cents cheaper than Wisconsin, 7 cents cheaper than Iowa and 13 cents cheaper than IN.
To compare apples to apples when comparing the price of fuel in one state to the price of fuel in another state, you need to ignore the fuel tax. You do that by subtracting the fuel tax rate from the price you pay for the fuel. After you have taken out the fuel tax the net price of fuel is what you end up with and you should purchase the fuel with the cheapest net price.
Keep in mind, this is only applicable to truck fuel, not reefer fuel. If you are purchasing reefer fuel, the cheapest retail price is the best.
Am new owning my own authority, I run local 150miles a day and never leave the state do I have to file for ifta? And if I have to file how will my quarterly returns look like
As long as you did not get an IFTA license, you would not have to file an IFTA return. IFTA is only for companies that travel across state lines. You may need to get a special fuel user permit. Every state is different, you should be able to call your state and ask their motor carrier division if you need one.
[…] about how you can actually save money on fuel by understanding how IFTA works. You can listen to episode 29 to learn […]
I’m a new trucking company in Oregon. I live right on the boarder with Ca. Almost all my miles have been in Ca. Oregon had me get an apportioned license and an Ifta permit. I buy most of my fuel in Ca and pay the tax at the pump. I’m getting ready to do my first Ifta report. Do I pay the taxes again. I don’t understand how this all works yet. Any help would be great.
If you buy most of your fuel in CA, you probably won’t have to pay any more in fuel tax, in fact, I would guess you are more likely to get a refund. The IFTA filing process basically adjusts what fuel taxes you have already paid. I’ll use a simple example to try to explain. If you have purchased all of your fuel in CA you would have paid fuel tax only to CA and you would have over paid them. If you ran 85% of your miles in CA and 15% in OR you would actually get a refund… Read more »
[…] more about how it works and even how you can save money on fuel in our podcast Haulin Assets. Listen to episode 29 to learn how to save money by understanding how IFTA […]
[…] free showers and savings on other truck stop purchases. Motor Carrier HQ’s owner Chris Vernon frequently discusses the benefits of fuel cards (combined with the other techniques on this list) on our Haulin’ Assets […]