Regulatory Updates - Jan 2009

By Jason Burroughs

Due to a publishing lag, some of these updates may old news, but here goes:

First, the big news. The recent financial crisis led to an almost-
missed extension of the biodiesel tax credits. In true bipartisan
style, they crammed it into the bailout package as a pork barrel
earmark. Not only was the credit extended for another year, the credit
for WVO-based biodiesel has been bumped up to $1, to match so called
agri-biodiesel! Those making biodiesel from yellow grease can rejoice
in the sudden parity between recycled oil and virgin oil. Expect the
commodity market to heat up, with at least some of the new money going to the
rendering industry. Just another reminder that he who owns the
feedstock owns the market.

Additional changes: the IRS will now reimburse 50% of the cost of an
alternative fuel refueling station (up from 30%), which can make a
major difference in a project being approved by a customer. Also, co-
processed renewable diesel will be limited to 50 cents per gallon in
credit instead of the current $1. And, the 'splash and dash' loophole
that allowed producers of biodiesel overseas to ship their product
into the Houston ship channel, squirt a bit of diesel in and take $1
per gallon in subsidy, then ship to Europe, has been closed! And to
make it better, they did it retroactive to June 15, 2008.

IRS has proposed a drastic change to the way biodiesel is taxed. To
start with, a bit of history. Years ago, diesel fuel was taxed at the
point of retail sale. Refineries sold to wholesalers tax free, who
sold to retailers tax free. As consumers filled up, the filling
station collected tax and remitted to state and federal agencies, very
similar to sales tax. At some point, the rules were changed so that
all diesel fuel is taxed at the refinery, and any non-taxed fuel must
be dyed red to show it is for off-road or other non-taxable use.
Because of this system of taxation, the IRS refers to diesel as "a
taxable fuel" - this refers to being taxable *at the refinery*.

When biodiesel was approved as a motor fuel, it was considered "a non-
taxable fuel", which means the burden of taxation is technically up to
the retailer who pumps the fuel into an actual motor vehicle tank.
From the sound of it, B100 and B99 should never have taxes paid on
them until they reach the end user, leaving the burden of registering
with and paying the IRS on the retailer. For those in the industry, we
know that producers often sell "B99 wholesale" which has been blended
for tax credit purposes, but not had the taxes paid. Also because of
this rule, biodiesel is not required to be dyed red for off-road use.

Under proposed IRS rules out for public comment at press time, all
biodiesel would be taxable the moment it is blended with diesel fuel.
So once again, the IRS decision to provide refundable credit only to
blended fuel rears its ugly head. Anyone blending to B99 or lower will
now be forced to register with the IRS and pay the taxes, and
optionally take the credit. This has a number of implications. First,
any B99 sold without taxes must be dyed red. This means it cannot
later be turned into taxable fuel, as many people do now by applying
for credit when taxes have been paid in advance, but turn out not to
be due if sold for non-taxable purposes. Second, producers would be
less likely to sell B99 because they have to endure more complicated
reporting requirements. This burden will affect the smaller
distributors and retailers who may not have the cash to float the cash
needed to wait 30-90 days for IRS refunds. It may have a side effect
of causing every blender to register as a bulk terminal, which brings
additional registration and reporting requirements.

Additionally, the often misquoted "400 gallon exemption" will go away.
Many in the homebrew community have claimed that there is somehow an
exemption to road taxes if an individual produces less than 400
gallons per quarter. Some have extrapolated this assumed exemption to
mean that a coop of 50 people can have an exemption if they produce
less than 20,000 gallons per quarter. The IRS requires taxes to be
paid on all fuel used in on-road vehicles, even if that fuel is water
or ranch dressing (to quote Jeff Plowman). However, if you are a
blender, AND the end user you sell to is liable for the taxes, the
burden of taxation is shifted to the end user in these small
transactions. With the new rules, the blender is both liable for the
tax and eligible for the credit.

More information can be found in the Federal Register at
http://edocket.access.gpo.gov/2008/pdf/E8-17270.pdf

In other news, the ASTM has approved what some are calling the most
important update to the biodiesel specification since it's
introduction in 1995 (fact check that date). ASTM D6751-08 includes a
major addition - a cold soak filtration test that is designed to
prevent the kind of filter clogging that has made headlines when
spectacular failures (Minnesota, 2005, for example) occured. This
addition has paved the way for two important changes: B5 is now
included in the definition of straight diesel (D975) and home heating
oil (D396). This means that virtually all diesel in the Unitied States
can be blended with 5% biodiesel with no labeling, no special
handling, and no consideration about use or possible issues. Insiders
at the NBB are concerned that even the major producers who voted for
the change are not yet ready to meet this standard, which is the
current standard as of October 16, 2008. It remains to be seen what
effect the new standard has on the industry or on pricing.

Greasy tidbits:

Griffin Industries filed with the state of Texas to become a "diesel
fuel producer" this summer, an indication they are considering or
actively building a biodiesel plant in Texas. With a major rendering
plant outside Austin currently providing a good amount of chicken fat
to area biodiesel producers, expect the competition for yellow grease
to intensify. I heard through the rumor mill that Griffin's plant in Kentucky
has not been as successful as they had hoped, and with the recent
dip in the market, this project may not get off the ground.

There is a movement afoot to try and remove the NBB's lock on EPA
health effects data early (the lock is set to expire in 2015). If
successful, anyone could make and sell biodiesel that meets ASTM
standards without needing a membership in the NBB. Stay tuned for a future
post in detail on this subject.

The 2009 Jetta TDI has been approved by the EPA for a $1300 refundable
tax credit due to clean diesel technology. Only 13,000 were imported
for 2009, and most were sold out before they hit the dealership
showrooms. Too bad they don't run on B100 - but at least they get 40+ MPG!