On July 1, 2017, a number of states’ gas tax increases took effect, including:
- Indiana: 9.9 cents per gallon
- Montana: 4.5 cents per gallon
- Tennessee: 4 cents per gallon
- West Virginia: 3.5 cents per gallon
- South Carolina: 2 cents per gallon
- California: 1.9 cents per gallon
- Maryland: .3 cents per gallon
- New Jersey: 10.8 per gallon for diesel fuel only
Shortly after that, we highlighted the move in South Carolina, noteworthy because it was so contentious; the legislation ultimately passed, but only after lawmakers overrode Gov. Henry McMaster’s veto. Accordingly, for each year until 2022, there will be a 2 cent per gallon gas tax increase. The prior rate was 16.75 cents per gallon, which put the Palmetto state’s gas tax at the second lowest, behind only Alaska, whose state gas tax is 12.25 cents.
All of the revenue is to be separated from the general fund, and deposited into the State Highway Fund, the State Non-Federal Aid Highway Fund, or the Infrastructure Maintenance Trust Fund.
At least one policy group criticized the mechanism, if not the effort to boost infrastructure investment. The Institute of Taxation and Economic Policy (ITEP) characterized the legislation as being “unnecessarily complicated,” because it relies on a refundable earned income tax credit, and “requires drivers to track all their gas and maintenance expenses every year for an average of $10 per vehicle.”
Nevertheless, on Jan. 1, 2018, the new income tax credit took effect, by way of the Infrastructure and Economic Development Reform Act with the hope that it will offset the increased tax, which the act calls a motor fuel user fee. As if to support ITEP’s point, last month, the South Carolina Department of Revenue issued a news release reminding drivers to “start saving receipts in January 2018 to claim new motor fuel income tax credit.”
The news release further explains what South Carolinians need to know about the tax credit:
- This is a refundable credit on up to two vehicles per resident taxpayer and is provided to offset the motor fuel user fee increase.
- To calculate and claim the credit amount and for personal tax records, taxpayers must save receipts and invoices from:
- Fuel purchases beginning in January 2018
- Vehicle preventative maintenance costs beginning in January 2018
- Taxpayers receive a credit on the lesser amount paid for either the motor fuel user fee increase or the vehicle's preventative maintenance.
- Taxpayers will calculate and claim the credit on Form I-385 when filing state income tax returns in 2019. The form will be available in January 2019.
In addition, the department referred taxpayers to South Carolina Revenue Ruling 17-6, an advisory opinion to guide the public on how to apply the tax law to individual circumstances.
The ruling acknowledges there is a statutorily set maximum dollar amount, for all taxpayers, of total credit. This maximum credit amount for each tax year is:
|Tax Year||Total Credit|
|2022 and beyond||$114 million|
The statute also provides for an “adjustment factor,” in the event that the total amount of tax credits sought exceeds the maximum set for that year. This will allow all qualifying taxpayers an opportunity to receive a motor fuel income tax credit.
The refundable nature of the credit serves to reduce a taxpayer’s South Carolina income tax liability. “It provides a refund to a taxpayer who owes no tax or a partial refund to a taxpayer who owes less tax than the full credit amount. A refundable credit is not related to a taxpayer’s adjusted gross income or tax liability.”
As an illustration, “[i]f a taxpayer earns a $20 motor fuel income tax credit, but has only a $5 South Carolina income tax liability for the tax year, then he will offset his $5 tax liability by $5 of his refundable credit, and would receive a refund for the remaining $15 motor fuel income tax credit. Assume instead that the taxpayer has a $0 South Carolina income tax liability for the tax year; if so, he would be refunded the entire $20 motor fuel income tax credit.”
Among other questions the ruling answers are these:
What qualifies as a “preventative maintenance” cost eligible for the credit?
New tires, oil changes, regular vehicle maintenance, and the like. These costs must be incurred in South Carolina for a vehicle registered in South Carolina to qualify.
General costs associated with owning, operating, and registering a vehicle are not eligible for the credit. Ineligible costs include, but are not limited to, license plate fees, insurance, property taxes, interest expense on vehicle loans, costs reimbursed by insurance, body and paint work expenses, and infrastructure maintenance fees paid upon registering a vehicle in South Carolina. The department issued revised Information Letter 17-10 in December containing an overview of the infrastructure maintenance fee that took effective in July 2017.
How do taxpayers filing a joint South Carolina income tax return determine which vehicle each spouse (i.e., each taxpayer) may use in computing the credit?
For a couple filing a joint return, the number of vehicles or motorcycles eligible for the credit by each spouse depends upon the name or names in which the vehicle is registered. One taxpayer may claim a credit for up to two private passenger motor vehicles or motorcycles. It is possible for a married couple filing a joint return to claim credit for up to four vehicles or motorcycles.
Is a vehicle that is used for both personal and business use eligible for the credit?
A vehicle used for both personal and business use by a taxpayer (e.g., a realtor, a home health nurse, a food delivery person) is eligible for the credit, providing the vehicle is a private passenger motor vehicle or motorcycle and the vehicle is registered in South Carolina in the name of the resident taxpayer.
Is a vehicle that is used exclusively in a business eligible for the credit?
A vehicle used exclusively in a business (e.g., a fleet of security trucks, fleet of house cleaning cars, or an auto dealer’s courtesy minivan) is eligible for the credit, providing the vehicle is registered in South Carolina in the name of the resident taxpayer. Further, the business vehicle must be a private passenger motor vehicle designed, used, and maintained for the transportation of ten or fewer persons, a truck having an empty weight of 9,000 pounds or less and a gross weight of 11,000 pounds or less, or a motorcycle.
Does a vehicle that is registered in the name of a sole proprietorship or single member limited liability company that is disregarded for tax purposes affect the number of vehicles a taxpayer may use in computing the credit?
A vehicle registered in the name of an individual’s sole proprietorship is considered a vehicle owned by the individual taxpayer for purposes of the credit. For example, assume a resident individual owns two vehicles in his name and his sole proprietorship owns one vehicle in its name. The individual must choose which two of the three vehicles to use in computing the credit. The individual may not claim a credit for three vehicles and the sole proprietorship may not claim a credit for any vehicle. The result is the same if the vehicle is owned in the name of a single member limited liability company that is disregarded for tax purposes.
Other information the ruling addresses includes how the credit is to be calculated and claimed by a resident taxpayer for various kinds of taxpayers, like full or part-year residents, C Corporations, S Corporations, partnerships, limited liability corporations, sole proprietorships, single member limited liability companies that are disregarded entities, and non-residents.
Finally, the ruling discusses expenses and documentation, and makes it clear that “a taxpayer must maintain documentary evidence to substantiate expenses incurred in South Carolina and reported on SC Form I-385, “Motor Fuel Income Tax Credit.” This includes gas receipts and paid maintenance invoices.
The taxpayer should not submit these receipts and documents with his South Carolina income tax return when filed, but should have them “readily available in the event of a Department audit.” The ruling further advises that “[s]ince fuel receipts can become illegible over time, a taxpayer may choose to scan or photocopy the receipts to have for future substantiation. Fuel receipts or credit card statements must show the number of gallons purchased in South Carolina during the tax year. The maintenance invoices must show the car model, amount, and type of preventative maintenance work performed in South Carolina.”Taxpayers should also be aware, as noted above, that fuel purchased outside of South Carolina, and preventative maintenance performed outside of the state, may not be used in determining the credit.