As explained in the previous article “The Vast Landscape of FTE” Cross-border fuel tax evasion (aka bootlegging) is a fuel tax evasion method in which fuel is purchased in a state with a low tax rate then delivered to a state with a higher rate.
This type of fraud is the “ghost” of the Fuel Tax Evasion (FTE) landscape as it seems clear it is happening, yet little evidence in the literature can be found to prove this assumption. The problem for states with this type of fraud is not only state’s inability to stop it, but their inability to even determine to what extent it is happening. The lack of statistics pointing to the actual amount of cross border bootlegging fraud taking place is concerning. It can be assumed with confidence, however, that bootlegging is not only taking place, but it is likely rampant considering the incentive to evade is huge in looking at potential profit gained from such evasion. Add to this the fact that retail gas stations make very little on a gallon of gasoline and the likelihood of bootlegging seems obvious.
How it works
Bootlegging gas is a simple process. A distributor buys a load of 8,000 gallons of diesel in a low tax state like Wyoming paying the terminal the cost of the fuel plus 24¢ a gallon –the diesel tax rate in that state (48.4¢ total with the Federal rate.) Once Wyoming collects its tax, where the fuel goes is not their concern. If he purchases the load from the rack in Sheridan, Wyoming, the distributor can then transport that load to Montana (whose southern border is just 25 miles north), where the tax rate is 28.5¢ a gallon (52.9¢ total with the Federal rate.) Striking a deal with a retail outlet, the distributor may split the difference of the tax savings with the retailer, discounting the load 2.25¢ extra per gallon on the sale while pocketing the other 2.25¢, or a total of $180. The retailer thus saves $180 on the load by charging the consumer at the pump the full price based on the Montana tax rate. This may seem like a minimal profit for both parties, but when considering that some retailers receive daily deliveries of 8,000 gallons, annual fraudulent profit to the distributor and the retailer combined in this scenario would be over $130,000. That same amount is lost tax revenue to the state of Montana for their roads fund. In fact, according to a study done by Battelle research for Montana in 2007, Wyoming’s per capita diesel consumption is about four times the national average and more than twice that of any other state in the nation. This statistic begs the question: is Wyoming really consuming that much diesel, or more likely, is that diesel being sold out of state – like in Montana? Proof of this includes investigations in which Bills of Lading were pulled on-road by state officials for Montana-bound Wyoming tankers that “yield unusually high diversion rates.” Losses to tax coffers were estimated at $12.1 million annually back in 2007.
The Wyoming-Montana example is modest compared to what other states face. With Pennsylvania charging 99.1¢ a gallon in total diesel taxes, surrounding states can serve as a cheaper, albeit illegal alternative. Shipping 8,000 gallons from Delaware to PA would net a total tax loss to PA (and thus profit to distributors and retailers) of $4,216 per load. If a retailer received daily shipments of bootlegged fuel, over $1.5 million dollars in a single year would be lost to PA’s highway fund. This only refers to potential losses in diesel gasoline taxes at one single gas station.
Since taxation takes place at the distribution level in PA, hiding such fraud is a relatively easy proposition for distributors and retailers. The fact that each state has separate collection processes makes bootlegging extremely lucrative and problematic to detect. In fact, detection is often by accident rather than intentional effort. Only if a state trooper pulls over a tanker and checks it bill of lading can such fraud be readily detected.
Further, the nature of the retail game has changed dramatically in the past 20 years. Where once oil companies owned a majority of gas stations and thus supplied their stations with their own product, today, less than one half of one percent of all retail gasoline outlets are owned by a major oil company reflecting the mass exodus from the retail business by the majors over the past few decades. Roughly 50% of retail gasoline outlets are contracted to sell a specific brand of gasoline which means they are committed to purchase fuel from a specific supplier. This both ensures quality of the fuel, a marketing benefit in that the station can advertise this brand in their station’s name (ie Conoco, Amoco, ARCO), ensures timely delivery of product, and can often lock in a rate to hedge against rising prices. These outlets are operated by independent business owners who sign a supply contract to sell gasoline controlled by a refining company. Such retailers have one option for gasoline purchases, that being a specific refinery.
The remaining gas outlets are operated by owners who do not sell gasoline under a brand owned or controlled by a refining company (which include “self branded” stations such as QuikTrip, 7-Eleven etc...). These retailers purchase gas from the “the unbranded wholesale market” and often seek to find the best deal from a list of potential distributors. This means the fuel they purchase one day could be from a bulk plant or terminal on the opposite side of the state from the fuel purchased the day before. According to The Association for Convenience & Fuel Retailing, single-store owned operators account 73,433 of all gas stations in the U.S. Though branded stations could purchase bootlegged fuel, it is the unbranded independent operators who are most likely to engage in this type of evasion.
There are clear cases in which bootlegging has been detected, but these instances are relatively few. In 1989, Federal agents secretly recorded a “Brooklyn gasoline wholesaler as he explained to another dealer how the Mafia shared in the theft of perhaps as much as $1 billion a year in Federal gasoline taxes in the New York metropolitan region” as reported by the New York Times. The FBI wasn’t even looking for this type of fraud. They were investigating a murder. After exhaustive research, beside the Montana study which also showed that during one sting operation, 60% of Montana bound Wyoming licensed tankers were carrying illegal loads, no other examples of wide-spread bootlegging violations could be found. Is it that it is simply not happening, or more likely, it is one of the largest frauds taking place in the United States that is going undetected?
Implied Evidence -The Hot Zones
Where there is opportunity, there will be fraud. And where there are few controls in a system, there will be a lot of fraud. Beyond proven cases of bootlegging, when considering the profit potential of such fraud, it is impossible to believe it is not just happening, but it is likely widespread. When looking at a few contributing factors, a map of “hot zones” where such fraud is likely happening can be determined. (See infographic map to right)
The analysis provided in the infographic “Cross Border (Bootlegging) Tax Evasion Hot Zones” is for the purpose of drawing general assumptions as to the least number of factors needed to create the potential for cross border tax evasion related to differentials among state diesel tax rates. To this end, we have assumed the following minimum potential factors which could lead to a cross border evasion scheme in order to develop a picture of where cross border evasion could most likely be happening in the United States.
The assumptions from which conclusions are drawn are as follows:
• The maximum legal number of hours a trucker can drive without a 10 hour break is 11 hours.
• Driving at 65mph, for 11 hours, the maximum distance for a single day turn-around delivery is 350 miles one way; 700 miles round trip.
• A typical delivery load is 8,000 gallons.
• We also assume a minimum required profit of $100 per load to the driver and the distributor. We further assume a 50/50 split in profit with the retailer, thus, each load, at maximum range of 700 round trip miles, after deducting the estimated cost of delivery (cost of gas for the truck), must be worth no less than a total of $200 profit per 8,000 gallon load for the fraudulent activity to be worth the effort.
• Further assumptions are that if a driver is breaking the law by committing fuel tax fraud, he would be less likely to drive over the speed limit and less likely to drive beyond the 11 hours allowed per shift by federal law in order to avoid detection. Certainly it is understood these assumptions would not apply to all law breakers. Again, our analysis is based on the minimum potential factors to develop a picture of where cross border evasion could most likely be happening.
If any of the above assumptions are not met, we assume that it would not be profitable to commit this type of fraud and therefore, some regions of the United States (in white on the maps) are less likely to see bootlegging fraud. Likewise, areas within these “zones” are more prone to fraud. Further, those areas closer to more borders with states of lesser tax rates and more racks in export states create a greater opportunity to purchase cheaper taxed fuel, (and greater levels of potential profit) and are considered potential “hot zones” for bootlegging violation.
Example: At the rack in Ardmore, Oklahoma, a driver/distributor purchases 8,000 gallons of fuel and pays the federal rate of 24.4¢ and the OK tax rate of 14.0¢. By selling this load in Texas without paying the 20.0¢ Texas state taxes he saves 6¢ per gallon, or, $480 for the entire load. After deducting the cost of his fuel for driving a maximum distance (based on max hours allowable at 65 mph multiplied by the current cost of a gallon of diesel and assumed needed fuel for the trip), the driver can deliver this load as far as the northern suburbs of San Antonio, Texas (350 miles away) and still make a profit on the tax evasion of $120 if he splits the total profit with the retailer.
The resulting map paints a picture in which the potential for bootlegging is immense. In this case of FTE, there are few smoking guns, but considering the general estimates of overall losses to fuel tax evasion with the potentially large profits to be had through bootlegging, it is hard to imagine that bootlegging is not costing states tens of millions of dollars in tax revenue.