601 KAR 1:201. Recordkeeping and audit requirements of taxes imposed in KRS 138.655 through 138.7291.

601 KAR 1:201. Recordkeeping and audit requirements of taxes imposed in KRS 138.655 through 138.7291.

RELATES TO: KRS 138.655-138.7291, 186.650, 49 C.F.R. 390.21, 49 U.S.C. 317

STATUTORY AUTHORITY: KRS 138.725(1), 281.600, 49 U.S.C. 317

NECESSITY, FUNCTION, AND CONFORMITY: Pursuant to 49 U.S.C. 317.05 and KRS 138.227, Kentucky is required to conform to the provisions of the International Fuel Tax Agreement (IFTA). This administrative regulation sets forth the recordkeeping and audit requirements of IFTA and KRS 138.655 through 138.7291 and provides for uniformity in the interstate and intrastate administration of KRS 138.660(1) and (2) so as not to violate the interstate commerce clause of the United States Constitution.

Section 1. Definitions. (1) "Base jurisdiction" means the member jurisdiction where qualified motor vehicles are based for vehicle registration purposes and:

(a) Where the operational control and operational records of the fuel tax licensee's qualified motor vehicles are maintained or can be made available; and

(b) Where some travel is accrued by qualified motor vehicles within the fleet.

(2) "Fuel tax license" means either an IFTA license or a KIT license.

(3) "IFTA" means the International Fuel Tax Agreement.

(4) "IRP" means the International Registration Plan.

(5) "IFTA license" means a motor fuel tax license issued in accordance with the IFTA "Procedures Manual."

(6) "Jurisdiction" means a state of the United States, the District of Columbia, or a province or territory of Canada.

(7) "KIT license" means the Kentucky intrastate tax license issued by the Kentucky Transportation Cabinet to intrastate motor carriers subject to the taxes imposed by KRS 138.660(1) and (2).

(8) "KYU license" means the Kentucky Highway Use License issued by the Kentucky Transportation Cabinet to motor carriers subject to the tax imposed by KRS 138.660(3).

(9) "Motor carrier" means as defined in KRS 138.655(5).

(10) "Over-the-road fuel" means fuel purchased from a retail distributor and placed directly into a qualified motor vehicle.

(11)(a) "Qualified motor vehicle" means a motor vehicle operated by a motor carrier that is used, designed, or maintained for the transportation of persons or property and that meets at least one (1) of the following criteria:

1. A single vehicle having two (2) axles and a gross vehicle weight or a registered gross vehicle weight exceeding 26,000 pounds or 11,797 kilograms;

2. A single vehicle having three (3) or more axles, regardless of weight; or

3. A vehicle used in combination, when the weight of the combination exceeds 26,000 pounds or 11,797 kilograms gross vehicle weight or registered gross vehicle weight.

(b) A qualified motor vehicle shall not include the following:

1. A recreational vehicle;

2. A motor vehicle registered pursuant to KRS 186.050(4) or under another jurisdiction's law as a farm vehicle; or

3. A motor vehicle used to transport persons for hire.

(12) "Quarterly reporting period" means a period of time consistent with the calendar quarterly periods of January 1 through March 31, April 1 through June 30, July 1 through September 30, or October 1 through December 31.

(13) "Recreational vehicle" means a motor home, pickup truck with an attached camper, a bus or similar motor vehicle if used exclusively for personal pleasure by an individual and which is not used in connection with any business endeavor.

(14) "Tax-paid fuel" means motor fuel purchased either in bulk or over-the-road by a motor carrier on which the motor fuel taxes imposed by a jurisdiction are paid at the time of purchase.

(15) "Taxpayer" means a Motor Carrier operating upon the roads of the Commonwealth subject to those taxes in KRS 138.660.

Section 2. Governing IFTA Documents. The following IFTA documents prepared and adopted by the membership of the International Fuel Tax Association shall govern Kentucky’s recordkeeping requirements and audit provisions of the taxes imposed by KRS 138.660(1) and (2):

(1) Articles of Agreement as revised July 1998;

(2) Procedures Manual as revised July 1998; and

(3) Audit Procedures Manual as revised July 1998.

Section 3. Tax Recordkeeping. (1) Each taxpayer shall maintain a complete record of all motor fuel purchased, received, or used in the conduct of its business. The fuel records shall contain at least the following information:

(a) The date of each receipt of fuel;

(b) The name and address of the person from whom purchased or received;

(d) The number of gallons of fuel received;

(e) The type of fuel;

(f) The vehicle or equipment into which the fuel was placed; and

(g) If applicable, complete records on power takeoff use of motor fuel as set forth in subsection (15) of this section.

(2) Except as set forth in subsection (14) of this section, each taxpayer shall maintain detailed distance records that show operations on an individual-vehicle basis. The distance records for each qualified motor vehicle shall contain at least the following information:

(a) Both taxable and nontaxable usage of fuel;

(b) Distance traveled for taxable and nontaxable use; and

(d) Trip origination and destination;

(e) Route traveled on trip;

(f) Trip beginning and ending odometer readings;

(g) Total mileage of each trip; and

(h) Distance recaps for each qualified motor vehicle for each jurisdiction in which the qualified motor vehicle is operated.

(3) In order for a taxpayer to obtain credit for a tax-paid fuel purchase a receipt or invoice, a credit card receipt or automated vendor-generated invoice or transaction listing shall be maintained by the taxpayer. An acceptable receipt or invoice for tax-paid fuel purchased shall not have been altered or indicate erasures and shall contain at least the following information:

(a) The date of purchase of fuel;

(b) The name and address of the person from whom purchased;

(d) The type of fuel;

(e) The price per gallon of the fuel purchased or the total amount of the sale;

(f) Unit number of the motor vehicle into which the motor fuel was placed; and

(g) Purchaser's name. (In the case of a lease agreement, receipts are acceptable in either name, provided the records firmly indicate the legal connection to the reporting party.)

(4) A taxpayer shall not apply for credit for withdrawal from licensee-owned, tax-paid bulk fuel storage unless the following detailed records are kept:

(a) Date of withdrawal;

(b) Number of gallons withdrawn;

(d) Unit number of the motor vehicle or equipment into which the fuel was placed; and

(e) Purchase and quarterly beginning and ending inventory records to substantiate that tax was paid on the bulk purchase.

(5)(a) A taxpayer shall account separately for tax-paid fuel purchased as storage or bulk from fuel purchased over the road;

(b) The licensee shall retain a copy of each delivery ticket and receipt for storage or bulk fuel;

(c) Bulk fuel inventory reconciliations shall be maintained. Records shall be maintained to distinguish fuel placed in a qualified motor vehicle from other uses;

(d) Each tax-paid purchase shall be supported by a receipt, invoice, credit card receipt or automated vendor-generated invoice or transaction listing; and

(e) Over-the-road fuel receipts shall identify the vehicle by the registration plate number or unit number, because only a vehicle identified with the fuel tax licensee's operation may be reported or mileage or fuel consumption.

(6) A separate total shall be compiled for each of the following fuel types used by a fuel tax licensee:

(a) Gasoline;

(b) Diesel;

(d) Gasohol;

(e) Liquid petroleum gas;

(f) Compressed natural gas; and

(g) Other.

(7) Each taxpayer shall retain the information required by subsections (1) through (6) of this section for a period of four (4) years from the date of filing the tax report based on these records, except when a "Consent of Extension of Statutory Limitation of Time for Assessment" has been filed with the Division of Audit Review to extend the four (4) year statutory period limitation.

(8) Each taxpayer subject to a KYU license shall maintain the following records on operations within Kentucky of each motor vehicle that is subject to the tax imposed by KRS 138.660(3):

(a) Type of motor vehicle;

(b) Declared gross weight of the motor vehicle;

(d) Except as provided in subsection (14) of this section, mileage operated by unit number in Kentucky as reported on trip sheets and driver logs that shall include the following:

1. Beginning and ending odometer readings of each trip;

2. Each route driven;

3. Beginning and ending date of each trip;

4. Trip origin and destination;

5. Total trip miles;

(e) Bills of lading; and

(f) Off-highway mileage which includes periodical logs showing entering and leaving of public highways; and

(g) Manual or computer-generated mileage recaps for Kentucky.

(9)(a) Each taxpayer subject to a KYU license shall retain the information required by subsection (8) of this section for a period of five (5) years from the date of filing the tax report based on these records, except when a "Consent of Extension of Statutory Limitation of Time for Assessment" has been filed for the Division of Audit Review to extend the five (5) year statutory period limitation.

(b) If the records required to be maintained in subsection (8) of this section are insufficient, incomplete, or unavailable for the auditor to complete an audit, the auditor may examine any other records of the taxpayer which might assist in establishing the tax liability of the taxpayer.

(10) Both the lessor and lessee involved in the short or long-term lease of motor vehicles shall maintain sufficient records, including copies of the leases and any supplemental agreements, to allow determination at any time of the entity responsible for reporting or payment of the taxes.

(11) Records may be retained on microfilm, microfiche, or other computerized or condensed record storage system if the system has been preapproved by the Transportation Cabinet's Division of Audit Review.

(12) If a taxpayer chooses to use an on-board electronic data recording system in lieu of or in addition to trip reports for tax reporting, the devices, recordkeeping, data collection, reporting and taxpayer responsibility shall comply with Section P600 of the IFTA Procedures Manual.

(13)(a) A taxpayer subject to an IFTA or KIT license who operates exclusively in intrastate commerce and for which all of the mileage traveled is taxable may choose to maintain quarterly odometer readings on an individual motor vehicle basis rather than the more detailed records set forth in subsection (2) of this section.

(b) A taxpayer subject to a KYU license who operates exclusively in intrastate commerce and for which all of the mileage traveled is taxable may choose to maintain quarterly odometer readings on an individual motor vehicle basis rather than the more detailed records set forth in subsection (8)(d) of this section.

(14) A taxpayer subject to an IFTA or a KIT license applying for a refund pursuant to Section 11 of 601 KAR 1:200 shall, in addition to the other requirements of this section, maintain the following records:

(a) Proof of power-take-off exemption percentage including how the percentage was calculated;

(b) Listing of bulk fuel storage which includes:

1. Location of bulk fuel storage;

2. Capacity of bulk fuel storage; and

3. Whether tanks are designated for "on" or "non" highway use;

(c) Kentucky Revenue Cabinet Motor Fuels Tax Refund Permit Number and Kentucky Revenue Cabinet Sales and Use Tax Number, if applicable;

(d) Equipment listing for each motor vehicle on which the refund is being requested including:

1. Vehicle type;

2. Use of power-take-off;

3. Vehicle unit number;

4. Vehicle identification number; and

5. Type of fuel used in each vehicle.

Section 4. Auditing. (1) For an audit, the taxpayer shall have available the following information if requested by the auditor:

(a) Records of all motor fuel purchased, received or used as identified in Section 3(1) of this administrative regulation;

(b) Detailed distance records that show operations on an individual vehicle basis as identified in Section 3(2) of this administrative regulation;

(d) For credit for tax-paid bulk fuel storage the records as identified in Section 3(4) of this administrative regulation;

(e) Copies of Kentucky income tax returns for the periods under audit;

(f) Copies of IFTA or KIT returns, KYU returns, and IRP returns that represents Kentucky operations, or the documentation of another responsibility party for the payment of the related taxes.

(g) General ledger relating to each period under audit; and

(h) The related books of original entry.

(2)(a) The fuel tax audit of a taxpayer subject to an IFTA or a KIT license shall be performed in accordance with the provisions of the "IFTA Audit Procedures Manual" which is incorporated by reference in Section 5 of this administrative regulation.

(b) An audit of a taxpayer subject to a KYU license shall be performed by verifying the following:

1. The combined license weight of each motor vehicle operated by the motor carrier;

2. Odometer correctness;

3. Reports of each trip that adequately identifies the truck, trip mileage, and route driven;

4. Weight reports;

5. Continuity of trips;

6. Off-highway mileage;

7. Seasonal variations in the motor carrier's business;

8. Electronic data processing; and

9. Sampling of representative months of operation.

(3) At least thirty (30) days prior to conducting a routine audit, the Transportation Cabinet shall contact the taxpayer in writing advising of the approximate date that the audit is to be conducted and the time period the audit will cover.

(4) The auditor shall conduct and document a preaudit conference with the taxpayer (or designated representative) outlining the carrier's operation, the audit procedures, the records to be examined, the sample period, and the sampling procedures. The taxpayer and auditor shall determine at the preaudit conference who shall have the responsibility for the final acceptance of audit findings and who shall be involved in the closeout conference.

(5) The auditor shall conduct and document a close-out conference with the taxpayer (or designated representative) outlining preliminary findings to include proposed assessment, recommendations resulting from the review of the records and internal control, rights of appeal, and to whom the audit report should be addressed.

(6) The Transportation Cabinet shall furnish the taxpayer a letter of audit findings and recap schedules. If requested, the cabinet shall supply any other work papers to the taxpayer.

(7) A taxpayer shall be notified of additional tax assessments by mail. Payment, including interest from the original due date, in the absence of protest, shall be made within forty-five (45) days from the date of the notice of tax due.

(8) A penalty assessed under KRS 138.715 shall be applied to audit assessments based upon the percentage of the underpayment of the tax liability prior to the deduction of fuel tax purchase credits (if applicable) by the licensee.

Section 5. Protest of Assessments. (1) A written protest may be filed by the taxpayer, or other persons representing the taxpayer, and shall include a supporting statement and documents which identify the specific adjustments requested or the portions of the audit being protested and setting forth the reasons the protest is being made (KRS 131.110 (1)). The protest shall be filed with the Transportation Cabinet, Division of Audit Review within forty-five (45) days from the date of the notice of tax due.

(2) If an IFTA license taxpayer elects to exercise the right under Section 1450.200 of the IFTA Articles of Agreement for Further Requests for Appeal, the cabinet shall consider this a protest of the assessment by the taxpayer, and place the taxpayer into protest status.

(3) If an IFTA member jurisdiction elects to exercise the right under Section 1360.100 of the IFTA Articles of Agreement to reaudit the taxpayer, the cabinet shall consider this a protest of the assessment by the taxpayer.

(4) If the supporting statements and documentation are not sufficient to change the assessment results, the taxpayer may request an information gathering or protest conference with the Division of Audit Review.

(5) Within a reasonable period after the information gathering or protest conference is held, the cabinet shall issue a final ruling to the taxpayer, stating the final assessment results and detailing the procedures for an appeal to the Kentucky Board of Tax Appeals (KRS 131.110).

(6) If the taxpayer does not request a conference, the cabinet shall issue a final ruling to the taxpayer, stating the final assessment results and detailing the procedures for an appeal to the Kentucky Board of Tax Appeals (KRS 131.110).

(7) Within thirty (30) days from the date of the final ruling by the cabinet, a written protest may be filed by the taxpayer, or other persons representing the taxpayer, with the Kentucky Board of Tax Appeals (KRS 131.110).

Section 6. Incorporation by Reference. (1) The following material is incorporated by reference:

(a) "International Fuel Tax Agreement", (July 1998 edition), International Fuel Tax Association;

(b) Form TC 95-214, "Fuel Tax Refund for Power Takeoff", (June 1996 edition), Transportation Cabinet.

(2) This material may be inspected, copied, or obtained at the Transportation Cabinet, State Office Building, 501 High Street, Frankfort, Kentucky 40622, Monday through Friday, 8 a.m. to 4:30 p.m.