Fuel Tax | Dyed Diesel

Dyed diesel is used for non-taxable purposes such as agriculture or construction equipment and is tax exempt. The use of dyed diesel is prohibited in highway vehicles. 

However, dyed diesel is not exempt from the Environmental Response Surcharge fee. This fee is reported and remitted on the fuel distributor's report. For more information for fuel distributors, visit the Fuel Distributors web page. For more information on this surcharge, visit the Fees & Surcharges web page.

The federal government requires dyeing of untaxed diesel fuel for two reasons:

  • To help reduce tax evasion by identifying fuel on which excise taxes have not been paid
  • To help reduce air pollution by identifying fuel not suitable for use in highway vehicles 

Misuse of Dyed Diesel

The vehicle operator is responsible for the proper fueling of the vehicle. Any visible presence of dye in the diesel fuel disqualifies that product from use in a highway vehicle. Be aware that mixing undyed fuel with dyed fuel will not produce a larger volume of usable product, but will instead make the whole quantity unsuitable for highway use and subject to penalties specified in the Internal Revenue Code. IRS penalties for misuse of dyed diesel are $1000 or $10 per gallon for the first violation. See IRS publication 4941 for more information.

Follow these tips to help ensure you do not inadvertently use dyed diesel in highway vehicles:

  • Beware that severely discounted prices or other creative rebates that do not appear credible may be an indication of tax evasion.
  • Deal only with trustworthy companies that you know from experience or reputation.
  • Keep your receipts -  Make sure all receipts identify the product and indicate where and when it was purchased.