The Biodiesel Explosion

In case you didn’t get the memo, the biodiesel industry is exploding.

Thanks to a strong Renewable Fuels Standard (RFS), the reinstatement of the $1/gallon biodiesel blender tax credit, and the State of Iowa’s record breaking production records, national biodiesel output is at an all-time high of 111.1 million gallons. This boom is great news for biodiesel suppliers who are focused on organizational growth. However, an increasingly complex fuel tax system has the potential to block their success. So, just what are those complexities, and how can suppliers navigate through them?

Unique to the fuels industry is a tax system that requires suppliers to file returns monthly to remain compliant or risk fines and penalties. However the tax rates and rules vary by jurisdiction and change constantly.

In 2012, the fuel industry saw 522 fuel tax related changes implemented, more than the previous two years combined. The biggest challenge for biodiesel suppliers beyond the sheer number of tax law changes is how quickly those changes can be deployed into invoicing systems.

In most cases, there is much more to update than a single tax rate. The complex nature of these changes can require IT program changes and testing to ensure that invoices will be accurately generated. Can your current IT organization and backoffice keep up with these changes? Successful organizations have been able to flex to the winds of these changes, allowing them to maintain a focus on what’s most important in a dynamic market – growth.

Agility is the key to continued growth.

So what’s the secret? Leading biodiesel producers have been able to balance the complexities of complying with fuel taxes while expanding into additional states and jurisdictions by having an agile invoicing and tax determination infrastructure. But what does that mean? Simply, keeping up to date with the rate and rule changes and centralizing your tax knowledge to prepare for the future. This can be accomplished via dedicated in-house resources or by using commercial tax solutions on the market.

Think about your invoicing infrastructure and how it will allow you to grow. Is it agile enough to allow for your forecasted product or regional growth? What about growth that isn’t forecasted? Central to that thinking is how your fuel taxes will be calculated, updated with the myriad of rate changes, passed to your accounting system, and accurately invoiced.

Simple, preventive medicine now can save money, time, risk, and stress in the long term. Organizations can save costs, reduce errors, and more quickly grow into new regions or add products by automating the identification and calculation of taxes.

Some companies scramble their IT resources on operational challenges and ignore tax changes; in the process, they increase financial risk by inaccurately calculating fuel taxes. As growth continues in the vibrant biodiesel industry, IT and tax resources will be in high demand and scrambling for competing priorities may become the norm.

Accurate invoice calculation and reconciliation is challenging.

Recent news has spotlighted that fuel invoices are often wrong and paid without notice. In fact, FuelQuest data indicates approximately 25% of invoices are wrong by $15 or more, and of those the average variance was $1,123 (in either the supplier or buyer’s favor). Thus incorrect invoices create an avoidable financial drain. Getting taxes calculated and billed accurately creates a positive customer experience and increases efficiency. ‘Getting it right’ is doubly important for growing companies in this nascent industry as they try to differentiate amongst their competitors.

Many companies calculate taxes and manually invoice customers, some through an in-house system. Fair warning. Tax research can be a huge project, and if you are already behind the curve, maintaining support is no small feat. Don’t build something internally now as it could be a nightmare later on when the company has outgrown it. Short-term benefits may be tempting but longer-term strategic thinking is key. Is your company going to stay in biofuels forever? You will likely be asked by key customers to expand your products, challenging you as you broaden your operations and increase the flexibility of your tax determination structures. Your IT infrastructure needs to be agile – don’t build or rely on an inefficient system. Centralize organizational knowledge, data, and processing now so you don’t have to worry in the future. The time value savings are huge and can be an enabler for business growth.

Tax structure complexity is on the horizon.

It is not if, but when for biodiesel tax changes. Savvy companies though, are proactive not reactive. The tax structure for alternative fuels such as CNG and biofuels are simple now, but as state, local and even federal tax revenue dollars continue to dry up there will be a need to recover this revenue.

The result will be disparate and complex fuel tax changes from each state as they handle these differently to suit their needs. The resulting tax structure will inhibit growth for those companies unprepared to manage this complexity, and maintaining tax compliance within the shifting sands of new regulations will be harder.

It is almost a Catch-22 that these various tax laws are designed to promote adoption and boost the industry, yet add a layer of complexity. Accurate tax determination and calculation should be your least concern to allow the company to focus on growth. If ignored, tax will be on the critical path to growth, and could be the biggest headache and largest investment in terms of dollars and resources.

As the industry continues to mature, the health of your business relies heavily on your invoicing and tax determination infrastructure. Just like your own health, if you wait too long before getting your checkups, you increase your risk that something harmful can happen. Consider your proactive tax medicine and prepare for the long term, to ensure your company is in the best shape to flex and grow in this booming industry.

About the author

Scott Clevenger brings more than 19 years of experience in tax technology to his role as Senior Director of Product Strategy for FuelQuest. Managing over 20 billion gallons of fuel a year to over 650 customers, FuelQuest solutions automate fuel management, manage the complexity of regulations and market volatility.

More about FuelQuest, here.