19 November 2012

IFTA: All in the wording...

In my new work we deal with a lot of taxes. In fairness, I do very little with the actual taxes. No, I have fun building the spreadsheets that calculate them--which I can say is rather nerve racking as the Federal Government is not very forgiving when mistakes are made--but I digress.

One of our most frequent taxes is called the International Fuel Tax Agree (or IFTA). It applies to the United States and most of Canada and was developed as a way to avoid the old method of making a truck register for fuel taxes in each state they would be traveling through. So, in general, IFTA was a really good idea all around.

One day my boss asked if I could make a diagram that explains how IFTA works so our clients could better understand it.

I said, "Sure... How does it work?" In defense of my question, I knew how it worked because I reviewed the formulas that make up the calculations that determine the taxes we report. I was really hoping for exactly what my boss gave me: an oral version of the formulas, which follow:
Total miles / Total gallons = MPG
State miles / MPG = Taxable gallons
Taxable gallons - Gallons bought in the State = Net taxable gallons
Net taxable gallons * Tax rate = Tax due
It is no wonder to me that people get confused on how the tax works. After a few minutes, it hit me: IFTA is actually very simple. Instead of thinking about the formulas we use to generate taxes amounts, I just had to think about what the tax was actually taxing (the key is in the MPG calculations). Thus, the grand conclusion is that IFTA is a calculation of fuel consumed while traveling through the state. In other words, how much fuel would you have needed to buy to operate in a given state. Sure, there is some averaging in there, but that is just to make it calculate easier.

It felt good to take something as complicated as the robust formulas and summarize it in a handful of words.
IFTA: A tax on the fuel you used in a state.
(Okay, two handfuls and a toe, but it is still much less complicated than the original formulas. A copy of the diagram is attached for amusement.)

How IFTA is Calculated. ©2012, used by permission. Details available upon request.

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