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 = MPGIt 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.
State miles / MPG = Taxable gallons
Taxable gallons - Gallons bought in the State = Net taxable gallons
Net taxable gallons * Tax rate = Tax due
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.|