Farmers Hesitate on Dyed Diesel as IRS Waives Penalties but Leaves Tax Liability Unclear

Key points

• Trump signed an executive order earlier in October allowing dyed diesel, typically reserved for off-road use, on public highways to lower fuel costs.
• The IRS announced on October 19 that it will not inspect vehicles or impose penalties for using dyed diesel on highways for the remainder of the year.
• The order directs Treasury Secretary Scott Bessent to explore eliminating the tax obligation, but does not currently waive the 24.4 cents per gallon federal tax.
• In South Dakota, Governor Larry Rhoden directed the highway patrol not to check for dyed diesel, but the state Department of Revenue warned that users without valid exemptions may face higher costs later.
• Farmers and commercial haulers are hesitant to use dyed diesel due to fears of future tax bills and inconsistent state regulations, such as in Minnesota and Nebraska.
• The South Dakota Farmers Union and state Democratic Caucus called for a special legislative session to enact a state-level fuel tax holiday, which Rhoden rejected as poorly thought out.

Background

This follows earlier state-level actions in September where Alabama and Louisiana suspended penalties for dyed diesel use during harvest seasons. The current federal move expands the scope but introduces new legal ambiguities regarding tax liability.

How outlets are covering it

SDPB highlights the confusion among South Dakota farmers and the political tension between the governor and legislative leaders. WTKR notes Virginia’s temporary suspension of restrictions through December 31. Overdrive Magazine questions the practical value of the IRS relief, emphasizing that the underlying tax remains. Cato Institute’s Molly Nixon argues the executive order lacks legal authority to waive taxes, only deferring them. SDPB also notes that some farmers distrust the policy without clear documentation of exemptions.

Why it matters

The uncertainty surrounding dyed diesel usage affects fuel costs for agricultural and commercial sectors during peak harvest. It highlights the limits of executive power in altering tax codes and the potential for future financial liabilities for businesses relying on temporary relief.

What to watch

The IRS is expected to provide further guidance on postponing or eliminating the dyed diesel tax. State legislatures may consider special sessions to address fuel taxes, while federal agencies continue to explore legal avenues for tax relief.