Is natural gasoline excluded from the definition of taxable 'gasoline' under the Illinois Motor Fuel Tax Law?

Plain-English summary

The requester asked the Illinois Department of Revenue to confirm that "natural gasoline" is not the kind of "gasoline" taxed under the Illinois Motor Fuel Tax Law, arguing that natural gasoline is really an unrefined feedstock — too high in sulfur, too low in octane, and too volatile to run in a car engine — and is only ever used as a blendstock or denaturant, not sold or commonly known as gasoline itself.

The Department disagreed. It pointed to the plain text of 35 ILCS 505/5, which lists the types of motor fuel a distributor must report and defines "gasoline" to expressly include "casing-head and absorption or natural gasoline." Because the statute names natural gasoline directly, the Department held that distributors must include natural gasoline in the itemized monthly returns they file under Section 5, regardless of the taxpayer's chemistry-based arguments about ASTM specifications, octane ratings, or the fuel's unsuitability for direct use in a vehicle.

The Department also addressed two prior Illinois Independent Tax Tribunal-adjacent decisions the requester had cited (an administrative hearing decision and a Tax Tribunal case) and explained that reporting natural gasoline on a return does not automatically mean tax is owed on it. Under 35 ILCS 505/6(1), no Motor Fuel Tax is due when natural gasoline is sold to another person who is also licensed under the Motor Fuel Tax Law. And under 35 ILCS 505/13, if tax is paid on motor fuel that ends up being used for something other than operating a motor vehicle on public highways (or a recreational watercraft on state waters), the taxpayer can file a claim and be reimbursed.

So the bottom line is a distinction between reporting and taxation: natural gasoline must always be reported by a licensed distributor, but the actual tax is owed only when it is ultimately sold to an unlicensed person for use as motor fuel, with no other exemption available.

What this means for you

Distributors of natural gasoline or natural gas liquids

If you hold an Illinois Motor Fuel Tax distributor's license and handle natural gasoline, casing-head gasoline, or absorption gasoline, this GIL confirms you must itemize it on your monthly Section 5 return like any other listed motor fuel — you cannot exclude it on the theory that it is a mere feedstock or blendstock rather than finished gasoline. Whether you actually owe tax on a given transaction depends on who you sold it to and how it was used.

Sellers to other licensed distributors

If your natural gasoline sales are to buyers who are themselves licensed distributors under the Motor Fuel Tax Law, 35 ILCS 505/6(1) means no tax is due on that sale even though it must still be reported. Keep documentation of the buyer's license status to support that position.

Buyers using natural gasoline for non-highway purposes (e.g., as an ethanol denaturant)

If you paid Motor Fuel Tax on natural gasoline (or fuel derived from it) that was ultimately used for something other than powering a motor vehicle on public highways or a recreational watercraft — such as using it purely as a denaturant in fuel-grade ethanol — 35 ILCS 505/13 allows you to file a claim for reimbursement of the tax paid.

Common questions

Q: Does Illinois tax natural gasoline as "gasoline" under the Motor Fuel Tax Law?
A: The statute's definition of gasoline in 35 ILCS 505/5 expressly includes "casing-head and absorption or natural gasoline," so the Department concluded distributors must report natural gasoline on their monthly returns, based on the plain statutory language.

Q: Does that mean tax is always owed on natural gasoline?
A: No. Reporting is required whenever a licensed distributor handles it, but actual tax is only owed if it is sold to someone not licensed under the Motor Fuel Tax Law and no other exemption applies. Sales to other licensed distributors incur no tax under 35 ILCS 505/6(1).

Q: What if tax was paid on natural gasoline that was never used to fuel a vehicle?
A: 35 ILCS 505/13 lets a taxpayer file a claim for reimbursement of Motor Fuel Tax paid on fuel that is used for a purpose other than operating a motor vehicle on public highways or a recreational watercraft on Illinois waters.

Q: The requester cited two prior cases finding natural gasoline reportable — did the Department rely on those?
A: The Department's conclusion rests on the plain language of 35 ILCS 505/5 itself, not primarily on the cited administrative decisions. The letter references those cases only in summarizing the requester's argument; it does not conduct its own independent analysis of them in reaching its answer.

Q: Is this letter binding on the Department for other taxpayers?
A: No. This is a General Information Letter (GIL), not a Private Letter Ruling. A GIL merely points to relevant regulations and statutes and is not a statement of Department policy, so it cannot be relied on by other taxpayers as binding precedent.

Citations and references

• 35 ILCS 505/1.1 (definition of motor fuel)
• 35 ILCS 505/5 (distributor's monthly return; definition of gasoline, including casing-head and absorption or natural gasoline)
• 35 ILCS 505/6(1) (no tax owed on motor fuel sold to another licensed distributor)
• 35 ILCS 505/13 (reimbursement of tax paid on motor fuel used other than for operating a motor vehicle on public highways or a recreational watercraft)
• 35 ILCS 505/17 (statement of purpose: tax on the privilege of operating motor vehicles, based on fuel consumption)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedure)
• 2 Ill. Adm. Code 1200.120 (General Information Letters)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2020.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2020/st20-0040-gil.pdf

Original ruling text

ST 20-0040-GIL 12/10/2020 MOTOR FUEL TAX
Based on the plain statutory language, distributors are required to include natural gasoline in
returns filed with the Department. See 35 ILCS 505/5. (This is a GIL.)
December 10, 2020
NAME
ADDRESS
Dear Xxxx:
This letter is in response to your letter, in which you requested information. The Department
issues two types of letter rulings. Private Letter Rulings (“PLRs”) are issued by the Department in
response to specific taxpayer inquiries concerning the application of a tax statute or rule to a
particular fact situation. A PLR is binding on the Department, but only as to the taxpayer who is the
subject of the request for ruling and only to the extent the facts recited in the PLR are correct and
complete. Persons seeking PLRs must comply with the procedures for PLRs found in the
Department’s regulations at 2 Ill. Adm. Code 1200.110. The purpose of a General Information Letter
(“GIL”) is to direct taxpayers to Department regulations or other sources of information regarding the
topic about which they have inquired. A GIL is not a statement of Department policy and is not
binding on the Department. See 2 Ill. Adm. Code 1200.120. You may access our website at
www.tax.illinois.gov to review regulations, letter rulings and other types of information relevant to your
inquiry.
The nature of your inquiry and the information you have provided require that we respond with
a GIL. In your letter you have stated and made inquiry as follows:
Pursuant to Ill. Admin. Code 1200.120, we request guidance from the Illinois
Department of Revenue (“Department”) as to the definition of “gasoline” in ILCS 505/5
and the imposition of Illinois Motor Fuel Tax thereon. Specifically the guidance
requested pertains to natural gasoline and whether or not this is a product included
within the definition of gasoline and taxable as such. We believe that the definition of
gasoline does not include natural gasoline and request that the Department issue
guidance confirming this and therefore clarifying for the industry that natural gasoline is
not subject to the motor fuel tax.
Applicable Law and Definitions
35 ILCS 505/1.1 defines motor fuel as “all volatile and inflammable liquids produced,
blended or compounded for the purpose of, or which are suitable or practicable for,
operating motor vehicles.”
35 ILCS 505/5 requires licensed distributors to file a monthly tax return showing an
itemized statement of the invoiced gallons of motor fuel of the types specified in that
section. The motor fuel referred to in that section include [sic] gasoline which is defined
as “[A]ll products commonly or commercially known or sold as gasoline (including
casing-head and absorption or natural gasoline)….” This provision of the law was first
enacted in 1929.

The definition of gasoline includes gasoline that is produced from casing-head gas,
produced using the absorption process method or produced from natural gasoline itself.
(As there is no actual absorption gasoline product we believe that the definition is
actually intending to refer to the absorption process of producing gasoline from natural
gas.) The key phrase is “[All] products commonly or commercially known or sold as
gasoline.” Casing-head, absorption and natural gasoline are not “commonly or
commercially sold as gasoline.” Rather they are products from which motor vehicle
grade gasoline may be derived and in the case of “absorption” it is a process whereby
gasoline is made from natural gas using the “absorption” method to produce the
gasoline. Therefore, the products and process that are used to make gasoline should
not be included in the definition of gasoline and should not be taxed as gasoline.
Natural gasoline is comprised of complex chains of hydrocarbons, primarily pentanes
and longer. 1 It is within the family of natural gas liquids and is a product of natural gas
processing plants and crude oil refineries. It is considered to be a heavy petrochemical
feedstock. Commercially, it falls within American Society of Testing and Materials
(“ASTM”) D8011, Standard Specification for Natural Gasoline as a Blendstock in
Ethanol Fuel Blends or as a Denaturant for Fuel Ethanol. Natural Gasoline does not fall
within the ASTM specification for gasoline which is ASTM D4814. It is therefore not
commercially known as gasoline. Natural gasoline is extracted form “wet” gas which is
produced simultaneously with crude oil. 2 The wet gas is separated from the oil,
collected and delivered to natural gasoline plants. The collection of natural gasoline
began to gain importance in the early 1900s with the introduction of automobiles. It can
be collected by either compression, oil absorption, charcoal absorption or refrigeration
methods. 3 Natural gasoline is also the last distillation column in a Natural Gas Liquids
fractionation facility. It is very similar to casing-head gasoline.
Casing-head gas is a form of natural gas from which gasoline can be derived. It is
produced along with crude oil from oil wells and is a “wet” gas. It is not itself a gasoline.
Casing-head gasoline is a term for gasoline that is derived from casing-head gas.
Casing-head gas contains gasoline vapor. Gasoline is extracted from casing-head gas
using compression and condensation methods. This was a sizable industry as far back
as the early 1900s with a report from 1917 4 stating that in 1915 65,000,000 gallons of
gasoline was produced and marketed using these methods. Casing-head gasoline is
collected through a process of condensation; natural gas that is rich in heavy
hydrocarbons is cooled until the heavy hydrocarbons – naphtha and gasoline –
condense into a liquid. This casing-head gasoline is then typically blended with
gasoline produced in the refinery.
Absorption gasoline is not actually a product in and of itself. Rather the term describes
a process used to extract gasoline from natural gas. Consequently, the only product the
inclusion of this term in the definition could refer to is motor vehicle gasoline produced
form an absorption process. The absorption process uses heavy oil to absorb natural
(or refinery) gas which contains the gasoline and then distills the gasoline from the oil.
See U.S. Energy Information Administration, “Today in Energy,” April 20, 2012 at
Https://www.eia.gov/todayinenergy/detail.pphp?id=5930 Retrieved July 31, 2018
2
See “Production of Natural Gasoline,” Robert B. Bowman, Engineering and Science Monthly, June 1945 at page 4.
3
Bowman, supra at page 6 and 7.
4
See Department of the Interior, Bureau of the Mines, “Extraction of Gasoline from Natural Gas By Absorption Methods,” George A.
Burrell, P.M. Biddison and G.G. Oberfell, (June 1917).
1

This process is effective in extracting gasoline from “dry” gas. Unlike “wet” gas which is
produced with crude oil, “dry” gas is generally obtained from non-oil producing gas
wells. The absorption process was first used in the early 1900’s. 5
Analysis
Gasoline can be extracted from crude oil by distillation (this is known as “straight-run
gasoline”), by thermal or catalytic cracking or condensed from the product of natural gas
wells (casing-head gasoline) 6 At the time the statute was enacted, gasoline was most
commonly produced from casing-head or absorption processes. This is likely the
reason why these terms are included in the definition – to ensure that gasoline, however
produced, was included in the definition of motor fuel and taxed accordingly. It does not
mean that casing-head gas or natural gasoline in their pure form prior to being used in
the production of gasoline are to be included in the definition (as noted above there is
no such product as absorption gas or absorption gasoline; this term describes a
method. Given that the only three “products” listed as being included in the definition of
gasoline are “casinghead, absorption and natural gasoline,” and given that at least one
of these is not a product but a process, the only logical conclusion is that the definition
was drafted as such to ensure that all motor vehicle grade gasoline from all sources and
processes in use at the time of enactment was specifically included.
Despite have [sic] similarities to a very low octane gasoline, natural gasoline is volatile
and unstable and cannot, without further processing, be used as a fuel in the engine of
a motor vehicle. This is clear by it not meeting the ASTM D4814 commercial
specification for gasoline. The sulfur content of natural gasoline is approximately 100 –
200 parts per million by weight; by contrast the maximum allowable sulfur content in a
batch of finished gasoline is 80 parts per million. The octane rating is usually around 70
which is considerably lower than conventional gasoline which tends to have a low
octane rating of 85 and therefore makes natural gasoline unfit for use by itself in the fuel
tank of a motor vehicle. Natural gasoline is commonly used today as a denaturant in
fuel grade ethanol and as a diluent for bitumen and tar sands crude oil. Additionally, its
characteristics make it an appealing blendstock as it can be blended with other
components to produce a finished gasoline but on its own is not suitable for use in a
motor vehicle. As such it is not commonly or commercially known as or sold as
gasoline. As it is not commonly or commercially sold as a gasoline it could not be
intended that this product be included within the definition of gasoline. Moreover, as
natural gasoline is not strictly produced, blended, compounded or suitable for use in a
motor vehicle it does not meet the definition of motor fuel in 35 ILCS 505/1.1. It should
not therefore be taxed as gasoline.
By contrast, gasoline that is derived from natural gasoline (i.e., gasoline that has been
produced through blending natural gasoline with other components) is produced,
blended, compounded and suitable for use in a motor vehicle engine because its
chemical make-up is not entirely the pentanes and heavier hydrocarbons of “pure”
natural gasoline. Gasoline that is derived from natural gasoline would meet the ASTM
specification for gasoline and would be known commonly and commercially as gasoline
Burrell, Biddison and Oberfell, supra at Page 14.
Kansas Depart of Health and Environment, Bureau of Environmental Remediation/Remedial Section, “Petroleum Refining: A 125
Year Kansas Legacy,” Aspen Junge, June 30, 2010.

5
6

and should be taxed accordingly. However, it is a different product from natural
gasoline and the distinction should be acknowledged in the taxation of the different
products.
We are aware of the decision by NAME, in Illinois Department of Revenue v. ABS
Business (MF 14-01, July 18, 2014). In that case, the taxpayer had purchased natural
gasoline to use as a denaturant in fuel grade ethanol. The decision states that the
natural gasoline was required to be reported on the taxpayer’s monthly motor fuel tax
return. (The decision goes to [sic] on to note that for reasons related to the use of the
denaturant the taxpayer and Department concluded that it was not taxable). While this
decision appears to state as fact that natural gasoline is required to be reported on the
monthly fuel tax return and is therefore taxable it bases this decision on the use of the
term “natural gasoline” in the statutory definition of gasoline and delves no further into
precisely which products are “commonly and commercially known as gasoline” and
therefore which products should be included in the definition of gasoline and did not
delve into the context of the terms within the statute. Had this decision looked into the
chemical composition, and had this decision noted that natural gasoline cannot be used
in a motor vehicle engine without further processing, and had this decision looked into
the use of the terms within the context of the statute the conclusion that natural gasoline
[sic] taxable should not have been reached.
Indeed, if we look at the decision in Waste Management of Illinois, Inc. v. Illinois
Department of Revenue (15 TT 130, 10/03/2016) there is further support for the position
that natural gasoline itself is not taxable as a motor fuel. In that case, NAME1 cites 35
ILCS 505/17 which states:
It is the purpose of Sections 2 and 13a of this Act to impose a tax upon the
privilege of operating each motor vehicle as defined in this Act upon the public
highways and the waters of this State, such tax to be based upon the
consumption of motor fuel in such motor vehicle, so far as the same may be
done, under the Constitution and statutes of the United States, and the
Constitution of the State of Illinois.
NAME1 stated that it was clear from the language of the section that “the legislature
meant to tax the use of each motor vehicle on its highways and to measure the tax
based on the consumption of motor fuel.” As the legislative intent is to tax the use of
motor vehicles based on the consumption of motor fuel it logically follows that only fuel
products capable of being used as a fuel in the engine of a motor vehicle should be
subject to tax irrespective of whether the legislature has chosen to require them to be
reported. It has been shown above that while gasoline produced from and using natural
gasoline is capable of being used in the engine of a motor vehicle, natural gasoline itself
cannot.
For the aforementioned reasons, we request that the Department issue a General
Information Letter clarifying for the industry, that natural gasoline is outside the definition
of gasoline and is [sic] therefore subject to Illinois’ motor fuel tax.
DEPARTMENT’S RESPONSE:

The Department is unable to agree with your conclusion that natural gasoline is outside the
definition of gasoline under the Motor Fuel Tax Law. Section 5 of the Motor Fuel Tax Law provides
that “. . . a person holding a valid unrevoked license to act as a distributor of motor fuel shall, between
the 1st and 20th days of each calendar month, make return to the Department, showing an itemized
statement of the number of invoiced gallons of motor fuel of the types specified in this Section which
were purchased, acquired, received, or exported during the preceding calendar month; the amount of
such motor fuel produced, refined, compounded, manufactured, blended, sold, distributed, exported,
and used by the licensed distributor during the preceding calendar month; the amount of such motor
fuel lost or destroyed during the preceding calendar month; the amount of such motor fuel on hand at
the close of business for such month; and such other reasonable information as the Department may
require. The next paragraph of Section 5 provides that “[t]he types of motor fuel referred to in the
preceding paragraph are: (A) All products commonly or commercially known or sold as gasoline
(including casing-head and absorption or natural gasoline). . . .” See 35 ICLS 505/5. Based on the
plain statutory language, distributors are required to include natural gasoline in returns filed with the
Department.
The statutory scheme of the Motor Fuel Tax Law deliberately includes robust reporting of
motor fuels to assist the Department in the tracking of and collection of tax on motor fuel. That said,
of course, tax is only required to be paid on reported motor fuel in cases where the sale of the motor
fuel is to a person who is not licensed under the Motor Fuel Tax Law and no other exemption applies.
To the extent natural gasoline is sold to another person licensed under the Motor Fuel Tax Law,
although reporting is required, no Motor Fuel Tax is owed. See 35 ILCS 505/6(1). In addition, to the
extent tax is paid on motor fuel that is then used for any purpose other than operating a motor vehicle
upon the public highways or operating recreational-type watercraft upon the waters of this State, upon
the filing of a valid claim, the Department shall reimburse the claimant for the Motor Fuel Tax paid.
See 35 ICLS 505/13.
I hope this information is helpful. If you require additional information, please visit our website
at www.tax.illinois.gov or contact the Department’s Taxpayer Information Division at (217) 782-3336.
Very truly yours,

Samuel J. Moore
Associate Counsel
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