Dyed Diesel Executive Order Update

RED-DYED DIESEL: FEDERAL ACTION DOES NOT CURRENTLY CHANGE CALIFORNIA REQUIREMENTS

On October 5, President Trump signed an Executive Order directing the IRS to provide temporary federal tax and penalty relief for the sale or use of red-dyed diesel on highways from October 5 through December 31, 2026. Importantly, the relief outlined in the Executive Order is not yet in effect. The Order directs the IRS to take action within five days to implement the federal relief.

However, California has not, at this time, waived enforcement of its state restrictions on the use of red-dyed diesel for on-road purposes.

California law continues to prohibit operating or maintaining a motor vehicle on a California public highway with dyed diesel in its fuel tank, subject to limited exceptions. CDTFA also continues to state that dyed diesel may not be used to power vehicles on California roads and highways unless the use is authorized under both federal and state law.

WHAT THIS MEANS FOR CALIFORNIA FUEL MARKETERS AND RETAILERS

At this time, California members should continue operating under the status quo.

The federal Executive Order does not, by itself, eliminate or suspend California’s separate state-law restrictions. Unless California takes corresponding action, members should continue to follow all existing California requirements governing the sale, handling and use of red-dyed diesel.

CFCA will continue monitoring developments at both the federal and state levels and will update members if California takes action that changes the current requirements.

ADDITIONAL INDUSTRY RESOURCE

For members looking for a helpful breakdown of the federal action and what it means for fuel marketers and retailers, SIGMA has put together an excellent explainer on the dyed-diesel waiver. We encourage members to review SIGMA’s explainer included below for additional context as this issue develops:

SIGMA Explainer: Red-Dyed Diesel

The executive order directs the IRS to stipulate the following for dyed diesel sold or used on highways from October 5, 2026 through December 31, 2026:

NOTE: nothing in the order is in effect until the IRS acts, which it has 5 days to do

1. WAIVES PENALTIES

In normal times, when dyed diesel is placed in highway vehicles, not only is a tax owed for that fuel, but there is an additional penalty for using the dyed fuel in this unlawful way. The executive order waives those penalties for both selling and using dyed diesel in highway vehicles.

2. DEFERS (BUT DOES NOT WAIVE) THE EXCISE TAX

The executive order says the Administration intends to delay the federal excise tax owed when dyed diesel is used on the highway until after this year. But it does not waive those payment obligations at the future date when they come due (to be clarified in future guidance). Although the president is empowered to delay collection of the tax in times of emergency, it requires an act of Congress to waive or otherwise change the excise tax scheme. Congress is highly unlikely to do this. Waiving the deferred tax would require Congress to replace the lost Highway Trust Fund revenue, and no offsetting revenue-raiser has been publicly discussed. The executive order does say the Trump Administration will “explore avenues, including legislation, to eliminate the obligation,” though we do not believe those avenues are likely to be viable.

3. ENCOURAGING STATES TO FOLLOW SUIT

The executive order directs the White House and USDA to encourage states to adopt matching relief. At least ten states have already acted, for periods of one to four months, but the relief varies: Some have suspended state fuel taxes outright, while others have only waived penalties for using dyed diesel on highways.

The executive order is mainly a farm-hauling measure. It lets agriculture and other related businesses with their own bulk dyed storage put that fuel into trucks and haul commodities or equipment during harvest. This will be particularly impactful in states that have also waived their own penalties (though, like the President’s executive order, most states aren’t waiving the tax obligation, but rather waiving penalties for using dyed diesel on the highway).

The White House appears to be trying to encourage the supply chain to move toward selling dyed fuel in non-traditional ways. We do not expect most reputable diesel retailers and fuel marketers to do this. First, the tax is still owed, so there’s limited upside to selling dyed fuel into highway vehicles in order to defer a tax bill that will come due unless Congress acts. Second, the logistical challenges outweigh any visible upside: Residual dye lingers in tanks and fuel systems. Even trace amounts in clear diesel can bring IRS and state penalties outside the waiver window or in states that haven’t undertaken their own penalty waivers.

Selling dyed fuel at scale requires dedicated equipment and enough dyed supply at the rack. Neither marketers nor commercial trucking companies are eager for the supply chain to reconfigure itself in order to accomplish this. Truck drivers travel through multiple states in a given day; untaxed fuel purchased in one state doesn’t mean the driver can avoid liability in states that do not waive enforcement. Ultimately, for most marketers, the liability and customer risk outweigh any temporary, uncertain benefit. It’s a lot of risk for compliance departments to absorb over the potential for a $0.24 deferral on diesel that is retailing for more than $6.00 per gallon in many parts of the country.

The executive order reflects a bona fide attempt by the Administration to provide relief to farmers during harvest ahead of the midterm elections. It does not change the broader supply picture that is causing high diesel prices in the first place. Even if market participants respond exactly the way the Administration wants, the underlying supply picture remains the same: Diesel inventories remain low, the war in the Middle East continues to constrain trade flows of both diesel and crude, and the Ukraine-Russia conflict is precluding Russian diesel from entering the global market.

This is all before we enter peak winter demand. Until those broader, macro issues improve, we expect the current elevated price environment to persist. We will continue engaging with the Administration on these issues, and will be watching Treasury’s implementing guidance to see if any clarifying information is forthcoming.