Iowa Expands Renewable Fuels Incentives

By Andrew Anderson and Adam B.Thimmesch | July 22, 2011

Iowa Gov. Terry Branstad signed comprehensive renewable fuels legislation into law on May 26.  The new law creates additional tax credits and extends and increases prior incentives to promote biofuel sales and production in Iowa. The bill enhances the ethanol promotion tax credit, replaces the current E85 credit, creates a new tax credit for certain ethanol blends, establishes a biodiesel production incentive, and liberalizes the biodiesel tax credit. Companies nationwide involved in the ethanol industry can learn from what Iowa is doing and can factor this into their economic plans.

The Ethanol Promotion Tax Credit applies to the current Iowa Renewable Fuels Standard, which provides tax incentives for retailers selling renewable fuels as a certain percentage of their total gasoline sales.  Retailers qualify for this credit based on their sales of biodiesel and ethanol.  In claiming this credit, retailers may elect to compute their Iowa RFS threshold on a company-wide or site-by-site basis.   

The new law increases the EPTC at each level of compliance.  Retailers that meet the RFS schedule are now eligible for a tax credit of 8 cents per gallon of ethanol sold (up from the prior rate of 6.5 cents per gallon).  For retailers within 2 percent of the RFS schedule, the new law increases the available tax credit from 4.5 cents to 6 cents per gallon of ethanol sold.  For retailers beyond 2 percent, but within 4 percent of the RFS schedule, the new law increases the 2.5 cent tax credit to 4 cents for years beginning in 2011. 

The E85 Promotion Tax Credit allows a retailer to claim a tax credit based on the total gallons of E85 fuel sold in a given tax year.  For 2011, the tax credit is 10 cents per gallon.  Under the new law, the E85 credit has been raised to 16 cents per gallon for 2012 through 2017.

With the 2011 bill, Iowa became the first state to incentivize E15-specific production.  The E15 credit allows retailers to claim a tax credit for ethanol-blended gasoline classified as E15 or higher, excluding gasoline classified as E85, effective July 1.  From that date through 2014, the tax credit is 3 cents per gallon.  For 2015 through 2017, the tax credit will be 2 cents per gallon.  With the addition of the E15 tax credit to Iowa law, the 2011 bill clarifies that a retailer may claim any or all of the EPTC, the E85 Promotion Tax Credit, and the E15 Tax Credit, if eligible.

The Iowa Biodiesel Tax Credit is available for retail dealers of diesel fuel who operate motor fuel pumps at a retail motor fuel site in Iowa.  The 2011 bill liberalizes the eligibility requirements for that tax credit by eliminating the requirement that a retailer’s biodiesel sales represent at least 50 percent of total fuel sales.  Current Iowa law provides for a tax credit of 3 cents per gallon for B2 and higher in 2011.  Under the new law, the tax credit for B2 to B4 blends will drop to 2 cents per gallon in 2012, while the tax credit will be 4.5 cents per gallon for B5 or higher blends.  For 2013 through 2017, the biodiesel-blended fuel must be classified as B5 or higher to qualify for the credit and the credit will be 4.5 cents per gallon.

The new law also provides some protection for retailers of biofuels by providing relief from liability for damages caused by the use of incompatible motor fuel dispensed at the retailer’s motor-fuel site.  To be afforded that protection, three conditions must be met: 1) the incompatible motor fuel must comply with the fuel specifications as provided by Iowa code, 2) the incompatible motor fuel must be selected by a person other than the retailer, including an employee or agent of the retailer, and, 3) the motor fuel pump must be correctly labeled.

Authors: Andrew Anderson
Partner, Faegre & Benson LLC

Adam B. Thimmesch
Associate, Faegre & Benson