United States: Illinois Appellate Court Reverses Tax Tribunal Regarding Taxation Of Compressed Natural Gas

On December 29, 2017, the First District of the Illinois Appellate Court reversed an Illinois Independent Tax Tribunal ("Tribunal") decision, which had held that compressed natural gas ("CNG") is subject to Illinois motor fuel tax for periods prior to July 1, 2017.1 This decision creates a potential refund opportunity for motor fuel tax paid on CNG used in the operation of vehicles in Illinois prior to July 1, 2017, and may not foreclose refunds for tax periods after that date.2


The taxpayer, Waste Management of Illinois, Inc. ("Waste Management"), operates trucks using CNG as fuel in its waste collection business. Waste Management originally paid Illinois motor fuel tax on the CNG that its trucks consumed in Illinois, but subsequently filed refund claims after the Illinois Department of Revenue (the "Department") amended its motor fuel tax regulations in 2014 to address gallon-equivalency rates for gaseous substances, including CNG.3 The Department denied Waste Management's refund claims, and the matter was appealed to the Tribunal.

Waste Management's Position

Waste Management asserted that CNG was not subject to motor fuel tax because "motor fuel" was defined by statute as a "liquid." Waste Management also asserted that the Department could not expand the statutory definition of "motor fuel"4 by regulation, and if there was any ambiguity as to whether CNG was taxable or not, such ambiguity must be construed against the Department.

The Department's Position

The Department argued that (i) CNG fit within the definition of motor fuel, which included the catch-all phrase "among other things"; (ii) limiting the tax to only liquids would mean that language elsewhere in the Motor Fuel Tax Law ("MFTL") was superfluous;5 (iii) the tax was intended to be imposed on all motor fuels used in the state; and (iv) the Department's interpretation of the MFTL is entitled to a high-level of deference.

Determination of the Tax Tribunal

In ruling for the Department, the Tribunal held that the definition of motor fuel could be read to include both liquids and non-liquids, which is supported by the fact that (i) the term "gallon" is defined to include gaseous substances, and (ii) fuel distributors are required to report CNG sales on their tax returns filed with the Department.6

Decision of the Appellate Court

The Appellate Court determined that the 2017 legislative change to expressly include CNG in section 2 of the MFTL was a prospective amendment. For the earlier periods at issue, the Appellate Court held that the statutory definition of "motor fuel," which includes only liquids, is not ambiguous, and that it was clear to the court that the legislature went to great lengths to explicitly exclude CNG from the meaning of "special fuel," a subset of taxable motor fuel.

The Department's argument that CNG fits within the motor fuel catch-all "among other things" was not persuasive to the court, given the clear legislative intent to limit the motor fuel tax to only liquids, and the expressed omission of CNG from the definition of "special fuels." The Appellate Court also determined that the requirement for distributors to report CNG sales on their Illinois motor fuel tax returns was not necessarily tantamount to taxation, as there can be unrelated reasons to capture such information, such as Illinois being a member of the International Fuel Tax Agreement.


The Appellate Court decision may be further appealed to the Illinois Supreme Court. However, the decision, as currently issued, creates possible refund opportunities for taxpayers that have paid motor fuel tax on CNG used in the operation of motor vehicles (or watercraft) for periods prior to July 1, 2017, the effective date of P.A. 100-0009.

Additionally, while the Appellate Court did not address tax periods after the effective date of P.A. 100-0009, taxpayers may be entitled to refunds for motor fuel tax paid on CNG for tax periods after this legislative change. While P.A. 100-0009 expressly included CNG in certain sections of the MFTL, it did not change the definitions of "motor fuel" or "special fuel," which remain restricted to "liquids."


1 See Waste Mgt. of Ill., Inc. v. Ill. Dep't of Rev. et al., 2017 IL App (1st) 162830-U (Dec. 29, 2017).

2 The Appellate Court notes in its decision that the Illinois Legislature, in enacting Public Act 100-0009 (eff. July 1, 2017), expressly subjects CNG to motor fuel tax by amending section 2 of the Motor Fuel Tax Law regarding tax rates, but did so "without changing the definition of 'Motor Fuel.'"

3 38 Ill. Reg. 18586, September 5, 2014.

4 "Motor Fuel" is defined by statute as:
[A]ll volatile and inflammable liquids produced, blended or compounded for the purpose of, or which are suitable or practicable for, operating motor vehicles. Among other things, 'Motor Fuel' includes 'Special Fuel'." "Special Fuel" is defined as "all volatile and inflammable liquids capable of being used for the generation of power in an internal combustion engine except that it does not include . . . combustible gases as defined in Section 5, example (B), of this Act. 35 ILCS 505/1.1; 1.13 (emphasis added).

5 MFTL section 1.8 defines a "gallon" to include measurements of substance in a gaseous state," and MFTL section 5 requires Illinois licensed motor fuel distributors to report to the Department the number of gallons of motor fuel purchased for use in the state, including CNG. 35 ILCS 505/5; 505/1.8.

6 Waste Mgt. of Ill., Inc. v. Ill. Dep't. of Rev., 15 TT 130 (Oct. 3, 2016).

This article is presented for informational purposes only and is not intended to constitute legal advice.

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