It has come to the attention of the Bureau of Tax Policy that some school districts in Michigan may have improperly used tax-free dyed diesel fuel in school busses that are owned and operated or leased and operated by a private contractor.

Section 122 of the Motor Fuel Tax Act (MFTA, MCL 207.1122, generally prohibits the use of dyed diesel fuel in vehicles that are operated on the public roadways in Michigan. However, there is an exception for diesel fuel used in a "motor vehicle owned and operated or leased and operated by the federal or state government or a political subdivision of this state." This exception allows a school district that owns and operates its busses to use tax-free dyed diesel fuel in those busses.

However, if a provate contractor owns and operates or leases and operates school busses pursuant to a contract with a school district, or if the private company operates busses owned or leased by a school district, the MFTA prohibits the use of tax-free diesel fuel in those busses.

Similarly, if taxed, clear diesel fuel is used in busses owned and operated or leased and operated by a private contractor pursuant to a contract with a school district, or is used in busses owned or leased by the school district but operated by the private contractor, neither the school district nor the private contractor would be eligible for a refund of the tax paid on that fuel.

Consequently, any school district that is using dyed diesel fuel in busses that the district does not own and operate or lease and operated should stop doing so immediately.

If you have any questions or concerns, please contact Douglas R. Miller, Special Taxes Division, Bureau of Tax Policy, at 517.636.6230.