Yes, government agencies—particularly state and local governments—are exempt from paying certain Federal Excise Taxes (FET) under specific conditions. These exemptions are outlined by the Internal Revenue Code and regulated by the IRS, helping eligible agencies reduce the cost of operational expenses like fuel, communications, and equipment procurement.
Let’s take a closer look at each exemption in brief throughout this blog to better understand how government agencies can benefit from them.
Federal Excise Tax (FET) is a tax imposed by the federal government on specific goods and services, such as:
Heavy trucks and trailers
Tires
Certain fuels (gasoline, diesel, kerosene)
Air transportation
Telephone communication
It is either included in the price of the good or paid separately at the point of sale. While most commercial entities are required to pay FET, certain organizations and agencies, including state and local governments, are eligible for exemptions
Federal excise taxes on motor fuels, such as gasoline and diesel, are usually imposed at the time of purchase. However, exemptions or refunds are available under certain rules.
Gasoline
Eligible Purchasers: State/local government entities or the District of Columbia.
Exemption Option: Purchase gasoline tax-free directly from a qualified wholesale distributor.
Required Documentation: Provide an annual certificate of ultimate purchaser to the distributor.
Refund Option: If tax is paid at the pump, the agency may file IRS Form 8849 for a refund.
NOTE: Records must clearly identify fuel type and quantity for claims to be processed.
Diesel Fuel
Tax-Free Purchase: Must be bought from a registered ultimate vendor, who has submitted IRS Form 637.
Annual Certificate: Must also provide a certificate to the vendor to qualify.
Refund Limitation: If purchased tax-paid, the government entity must request a refund from the vendor—not the IRS.
According to FAR Subpart 29.2:
Federal agencies are generally exempt from excise taxes imposed on goods and services purchased for official use.
Contractors making purchases on behalf of a government agency can also be exempt, provided they follow the applicable procedures.
To qualify for tax-free fuel or telephone service:
Purchases must be for the agency’s exclusive use
Proper documentation (certificates or registration forms) must be filed
Entities must maintain accurate records of usage
Refer to these IRS documents for guidance:
While this blog focuses on government agency exemptions, it's worth noting that other entities also qualify for FET relief:
Nonprofit hospitals and educational institutions
Charitable organizations
Businesses using idling reduction devices on vehicles (under EIEA 2008)
Credit/refund claims for nontaxable fuel uses (e.g., kerosene, aviation gasoline)
Refer to Form 8849 Schedule 1 for non-taxable fuel usage claims.
The IRS also runs a Federal Excise Tax Exemption Program for eligible foreign, governmental, and international organizations. It provides:
Centralized processing of excise tax exemption claims
Verification and certification for organizations
Guidance through IRS.gov on how to apply and maintain compliance
WRAP:
Government agencies, especially state and local governments, can benefit significantly from exemptions from Federal Excise Tax—especially on fuel and telecommunications. These exemptions are governed by a combination of IRS regulations, forms, and federal acquisition policies. By understanding the eligibility rules and maintaining proper documentation, government entities can reduce operational costs and ensure compliance.
If you work in a government agency, consult your procurement officers and tax professionals to ensure you're taking full advantage of these exemptions.
File your Federal Excise Tax online with the IRS authorized Simple720 portal.