Flash Titles & Diversions: Essential Knowledge for Navigating Complex Fuel Reporting

For fuel tax teams, few scenarios create more compliance headaches and reporting pitfalls than flash titles and diversions. These transactions introduce complexity that can lead to incorrect filings, audit exposure, and financial penalties. When title transfers happen simultaneously at the rack or a load gets rerouted mid-journey, your reporting processes are put to the test. The key to managing this complexity is being aware of what is happening and how it impacts your tax reporting and finances.

Flash Title

A flash title occurs when ownership of the fuel transfers between two or more parties simultaneously with the product being loaded at the terminal. This often happens when a company purchases fuel from a terminal and immediately sells it to their customer.

Diversions

A diversion happens when fuel is delivered to a destination state different from the one listed on the original bill of lading (BOL). Both situations can obscure the tax-responsible party and the correct jurisdiction for remittance, creating significant reporting challenges.

For a refresher on motor fuel taxation for beginners, read our Gasoline State Tax Rates guide..

Why Flash Titles and Diversions Complicate Tax Reporting

The core challenge with flash titles and diversions is the disconnect between the physical movement of fuel and the paper trail that documents its sale and taxability. This gap can lead to audit red flags.

• Obscured Liability: In a multi-party flash title chain, who is the legally responsible party for remitting the tax? If one party in the chain is unlicensed in the destination state, the tax obligation can shift unexpectedly, often leaving another party liable without their knowledge.
• Incorrect Tax Calculation: The position holder at the terminal rack may collect tax based on the destination state shown on the bill of lading (BOL). If your customer diverts that load to a state with a different tax rate, you could end up with an underpayment in one state and the need for a refund from another, making it a time-consuming process.
• Mismatched Data: Auditors heavily rely on cross-matching data from terminal operator reports, supplier reports, and state-to-state information sharing. When a diversion occurs, the bill of lading (BOL) from the origin terminal won’t match the delivery records, immediately flagging the transaction for review.
• Licensing Gaps: A common issue in below-the-rack transactions is when fuel is sold through a chain of distributors, and one party lacks the proper license. This breaks the tax-exempt chain and can trigger an immediate tax liability, often with penalties and interest.
• Lost Collection Allowances: The party who remits the tax is generally the one entitled to the collection allowance. If a flash title or diversion causes confusion over who that party is, your company could miss out on this administrative discount.

Understanding Tax Flow in Complex Scenarios

To report correctly, you must understand how taxes should be handled based on the transaction type and the jurisdictions involved.

Origin vs. Destination State Taxation

States generally follow either an “origin” or “destination” model for taxation at the terminal rack.

• In a destination state model, the supplier at the rack is responsible for collecting the tax of the destination state listed on the BOL.
• In an origin state model, the tax of the state where the terminal is located is collected, unless a valid exemption for export applies.

A flash title transaction that crosses state lines can complicate this. The position holder may see the sale as occurring at their origin terminal, while the ultimate customer sees it as a purchase in their destination state. This discrepancy can lead to dual taxation or missed tax payments.

Blended Fuels

Blends add another layer of complexity. For example, a customer might order a 10% ethanol blend (gasohol). In many states, the gasoline component is taxable, but the ethanol portion may be exempt or taxed differently. If this load is diverted to a state where ethanol is taxable, your initial tax calculation becomes incorrect. Your system must be able to track the taxability of each product component based on the state of the final delivery.

Multi-Party Pass-Throughs

Consider a scenario where a position holder sells to Distributor A, who sells to Distributor B, who then sells to the end user. If all parties are properly licensed, the transaction can often pass through tax-exempt until the final taxable sale. However, if Distributor B isn’t licensed in that state, the chain is broken. Distributor A may suddenly become liable for the tax on their sale to Distributor B, creating an unforeseen tax debt.

An Operating Playbook for Accurate Reporting

A proactive, systematic approach is the best defense against the chaos of flash titles and diversions. This playbook breaks the process down into manageable steps.

1. Pre-Load Validation

Before a load is even pulled, validate your customer’s license for the intended destination state. Maintain a master database of customer licenses and update it regularly. If a customer plans to pull fuel for a state where they are not licensed, your system should flag the transaction so you can ensure tax is charged correctly.

2. Accurate Destination Capture

Instruct dispatchers and carriers to confirm the final destination before loading. While things can change, getting the correct destination on the initial BOL prevents a significant number of “planned” diversions from becoming reporting exceptions.

3. Real-Time Diversion Registration

When a diversion is unavoidable, the carrier must report it immediately. Most states require diversions to be registered through an in-house program or a third-party service. This creates an official record that connects the original BOL to the new destination. Your process should require the carrier to provide you with the diversion number as soon as it’s generated.

4. Exception Handling and Communication

Create a clear process for handling exceptions. When your team receives a diversion number, who is responsible for updating the transaction in your system? This update should adjust the destination state, recalculate the tax, and ensure the invoice is correct. Clear internal communication prevents diverted loads from being reported based on outdated BOL data.

5. Control Payment and Deferral Timing

In states that allow tax deferral, payment timing is critical. A supplier might be protected from liability only if their licensed customer pays the tax within a specific timeframe. Your process must track these deadlines closely. In a flash title chain, you need to know who paid whom and when to ensure you are not left with the liability if a downstream party defaults.

6. Month-End Reconciliation

At month-end, reconcile your sales and purchase data against terminal operator reports and diversion registry reports to identify discrepancies before filing. Map every BOL to a final delivery ticket and its corresponding tax calculation on your return. This creates a clear audit trail that substantiates your filings.

Essential Documentation Checklist

Accurate reporting is impossible without proper documentation. Auditors will always ask for it, so have it organized and ready.

• Bill of Lading (BOL): The foundational document from the origin terminal.
• Carrier Delivery Ticket: Proof of where the fuel was actually delivered. This is critical for supporting a diversion.
• Supplier Invoice: Shows who purchased the fuel and what taxes were charged.
• Diversion Number/Confirmation: The official record of the change in destination.
• Prior Period Tax Returns: Needed to correctly file amended returns for late-reported diversions.

Three Scenarios: How to Report Correctly

Let’s apply these concepts to real-world situations.

Scenario 1: The Partial Diversion

• Situation: A truck loads 8,500 gallons of gasoline at a Michigan terminal with the BOL showing a Detroit destination. The station’s tanks are fuller than expected, and the carrier diverts the remaining 1,000 gallons to a station in Toledo, Ohio.
• Correct Reporting: The carrier must obtain a diversion number for the 1,000 gallons delivered to Ohio. Your return for Michigan should show the sale of 7,500 gallons. Your Ohio return should report the import of 1,000 gallons, and you must remit the Ohio tax. You will then need to file for a refund of the Michigan tax paid on those 1,000 gallons.

Scenario 2: The Flash Title Export

• Situation: Your customer uses your card to pull fuel at an Indiana terminal. The BOL shows your company as the purchaser and a destination of Ann Arbor, Michigan. Title flashes from the position holder to you, and simultaneously to your customer, who transports the fuel.
• Correct Reporting: The terminal report will show a sale to you destined for Michigan. You must report this as a purchase from the position holder and a sale to your customer. Because the destination is Michigan (a rack state), the tax liability falls at the rack. The position holder should charge you Michigan tax, and you should pass that tax on to your customer. Your reporting must reflect this pass-through.

Scenario 3: The Missing Load

• Situation: Diesel is purchased at an Iowa terminal with a BOL destination of Madison, Wisconsin. The fuel never arrives, the driver cannot be reached, and there is no delivery record.
• Correct Reporting: This is a worst-case scenario. Without a delivery ticket or diversion record, the fuel is presumed to have been delivered to the destination on the BOL, Wisconsin. You are responsible for remitting the Wisconsin tax. The lack of documentation makes it nearly impossible to prove otherwise, highlighting the importance of real-time tracking and delivery confirmation.

Managing flash titles and diversions is about control and communication. Your tax team cannot operate in a silo. While not always perfect, building an integrated process that connects your sales, dispatch, carrier, and compliance functions helps reduce exposure to inaccurate data and ensures you have a defensible position in any audit.

Register for our live webinar “Avoiding Costly Mistakes in Fuel Tax Reporting” to discover actionable solutions to these challenges from tax experts.

This analysis is intended for informational purposes only and is not tax advice.  For tax advice, consult your tax adviser. See the full disclaimer here.