IFRA Guidance on Federal and State Dyed Diesel Relief
Federal and Illinois officials have issued temporary relief for dyed (off-road) diesel used on highways through Dec. 31, 2026. The two actions are very different, and for most Illinois fuel retailers, the rules have not changed.
Federal relief
Penalties suspended. Following President Trump’s Oct. 5 executive order, the IRS announced on Oct. 14 that it will not impose federal penalties when dyed diesel is sold for or used on highways, retroactive to Oct. 1 and running through Dec. 31, 2026 (IR-2026-122).
The tax is still owed. The 24.4-cent-per-gallon federal diesel tax is deferred, not forgiven. Unless Congress acts, it will come due. Treasury has not yet issued guidance on when deferred taxes must be paid. Generally, the person who sells dyed diesel at retail owes the tax.
Federal only. The IRS relief has no effect on state taxes or penalties.
Illinois relief
Agricultural use only. Gov. JB Pritzker’s Executive Order 2026-08 covers dyed diesel sold or used from bulk storage for farming and agricultural purposes, from Oct. 6 through Dec. 31, 2026. General trucking and other non-agricultural highway use remain subject to Illinois penalties.
Retailers are not authorized. Only licensed Illinois motor fuel distributors may sell dyed diesel. The Illinois Department of Revenue (IDOR) confirmed to IFRA that the order “does not expand the population of people who can sell dyed diesel.” It does not cover sales from retail dispensers to the motoring public.
State tax treatment. IDOR says qualifying agricultural on-road use is exempt from Illinois motor fuel tax and the UST/Environmental Impact Fee, and that the relief applies on all public roads.
Records still matter. Unlike the IRS, Illinois expects documentation. Distributors should keep records showing dyed diesel was sold for agricultural use, and customers claiming relief must keep their own records for four years. See IDOR Informational Bulletin FY 2027-07.
What IFRA recommends
Plan as if the federal tax will come due. If you don’t collect the 24.4 cents now, you may not be able to recover it later.
Document every dyed diesel sale for road use by date, customer, location and end use, even though the IRS says you don’t have to.
For Illinois sales, sell for highway use only when you have confirmed and documented qualifying agricultural use.
Plan for Jan. 1, 2027, when federal and state penalties resume. Red dye can remain in tanks for weeks or months.
Review your situation with your legal and tax advisers before changing your practices.
IFRA is working directly with IDOR and Treasury and will update members as further guidance is issued. Members with questions can contact Nate Harris at Nate@fuelingillinois.com.
This notice is for general informational purposes only and is not legal or tax advice.