Illinois Gas Tax v. Business Mileage Rate

Written by mBurse Team Member Jul 12, 2021 7:00:00 AM

If you provide a vehicle reimbursement to employees working in Illinois, gas tax increases could put your organization in a bind. The IRS business mileage rate cannot guarantee compliance with the labor code.

Illinois gas prices and business reimbursements

In 2021 across the country gas prices have risen steadily. But few states have seen as sharp an increase as Illinois. At $3.35/gal in July, we're not talking California prices ($4.30/gal), but a recent increase in the Illinois gas tax has now sent the average price to more than 50 cents per gallon higher than neighboring Missouri and 20 cents higher than the national average.

Back in 2019, Illinois doubled the gas tax from 19 cents to 38 cents per gallon. Since then, then gas tax has automatically increased every year on July 1 by an amount indexed to inflation. As Illinois gas prices continue to increase relative to the national average, this could increasingly put pressure on business vehicle reimbursements, such as paying the IRS mileage rate.

Few companies increase their reimbursement rates relative to gas prices, and even fewer base their reimbursement rates on employees' location. Say a regional business based in the Midwest pays the same amount to employees based in Illinois as to employees based in Missouri. The Illinois workers will find that rate less suitable, since they are paying 50 cents more per gallon of gas than their nearby coworkers.

How the Illinois labor code handles gas prices

For businesses with Illinois employees operating personal vehicles for work, it is essential to understand the reimbursement laws in that state. In January 2019, the state updated its labor code to require employers to provide a full reimbursement of employees for all business-related costs.

This employee expense indemnification code means that employers in Illinois are required to make sure all business-related vehicle costs are fully covered. In other words, employers cannot pass along business expenses such as an increased gas cost to employees and must be able to offer a defensible reimbursement rate for vehicle expenses.

As gas prices increase, businesses operating in Illinois need to make sure their reimbursements can keep up. It is often assumed that the IRS standard business mileage rate is automatically sufficient to comply with the law. But this is not always the case, and the current increases in fuel costs will continue to put the IRS rate to the test.

Labor Code self audit

Why the IRS rate cannot ensure Illinois labor code compliance

Costs of various goods and services vary from state to state. Taxes vary as well. Does it make sense to use a nationally-indexed rate to reimburse costs that will necessarily vary by state, or even by region within a state?

The IRS business mileage rate reflects national averages for the cost of owning and operating a motor vehicle driven an average number of miles. It was designed to be a tax deduction tool, where averages are fine. It was not designed to provide precise vehicle reimbursements.

Because Illinois gas prices are significantly higher than the national average, and because they will continue to increase relative to that average as the state gas tax makes its annual increase each July, a reimbursement rate based on national averages cannot guarantee sufficient reimbursements or labor code compliance.

How to reimburse vehicle costs in Illinois

In order to comply with the Illinois labor laws, it is important to use a vehicle reimbursement rate that rises and falls with gas prices and is not automatically the same rate in each state or region. Yes, this means sacrificing the simplicity of a standardized rate like the IRS business rate. But it is more important to fairly reimburse employees and to avoid the repercussions of labor code violations.

The best way to reimburse business vehicle costs is to standardize the vehicle used to derive the rate while varying the rate based on the localized costs of each worker's location (ideally as specific as their zip code).

One of the other problems with standardized mileage rates is their tendency to under-reimburse low mileage drivers and to over-reimburse high mileage drivers. The best way to address this problem is to separate fixed costs (insurance, depreciation, taxes) from variable costs (gas, oil, tires) and only use a mileage rate to address the latter. The former can be addressed with a fixed payment equal to the known, consistent monthly costs.

The gas tax in Illinois will continue to keep prices higher there than average. To learn how to create a more flexible vehicle reimbursement and pinpoint the appropriate rates for Illinois workers (or workers in any zip code), contact mBurse today or try our self-guided process to update your reimbursement and define a more accurate rate.

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