Compressed Natural Gas (CNG) Tax: Rates, Form 720, and Deadlines

The federal compressed natural gas tax is 18.3 cents per gasoline gallon equivalent, where one GGE equals 5.66 pounds of CNG. The tax is reported quarterly on IRS Form 720 by the person who delivers CNG into a vehicle’s fuel tank, or by the end user if no taxable sale occurred at delivery. Several categories of buyers, including state and local governments, school buses, and farms, qualify for a full exemption when they provide the seller with a signed certificate.

Who Owes the Tax

Section 4041 of the Internal Revenue Code puts the tax on the person who sells and delivers CNG into the fuel supply tank of a motor vehicle or motorboat. When there is no taxable sale at that point, liability shifts to the person who actually uses the fuel.¹ That second situation is common for fleet operators who fuel their own vehicles from a private station rather than buying at retail.

How the Gasoline Gallon Equivalent Math Works

Natural gas is sold by weight, but the tax is measured in gasoline gallons, so the statute fixes a conversion: 5.66 pounds of CNG equals one GGE, which matches the energy content of a gallon of gasoline.¹ Retail dispensers are required to display this conversion factor so buyers see how many GGEs they are purchasing.²

To calculate the tax owed for a quarter:

Add up the total pounds of CNG sold or consumed during the quarter.
Divide by 5.66 to convert to GGEs.
Multiply the GGE figure by $0.183.

The result is your federal excise tax liability for that quarter. Keep the delivery invoices, meter readings, and your GGE calculations as supporting records.

Exemptions That Zero Out the Tax

When an exemption applies, the rate goes to zero rather than to a reduced figure. The statute recognizes several non-taxable uses:

CNG used exclusively by a state, a political subdivision such as a county, city, or school district, or the District of Columbia.¹
CNG sold for use in school buses transporting students and school employees.³
CNG used on a farm for farming purposes, including cultivating soil, raising livestock, and handling raw agricultural products you produced. Farm tractors and similar off-road equipment sit outside the definition of “motor vehicle” for this tax.
CNG purchased by nonprofit educational organizations that are tax-exempt under Section 501(a) and maintain a regular faculty, curriculum, and enrolled student body, for their exclusive use.
CNG used as supplies for vessels or aircraft.
CNG sold for export or shipment to a U.S. possession, provided it is actually exported.
CNG used by federally recognized tribes for essential governmental functions. Activities outside that scope do not qualify.⁴

The Exemption Certificate Requirement

None of these exemptions is automatic. The buyer has to give the seller a signed exemption certificate, called Model Certificate J by the IRS, that identifies the non-taxable use. Without it, the seller remains on the hook for the tax even if the buyer’s use would otherwise qualify. Each certificate is valid for up to one year from its effective date, and the seller must have no reason to believe the information is false.³

Filing Form 720 and Registering on Form 637

The CNG excise tax is reported on IRS Form 720, the Quarterly Federal Excise Tax Return, in Part II under IRS Number 120.⁵ Enter your total GGEs for the quarter and apply the 18.3-cent rate.

Businesses that sell or use CNG as a motor fuel may also need to register with the IRS by filing Form 637. The activity code is “AL” for an alternative fueler that sells or uses alternative fuel in a motor vehicle or motorboat. Producers of alternative fuel mixtures use code “AM.” Registration matters for accepting tax-free sales and for claiming credits or refunds on Schedule C of Form 720 or on Form 8849.⁶

Keep your records for at least three years from the date you filed the return.⁷ If you claim credits on Schedule C, hold the records for four years from the latest of the date the tax became due, the date you paid it, or the date you filed the claim.⁵

Quarterly Deadlines and How to Pay

Form 720 is due by the last day of the month after each quarter ends:⁵

January through March: April 30
April through June: July 31
July through September: October 31
October through December: January 31

You can mail the return to the address in the Form 720 instructions. Payment is faster through the Electronic Federal Tax Payment System (EFTPS), but enrollment is linked to a bank account and takes up to five business days to process, so set it up well before your first deadline.⁸ Electronic filing of Form 720 itself is optional; paper returns are still accepted.⁹ After payment processes, EFTPS provides a confirmation number; keep it with your Form 720 records as proof of timely payment.

Penalties for Missing a Deadline

The failure-to-file penalty under Section 6651 is 5% of the unpaid tax for each month or partial month the return is late, up to a maximum of 25%.¹⁰ A $1,000 quarterly liability sitting unfiled for five months picks up $250 in penalties on top of the tax itself.

If you are required to make deposits and miss them, Section 6656 adds a separate tiered penalty:¹¹

1 to 5 days late: 2% of the underpaid amount
6 to 15 days late: 5%
More than 15 days late: 10%
Still unpaid after a delinquency notice: 15%

Interest runs from the due date and stacks on top of the penalties.

State CNG Taxes Are Separate

The federal excise tax is only part of what a CNG buyer or seller pays. State CNG taxes vary widely in both rate and structure. Most states use one of three approaches, and some combine them.

The most common model mirrors the federal one: a fixed cents-per-GGE excise tax collected at the pump, with state rates running roughly from $0.05 to $0.50 per GGE. Many states adjust their rates annually. A second approach replaces the pump tax with an annual flat-fee decal, often scaled to vehicle weight or type, displayed on the windshield as proof of prepaid road use; this shows up most often where fueling infrastructure is sparse. A few states apply their general sales tax to the retail price of CNG, which makes the tax float with fuel prices, and at least one state exempts CNG from sales tax as an adoption incentive.

Fleet operators running across state lines should check each state’s fuel tax authority directly rather than assuming their home state’s rules travel with them.

The Alternative Fuel Credit Has Expired

The federal alternative fuel excise tax credit that previously provided $0.50 per GGE of CNG sold or used as a motor fuel expired for sales or uses after December 31, 2024. As of 2026, no replacement or extension has been enacted.¹²

When it was active, eligible registered alternative fuelers claimed the credit on Schedule C of Form 720 to offset their CNG tax liability, or on Form 8849, Schedule 3, as a refund if they had no liability to offset. The credit had to be applied against CNG tax liability first, with only the excess claimable as a refund. Claims required a minimum of $200 unless filed electronically, and each claim had to cover at least one week.¹³

Congress has let this credit lapse and retroactively reinstated it several times over the past decade. Check the IRS excise fuel incentive credits page for the current status before assuming no credit is available for the period you are filing.

1
Office of the Law Revision Counsel. 26 USC 4041 – Imposition of Tax
2
Alternative Fuels Data Center. Gasoline and Diesel Gallon Equivalency Methodology
3
Internal Revenue Service. Publication 510, Excise Taxes
4
Internal Revenue Service. ITG FAQ 7 – Are Federally Recognized Tribes Subject to Excise Taxes
5
Internal Revenue Service. Instructions for Form 720 – Quarterly Federal Excise Tax Return
6
Internal Revenue Service. Application for Registration (For Certain Excise Tax Activities)
7
Internal Revenue Service. How Long Should I Keep Records
8
Internal Revenue Service. EFTPS: The Electronic Federal Tax Payment System
9
Internal Revenue Service. Frequently Asked Questions – Form 720, Quarterly Federal Excise Tax Return (e-file)
10
Office of the Law Revision Counsel. 26 USC 6651
11
Office of the Law Revision Counsel. 26 US Code 6656 – Failure to Make Deposit of Taxes
12
Internal Revenue Service. Excise Fuel Incentive Credits for Businesses
13
Internal Revenue Service. Schedule 3 (Form 8849), Certain Fuel Mixtures and the Alternative Fuel Credit