Liquefied Natural Gas (LNG) Tax: Federal Rate, Forms, and Credits

Liquefied natural gas used as motor fuel is taxed by the federal government at 24.3 cents per diesel gallon equivalent, reported quarterly on IRS Form 720 by anyone who sells or uses it in a highway vehicle or motorboat.¹ Before making a first taxable sale, the seller or user must register with the IRS on Form 637. Most states then add their own layer, either on production at the wellhead or on fuel dispensed into vehicles.

The Federal Rate and How LNG Is Measured

The federal tax applies whenever LNG is delivered into the fuel tank of a motor vehicle or motorboat, or when LNG is used as fuel in those vehicles without tax having already been paid at the point of sale.² The rate is 24.3 cents per diesel gallon equivalent (DGE).¹

Compressed natural gas and propane are taxed at a different rate of 18.3 cents per gasoline gallon equivalent. That rate does not apply to LNG.¹ LNG uses the diesel gallon equivalent because its energy density sits closer to diesel than to gasoline, and mixing the two measurements is a common source of underpayment.

One DGE is defined by statute as the amount of LNG with a Btu content of 128,700 on a lower heating value basis, which works out to 6.06 pounds of LNG.² If your dispensers or records track LNG by liquid gallons instead of by weight, one DGE equals roughly 1.71 gallons of LNG.³ Lock these conversion factors into any fuel tracking system before the first taxable transaction.

One boundary worth naming: the general federal fuel tax framework covering gasoline, diesel, and kerosene at the terminal or refinery level does not reach LNG. That statute defines “taxable fuel” as only gasoline, diesel, and kerosene.⁴ LNG runs on its own separate structure.

Register on Form 637 Before Your First Sale

Before you can legally sell LNG at retail, deliver it in bulk for motor vehicle use, or use it as fuel in your own fleet, you have to register with the IRS on Form 637, Application for Registration. The activity letter for a business that sells or uses alternative fuel in a motor vehicle or motorboat is “AL.” For anyone producing an alternative fuel mixture, it is “AM.”⁵

The penalty for operating without this registration is $10,000 for the initial failure plus $1,000 for each additional day, with reasonable cause as the only defense.⁵ The IRS has to review and approve your application before you count as registered, so file well ahead of any anticipated sale.

Filing Form 720 Every Quarter

The federal LNG tax is reported on Form 720, the Quarterly Federal Excise Tax Return, under IRS Number 124.⁶ You total the taxable DGEs for the quarter, multiply by 24.3 cents, and submit the return with payment.⁷

The 2026 quarterly deadlines are:

January through March: due April 30
April through June: due July 31
July through September: due October 31
October through December: due January 31 of the following year

A deadline that falls on a weekend or legal holiday moves to the next business day.⁶

Most filers pay through the Electronic Federal Tax Payment System, a free Treasury service tied to your taxpayer identification number that generates an immediate confirmation.⁸ If you file by mail, include Form 720-V as a payment voucher and use certified mail so you have proof of the submission date.

When LNG Isn’t Taxed

Not every gallon triggers the excise tax. The statute exempts LNG sold for use or used in an off-highway business setting, such as powering stationary construction equipment or generators. It also exempts LNG used on a farm for farming purposes.²

Claiming these exemptions depends on internal records that clearly separate off-highway volumes from fuel burned in taxable on-road vehicles. If you already paid tax on fuel that later qualifies for an exemption, you can take a credit on Form 720’s Schedule C or file Form 8849, Schedule 3, for a refund. Schedule 3 requires that you be a registered alternative fueler, that the claim cover at least one week of sales or use, and that the refund be at least $200 unless filed electronically.⁹

The 50-Cent Alternative Fuel Credit Has Expired

For years, businesses could claim a 50-cent-per-DGE credit for LNG sold or used as motor fuel. That credit expired on December 31, 2024, and Congress has not renewed it.¹⁰ The corresponding lines on Form 4136 are now reserved for future use.¹¹

Older publications and third-party guides still describe the credit as active, which catches filers off guard. If your fuel cost projections assumed the 50-cent offset against the 24.3-cent excise tax, recalculate. The separate Clean Fuel Production Credit under Section 45Z operates under different rules and uses a gasoline-gallon-equivalent standard; it is not a direct replacement.

Penalties for Late Filing or Non-Payment

A missed Form 720 deadline triggers two penalties that run at the same time. Failure to file costs 5 percent of the unpaid tax for the first month and another 5 percent for each additional month, capped at 25 percent. Failure to pay adds 0.5 percent of the unpaid amount per month, also capped at 25 percent.¹² Interest accrues on top of both.

If the IRS determines the failure to file was fraudulent, the filing penalty rises to 15 percent per month with a 75 percent cap.¹² The Form 637 registration penalty ($10,000 plus $1,000 per day) can stack on top of the filing and payment penalties if you were operating without a valid registration.⁵

State Taxes Come on Top

Federal excise tax is only one layer. States tax LNG through two main channels: severance taxes when natural gas is extracted, and motor fuel excise taxes when LNG is dispensed into vehicles.

Severance Taxes on Production

Roughly 34 states levy some form of severance tax on natural gas production. The tax is calculated either as a percentage of gross or market value or as a flat amount per unit of volume. Rates run from under 1 percent to as high as 7.5 percent of gross value, with per-unit fees in some states. Several states reduce the rate for marginal or high-cost wells, and one uses a per-well impact fee instead of a traditional severance tax. These taxes fall on the producer or first purchaser, but the cost travels downstream into the price of LNG.

Motor Fuel Taxes at the Dispenser

At the consumer level, states tax LNG much like diesel, though rates and measurement methods vary. State excise rates generally fall between roughly 10 cents and over 50 cents per DGE. Some states use a flat per-DGE rate; others apply a percentage of the sale price, which lets the effective rate move with the market.

A handful of states use a decal program instead of a per-gallon pump tax. Owners of LNG-powered vehicles pay an annual flat fee that stands in for road-use tax, and they skip the per-gallon charge when fueling. Decal fees vary by vehicle weight class, from around $100 for light passenger vehicles to over $1,000 for the heaviest commercial trucks. Fleets crossing state lines need to know which states use pump taxes, which use decals, and which use both.

Records to Keep and for How Long

The IRS can assess additional excise tax within three years after a return is filed. If you underreport tax by more than 25 percent of the amount shown, the window stretches to six years.¹³ Three years is the minimum retention period; six is the safer practice.

Your records should include:

Volume and weight logs showing total LNG dispensed or consumed each quarter, in gallons or pounds, converted to DGEs at 6.06 pounds per DGE
End-use documentation separating highway use from off-highway and farm use
Invoices and bills of lading identifying the fuel’s origin, the buyer, and the transaction date
Your approved Form 637 registration and activity letter
Copies of each Form 720 filed and EFTPS confirmation numbers for every payment

If you cannot produce documentation showing you owe less, the IRS does not have to prove you owe more.

1
Alternative Fuels Data Center. Alternative Fuel Excise Tax
2
Office of the Law Revision Counsel. 26 USC 4041 – Imposition of Tax
3
Alternative Fuels Data Center. Fuel Properties Comparison
4
Office of the Law Revision Counsel. 26 USC 4081 – Imposition of Tax
5
Internal Revenue Service. Application for Registration (For Certain Excise Tax Activities)
6
Internal Revenue Service. Instructions for Form 720 (Rev. March 2026)
7
Internal Revenue Service. About Form 720, Quarterly Federal Excise Tax Return
8
Internal Revenue Service. EFTPS: The Electronic Federal Tax Payment System
9
Internal Revenue Service. Schedule 3 (Form 8849), Certain Fuel Mixtures and the Alternative Fuel Credit
10
GovInfo. 26 USC 6426 – Alcohol Fuel Mixture Credit, Etc.
11
Internal Revenue Service. Instructions for Form 4136 and Schedule A
12
Office of the Law Revision Counsel. 26 USC 6651 – Failure to File Tax Return or to Pay Tax
13
Office of the Law Revision Counsel. 26 USC 6501 – Limitations on Assessment and Collection