Iowa Implements Excise Tax Exemption for High-Ethanol Agricultural Fuel

DES MOINES, Iowa – The Iowa Department of Revenue has implemented a new motor fuel tax exemption for certain high-ethanol gasoline blends used in agricultural equipment, which took effect on July 1, 2026. The change, stemming from the enactment of Senate File 2493 signed by Governor Kim Reynolds on June 1, eliminates the state’s excise tax on fuel containing more than 85% ethanol when it is purchased for farm use.

The new law is designed to promote the use of biofuels and provide financial relief to Iowa's agricultural sector by lowering fuel costs. By exempting these high-ethanol blends, the state creates tax parity with diesel and biodiesel fuels, which already receive similar treatment when used for agricultural purposes. The move directly impacts farmers, fuel suppliers, and distributors across the state who handle these specific fuel products.

For agricultural businesses and fuel suppliers in Iowa, this exemption is more than just a tax cut; it's a significant operational shift. While the savings for farmers are direct and welcome, the compliance burden falls on the fuel distributors and retailers who must now meticulously track and document which sales qualify. We've seen similar targeted tax incentives create downstream accounting challenges for mid-sized businesses that lack dedicated tax specialists. The key is to implement robust tracking systems from day one to segregate exempt sales from taxable ones, ensuring accurate remittance to the state without leaving money on the table or risking an audit. This is precisely the type of complex regulatory change where our tax preparation and compliance services become critical. We help clients adjust their processes to align with new rules like these. For guidance on navigating Iowa's updated fuel tax landscape, contact C&S Finance Group LLC at csfinancegroup.com.

In a statement upon signing the legislation, Governor Reynolds emphasized the connection between the state's agricultural and biofuel industries. “Ethanol isn’t just beneficial to Iowa agriculture as a product, it is also a fuel the farmers depend on to operate equipment at competitive prices,” she said. “This legislation builds on Iowa’s leadership in renewable fuels and recognizes the important connection between agriculture and biofuel production.”

This exemption is the latest in a series of state-level initiatives aimed at bolstering the biofuels market. It follows House File 2128, which in 2022 created a new deduction for fuel suppliers and distributors. That measure allows them to sell gasoline or diesel intended for blending into biofuel at the lower, pre-blended tax rate. According to the Iowa Department of Revenue, that deduction was intended to reduce the need for end-customers to file for tax refunds after the fact. The new exemption under SF 2493 provides a more direct, point-of-sale tax removal for a specific use case, further refining the state's tax incentives.

However, the implementation of this tax break coincides with a scheduled tax increase for other forms of ethanol-blended gasoline. Also effective July 1, 2026, the Iowa fuel tax rate for alcohol and for ethanol blends of E15 or higher increased from $0.265 per gallon to $0.280 per gallon. The Iowa DOR noted this increase is a statutory requirement tied to the rising distribution percentage of E15 and higher blends, which grew from 19.4% to 28.8% in the last reporting period. This triggered a shift into a different tax rate category under a formula established by a 2020 law. Tax rates for standard gasoline (E10 to E14), diesel, and other fuel types remain unchanged.

The point of taxation for most fuel in Iowa occurs when it is withdrawn from a terminal rack by a licensed supplier. This places the responsibility for collecting and remitting the correct tax amount on these suppliers. The new exemption for agricultural E85+ will require these businesses to adjust their reporting on the Iowa Fuel Tax Supplier/Distributor Return to account for the newly exempt gallons.

Iowa’s focus on ethanol aligns with broader federal efforts. Throughout recent summers, the U.S. Environmental Protection Agency has repeatedly issued temporary waivers to allow the sale of E15 gasoline during periods when it would typically be restricted due to regulations concerning fuel vapor pressure. These federal actions, combined with state-level incentives like Iowa's new exemption, signal continued government support for increasing the market share of ethanol-based fuels.

Moving forward, Iowa's fuel distributors and agricultural businesses will need to adapt their accounting and compliance systems to the new rules. The Department of Revenue is expected to provide further guidance on documentation requirements for claiming the exemption. The effectiveness of the policy in stimulating demand for high-ethanol blends in farm equipment will be closely watched by industry stakeholders and policymakers alike.