What Kind of Income Is a Fuel Surcharge?

When gas and other fuel prices rise, transportation and travel firms with significant fuel expenses often assess a fuel surcharge. Companies do this as a way to offset the associated rise in costs. Fuel surcharges are costs that companies incur while performing a service or providing a product to a customer. If the revenue generated by the service or product is taxable, as it typically is, then the related fuel surcharge is also taxable.

A fuel surcharge is an additional fee or levy added to the price of a ticket, fare, transport load or other transportation-related item to recover fuel cost increases. Companies do not typically charge for fuel that is moderately priced, because they reflect this pricing in their overall rate or fee calculations. Therefore, fuel surcharges are charges above the "normal" rate.

Airlines, bus companies, freight haulers and other transporters of people and cargo add fuel surcharges when fuel prices increase faster than they can raise regular prices to cover the cost. Fuel surcharges help companies contain their operational costs. These surcharges also help companies manage the financial risk associated with fuel price volatility, namely that fuel prices will rise so high so quick that the price increases eliminate any profits and perhaps lead to massive losses.

The Internal Revenue Service treats fuel surcharges as revenue. Companies must include fuel surcharges they charge customers as revenue on their income statements. Conversely, companies must record any fuel surcharges they pay to as expenses. When companies pay these fuel surcharges to unincorporated independent contractors and vendors, they must include the fuel charges in the total payments denoted on Form 1099.

If a company pays income taxes on its regular services or products sold, it must also pay applicable sales taxes on the related fuel surcharge. For example, say a delivery service charges a $30 to deliver furniture to a customer’s house and assesses a fuel surcharge of $15 for destinations outside of a 15-mile radius. The delivery service must compute the sales tax on the $45 total, which includes the delivery charge and the fuel surcharge. If what the company sells is exempt from sales tax, the fuel surcharge is also exempt from sales tax.

Transportation and travel companies typically base their fuel surcharge on a government or industry-reported average price index. Companies levy a fuel surcharge when fuel prices fluctuate over this specified level or benchmark. This surcharge fluctuates with the cost of fuel. By linking to an index, companies standardize their policies with similar companies in their industry, reducing the likelihood of customer complaints. As prices rise high above the benchmark, the surcharge increases; as prices draw nearer to the benchmark, the surcharge decreases.