If he's not paying motor fuel tax, he's probably breaking the law. You can run a diesel on waste oil or heating oil but I bet your state expects you to pay motor fuel taxes if you use your vehicle on the road.
Good point. What is your source for this?
The tax is paid at the pump, but what mechanism is in place to tax someone that is using an alternative (non-taxed) fuel.
To the best of my knowledge, there isn't one.