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Motor Fuel Tax – Another Example of A “Gotcha” Transaction Tax

Many state and local tax (“SALT”) practitioners often refer to state and local transaction taxes as “gotcha” taxes. Over ambitious state agencies seek to extort money from businesses all the time by using fire first, ask question later type tactics. SALT auditors write up whatever they can as taxable and force businesses to prove them wrong. Similar to state and local sales and use taxes, motor fuel tax can often be a mine field for the unsuspecting business. In a 2014 decision, a Pennsylvania court agreed with the revenue agency’s “gotcha” mentality in Luther P Miller Inc v. Pennsylvania, 88 A. 3d 304 (Pa. Comm’w Ct 2014).

Luther P Miller Inc. was a typical motor fuel supply company that sold fuel at some 10 locations. Like many fuel companies, Miller had 4 bulk plant facilities and 6 card lock facilities. The company had several customers including a school district and a Head Start Program, both of which it believed to be exempt. Following an audit, the company was assessed a modest $34,600 in tax due including penalty and interest. Believing that its sales were to tax exempt entities, the company appealed the assessment.

Most states, including Pennsylvania, have an exemption for sales to school districts. However, what happens if instead of billing and collecting the sales revenue from the School District, the fuel is actually billed and paid for by a bus company that contracted with the school district? To the company’s frustration and dismay, the exemption is in the form of the transaction. In other words, in most states, if a company charges and is paid by the school directly then it is exempt, otherwise the exemption fails. The court agreed with the auditor’s “gotcha” approach and being that the fuel company was paid by an operator who contracted with the schools, the exemption failed and the assessment was sustained. Seems fair doesn’t it?

On top of getting them twice for sales made to apparent instrumentalities of the state, the state went a step further. During the audit, the auditor also raised an issue dealing with stock loss. Unlike many items in the SALT world, fuel levels can fluctuate due to temperature changes. In Pennsylvania, the state considers about .5% stock loss as an acceptable range. The company, however, reported about .8% of on road diesel and 1.4% of its gasoline as stock loss during the audit period. The taxpayer was unable to adequately prove its departure from normal ranges so the court determined that the auditor properly got them there too.

In short the case was a total loss for the Taxpayer. It lost its exempt sales made to the school, the sales made to the Head Start Program, and it was unable to prove its stock loss. I am sure this decision will encourage other similar companies to sell to schools and head start programs, knowing the state is out for its extortion. More importantly, this case serves as a reminder to taxpayers, especially those audited by state SALT departments to keep meticulous records of exempt sales and any deduction like items. Without proper paperwork, state agencies will try to get you too.

About the author: Mr. Donnini is a multi-state sales and use tax attorney and an associate in the law firm Moffa, Gainor, & Sutton, PA, based in Fort Lauderdale, Florida. Mr. Donnini’s primary practice is multi-state sales and use tax as well as state corporate income tax controversy. Mr. Donnini also practices in the areas of federal tax controversy, federal estate planning, Florida probate, and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Donnini is currently pursuing his LL.M. in Taxation at NYU. If you have any questions please do not hesitate to contact him via email or phone at 954-642-9390.

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