The Kentucky Board of Tax Appeals (the “Board”) recently held that fuel purchased and loaded into tank cars in Kentucky for immediate shipment out-of-state is not subject to the special fuels tax and petroleum environmental assurance fee.[1] The taxpayer, Owensboro Grain Company, produces a wide variety of products from soybeans.  In 2007, the taxpayer opened a biodiesel fuel production facility to produce its B100 renewable biodiesel fuel, which blends vegetable oils with diesel fuel to create cleaner fuel that substantially reduces carbon emissions.  The manufacture of the B100 biodiesel fuel occurs at the taxpayer’s plant locations in Western Kentucky. 

During the period at issue, the taxpayer sold some of its biodiesel fuel to out-of-state purchasers.  Under the terms of the taxpayer’s sales contracts, the fuel was sold FOB-Owensboro, Kentucky, and the purchasers made their own arrangements for shipping the fuel out-of-state.  In each instance, the fuel was loaded into the carrier’s tank car or tank truck in Kentucky and then shipped directly to the purchaser’s out-of-state location.

The Department of Revenue (the “Department”) argued that although the fuel was exported to out-of-state customers, the fuel was actually “received in this state” and subject to the special fuels tax and petroleum environmental assurance fee.  Under KRS § 138.220(1)(a), an excise tax is imposed on all gasoline and special fuel “received in this state” at the rate of nine percent (9%).  Likewise, under KRS § 224.60-145(1), a petroleum environmental assurance fee is imposed on dealers on each gallon of gasoline and special fuels “received in this state.” 

The Board rejected the Department’s position, noting it needed to look no further than the plain meaning of the word “received” in the definitional statute, KRS § 138.210(15).  The statute defines “received” or “received gasoline” or “received special fuels” to mean the following:

Gasoline and special fuels . . . shall be deemed to be received when it has been loaded for bulk delivery into tank cars or tank trucks consigned to destinations within this state. . . .  [I]t shall be presumed that all gasoline and special fuel loaded by any licensed dealer within this state into tank cars or tank trucks is consigned to destinations within this state, unless the contrary is established by the dealer. . . .

(emphasis added).  In other words, the Board noted, all the statute requires is a showing by the dealer that the fuel loaded in Kentucky is consigned to a destination outside this state.  It does not matter that the dealer arranged for pick-up of the fuel in Kentucky or that the terms of delivery were FOB Kentucky.  If the legislature intended for the FOB-designation to control taxation of the fuel, it could have so specified.  Furthermore, although the taxpayer did not raise a constitutional issue, the Board noted imposition of tax on fuels used outside of Kentucky constitutes a constitutionally forbidden burden on interstate commerce.