An Alabama circuit court recently held that a taxpayer’s method of calculating a refund under Alabama’s wholesale oil license tax was reasonable, affirming Chief Administrative Law Judge Bill Thompson’s extensive 2009 ruling. Alabama Dep’t of Revenue v. Motiva Enterprises, LLC, CV-2009-900959 (Jan. 30, 2013). The case centered on the taxpayer’s burden of proof in establishing its claim to a refund and the validity of the Department of Revenue’s requests, first by letter and then by a new regulation, for records to substantiate the refund.
The case involved two state taxes, both of which may apply to the sale of diesel fuel in certain circumstances. Both taxes, however, are never due on the same diesel fuel. The first tax was Alabama’s wholesale oil license tax (sometimes referred to as the “wholesale oil license fee” or “WOLF”), which was (until October 1, 2012) levied on the first wholesale sale of certain fuel oils, including diesel, in Alabama. Ala. Code § 40-17-174. The second tax was the motor fuel excise tax, commonly known as the “motor fuels tax.” Ala. Code § 40-17-2, -220. This tax is generally due when diesel fuel is sold to non-exempt end-users such as a construction company with bulldozers. If the motor fuels tax is ever paid on diesel fuel, by anyone in the chain of sale, the fuel is exempt from the WOLF. Ala. Code § 40-17-2(1). Accordingly, the first taxpayer (i.e., the taxpayer paying the WOLF on a wholesale sale) is effectively given a retroactive exemption and refund claim when a subsequent taxpayer pays the motor fuels tax on the same diesel fuel, even though the diesel fuel has left the possession and control of the first taxpayer.
The taxpayer, Motiva Enterprises, LLC, an affiliate of Shell Oil Company, supplied diesel fuel in Alabama to both wholesale distributors and end-users. When Motiva sold diesel fuel at retail to end-users, it paid the motor fuels tax, but not the WOLF. Conversely, when diesel fuel was sold to distributors, the taxpayer dutifully paid the WOLF on these wholesale sales. Much of the diesel fuel purchased by the distributors was subject to the motor fuels tax when it was later resold by the distributor to its customers. The taxpayer petitioned for a refund of the WOLF related to its sales of diesel fuel to distributors who either paid the motor fuels tax or their customers paid the tax.
Using copies of the monthly motor fuel tax returns from several of its larger distributor customers, the taxpayer calculated the refund due. The returns showed the total gallons of diesel fuel purchased by each distributor during the month and also the total gallons sold subject to the motor fuels tax. Using these amounts, the taxpayer computed the monthly percentage of diesel fuel on which the distributor paid the motor fuels tax. Based on this computation, the taxpayer requested a refund of the corresponding percentage of the WOLF paid on sales to that distributor during that month.
The Department denied the majority of the refund claim, arguing that the burden was on the taxpayer to prove its entitlement to every dollar of the refund claim. According to the Department, the taxpayer could prove its entitlement only if it provided copies of bills of lading and invoices showing specific taxable sales of diesel fuel from distributors (i.e., the taxpayer’s customers) to the distributors’ customers. The Department then required the taxpayer to trace the same fuel sold by the distributors to the specific sales by the taxpayer to the distributors. The taxpayer countered by arguing that it never had these records, was not required by any law or regulation (then in effect) to maintain these records, and had no means—legally or practically--of obtaining these records.
Not only were the distributors the taxpayer’s customers, they were also the taxpayer’s competitors, in many cases competing for the same end-users. A distributor’s pricing scheme and customer list are confidential, and a distributor would not voluntarily provide those records to a large competitor. In addition, Motiva argued that an exchange of this type of information may also violate various antitrust and other state and federal pricing and trade secrets laws.
The Department of Revenue’s Chief Administrative Law Judge, Bill Thompson, agreed with Motiva, finding that the Department’s after-the-fact recordkeeping requirements, “at least those relating to the production of confidential third-party records,” were clearly unreasonable. In contrast, the taxpayer’s calculation methodology was found to be reasonable; it was based on exact numbers in its customers’ motor fuel tax returns and did not contain any unreasonable assumptions.
On appeal to the Jefferson County Circuit Court, the Department argued that the ALD’s Final Order was contrary to the “statutory requirements and ignore[d] well established legal precedents concerning the requirement that taxpayers factually prove their allegations in order to be entitled to a refund of their taxes.” Judge Michael Graffeo rejected the Department’s position and agreed with Judge Thompson that the taxpayer’s method of calculating the refund was reasonable. Perhaps more importantly for other taxpayers, Judge Graffeo likewise rejected the Department’s attempt to apply its Rule 810-8-1-.06 retroactively to the taxpayer, when the rule wasn’t even promulgated until October 2006--long after the taxpayer filed for a refund. He also found that the recordkeeping requirements under the new Rule, relating to the production of confidential third-party records, were “clearly unreasonable in that [s]o doing may well lead to violation of one or more federal antitrust laws.” The Department did not appeal this ruling so it is now final.