Sunoco Inc. was a partner in Sunoco Partners LLC, which was the general partner in Sunoco Logistics Partners L.P. (“Logistics”). Logistics engaged in the transport, terminaling, and storage, as well as the purchase and sale, of refined products and crude oil. Logistics owned miles of pipelines and numerous terminals and engaged in buy/sell transactions with other oil dealers to reduce transportation costs. These buy/sell transactions occurred when there was a third-party purchaser for oil products, resulting in products being resold immediately without remaining in inventory. Logistics recorded the buy and sell sides of the buy/sell transactions as two independent transactions, similar to any other sale or purchase. At the end of each month, following Generally Accepted Accounting Principles, Logistics debited sales accounts and credited cost of goods sold to adjust sales to zero. Any differential in pricing was reflected as an adjustment to inventory costs in costs of goods sold and not as gross receipts or sales.
For tax years 2007 through 2010, Sunoco Inc. amended its New York corporate income tax returns to adjust the receipts factor of its business allocation percentage to include the gross amounts of Logistics’ sale side of buy/sell transactions in the denominator, following partnership flow-through rules for state apportionment. The state denied the $2.6 million refund claim, which led to the appeal to Division of Tax Appeals.
In the appeal,1 Logistics claimed that the receipts should be included in the business allocation percentage (BAP) if the receipts were generated from sales that occurred in the regular course of business and were included in the computation of federal taxable income. The buy/sell transaction occurred in the regular course of business because they were recurring and executed by dedicated personnel using fair market pricing and were not occasional sales. The taxpayer relied upon the Tax Appeals Tribunal’s decision in Matter of CS Integrated2 to conclude the sell transactions were includable in the receipts factor for determining its BAP.
The Division of Taxation (“Division”) asserted that the sell side receipts were not included as gross receipts for federal income tax and, therefore, should not be included as receipts for purposes of the business allocation percentage. The Division also maintained that the buy/sell transactions were not a distinct sale and purchase, but rather one multistep transaction. These buy/sell transactions were effectively exchanges of inventory where only the net difference from contracts from the previous month were paid. They were not considered to be receipts from the sales of tangible personal property.
Although Logistics maintained that the buy/sell transactions differed from inventory exchanges because each sale was an independent sale with a transfer of oil for a set price, the Administrative Law Judge rejected the taxpayer’s definition of sale for purposes of receipts includable in the taxpayer’s BAP, finding the facts of CS Integrated were distinguishable and not applicable to Logistics, and denied the refund claims.
Taxpayers should clearly consider the substance and form of a transaction as well as the consequences for apportionment purposes as they engage in certain transactions. For assistance in determining the nature of your transactions as they affect your apportionment formula, please reach out to the Ryan professionals listed below.
1 In the Matter of the Petition of Sunoco Inc. (R&M) Combined Affiliates, Case Numbers 829399, 829400, 829401, and 829402.
2 Tax Appeals Tribunal, November 20, 2003, confirmed 19 AD3d 886 [3d Department 2005].
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