Extras on Excise: Who is the “Taxpayer” of Kentucky Fuel Taxes?

How often does a case involving a dispute over state fuel excise taxes make its way to federal court? Not very often. But fuel tax payments became the source of debate in the bankruptcy adversary proceeding of Bulk Petroleum Corp. v. Ky. Dep't of Revenue (In re Bulk Petroleum Corp.), 2015 BL 245860 (7th Cir. July 31, 2015),[1] illustrating the important role that licensing requirements play in state tax collection schemes and warning other businesses to consider the consequences before operating without a valid license. 

The case involved a dispute about whether Bulk Petroleum Corp. (Bulk), an unlicensed fuel tax dealer/distributor, was entitled to request a refund from the Kentucky Department of Revenue (KDOR) for taxes Bulk paid to its suppliers, Marathon and BP, from Nov. 1, 2006 to Aug. 3, 2007, who then remitted the taxes to the state. The Seventh Circuit had to answer the question, “Who was the ‘taxpayer’ of the taxes paid to Kentucky?” 

The KDOR argued that under Kentucky law, Bulk was not the taxpayer because Bulk did not have a license during the time at issue and did not actually pay any taxes to the KDOR during that time; the suppliers paid the taxes to the state and invoiced Bulk.[2] Therefore, according to the KDOR, Bulk was not entitled to request a refund.

The intricacies of Kentucky’s fuel tax regime are of key importance in this case, particularly its licensing requirements and methods of tax collection. 

In Kentucky, licensed gasoline dealers and distributors are allowed to purchase fuel from suppliers tax-free, and then make reports to the KDOR about how much gasoline was “received” for use in Kentucky and pay tax only for that amount. “Received” means fuel loaded into a tank truck from a terminal facility in the state. Kentucky presumes that all fuel “received” in the state is destined for use in state, but licensed dealers and distributors can rebut this presumption by demonstrating that only a portion of fuel “received” in Kentucky is actually used in the state. Fuel shipped out-of-state would not be subject to Kentucky tax. 

Because Bulk was unlicensed during the period the disputed tax payments were made, it did not file reports showing that only a portion of fuel that it “received” from its suppliers, Marathon and BP, was actually used in Kentucky. Instead, Marathon and BP invoiced Bulk for Kentucky excise taxes due on all fuel that they delivered to Bulk trucks at Bulk’s Louisville terminal, including fuel that was later sent out-of-state. Bulk paid the invoiced amounts to Marathon and BP, and then filed refund requests with the KDOR for taxes paid on the fuel shipped outside of Kentucky. 

In response to its refund requests, the KDOR told Bulk that only licensed dealers could purchase product without the Kentucky tax for export, so Bulk was correctly charged tax for the entire amount of fuel “received” in state, and thus was not entitled to a refund. The KDOR told Bulk that if Bulk’s license was reinstated and its outstanding tax liabilities satisfied, consideration would be given to Bulk’s refund requests. Bulk regained its license on Aug. 3, 2007, but the KDOR said that Bulk had not paid any taxes during the time that it did not have a license.  

According to the Seventh Circuit, the KDOR erred because even though Marathon and BP technically collected and remitted fuel taxes to the KDOR, Bulk was ultimately responsible for all taxes due as Bulk was the entity “receiving” the fuel when it was delivered. 

Under Ky. Rev. Stat. Ann § 138.220(1)(e), “[t]he tax herein imposed shall be paid by the dealer receiving the gasoline . . .” in Kentucky. Marathon and BP were not “receiving” the fuel when it was delivered to the Bulk Petroleum’s Louisville terminal because Marathon and BP already had the fuel in their possession—they were merely delivering it to another dealer. Also, under Ky. Rev. Stat. Ann § 138.224, Bulk Petroleum is jointly and severally liable for fuel taxes that are not paid to the state. If Marathon and BP had not invoiced Bulk for fuel taxes and those taxes had not been paid to the state, the KDOR could have attempted to collect the tax directly from Bulk. As the court said in its opinion, “If Bulk is liable for the tax under [§ 138.224], how is it not a taxpayer?” 

Other arguments made by the Kentucky Department of Revenue also failed. The Seventh Circuit reversed the district court opinion and remanded the case for a judgment requiring the Kentucky Department of Revenue to refund $774,961.30 to Bulk Petroleum Corp. 

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Do you agree with the Seventh Circuit’s opinion? 

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[1] This issue arose during the bankruptcy proceeding because it effects the value of the bankruptcy estate. 

[2] The KDOR had revoked Bulk’s dealer’s license because Bulk failed to post additional security as requested by the KDOR.