Illinois Appeals Court Says Book-Out Transactions Are Subject to Fuel Tax

In a recent decision, the First District Court of Appeals in Illinois held that book-out transactions – where there is no physical delivery of fuel and fuel inventories do not change – are transfers of ownership of fuel and are subject to tax under the Cook County Retail Sale of Gasoline and Diesel Tax Ordinance.

Taxpayers buying and selling gasoline and diesel in Cook County, Illinois should consider that all transactions, whether or not there is a movement of the fuel or a change in the physical custody, are likely to fall within the Cook County Fuel Tax Ordinance. Taxpayers engaging in fuel transactions should obtain a distributor license and request confirmation from a wholesale customer that the customer is licensed; if the customer is not licensed, the County tax should be collected and remitted.

Background

The case, Marathon Petroleum Co. LP v. Cook County Department of Revenue, Ill. App. Ct. 1^st Dist., No. 1-21-0635, (December 30, 2022) was an appeal from the Circuit Court of Cook County, IL. 

Marathon Petroleum Co., LP (“Marathon”) is a refiner and distributor of crude oil and petroleum products in Cook County, IL. In May 2014, the Department of Revenue initiated an audit of Marathon’s gasoline and diesel activity for the period January 2006 – July 2014. At the end of the audit, the Department of Revenue issued assessments for unpaid County fuel taxes on gasoline and diesel transactions. Marathon protested the assessments, arguing that the transactions in question were book-outs that did not constitute a transfer of ownership and were not taxable sales of fuel. The administrative judge disagreed. Upon appeal to the Circuit Court, the decision was reversed in favor of the Taxpayer. The Department of Revenue appealed and the Appellate Court, reviewing the administrative decision sides with the Department of Revenue.

Reasoning

Pursuant to local Fuel Tax Ordinance, Cook County, IL, imposes a fuel tax on the retail sale of gasoline, diesel, biodiesel and GDiesel. All distributors of fuel in Cook County are required to be registered with the County. If a purchasing distributor is registered with the Department of Revenue, the selling distributor does not collect the fuel tax from the purchaser. The tax is only collected when the last distributor in the distribution chain sells the fuel to a retailer doing business in Cook County or to a consumer who purchases fuel directly from a fuel distributor for delivery in Cook County. In contrast, if a purchaser is not registered, the selling distributor must collect the fuel tax from the unregistered buyer and remit the tax payment to the Department. A sale from one distributor to another or from a distributor to a retailer is characterized by a change in ownership, not necessarily a change in physical custody; it is therefore possible to have a sale of fuel occur while the fuel remains in one location.

Marathon had argued that a book-out does not involve an actual transfer in ownership but rather is one way to financially settle a forward contract. The purpose of a book-out transaction is related to controlling costs and risk management where the parties to the contract can buy and sell intangible interests in commodities. That view was rejected by the Department of Revenue’s administrative review and the Court of Appeals, but the Illinois Circuit Court did agree with the Taxpayer. On reversing the decision of the Circuit Court, the Appeals Court said that Marathon had not provided evidence that there was no transfer of ownership.

However, when it came to the imposition of penalties, the Court stated that the Taxpayer did not owe penalties for failure to pay the tax, as its reasons for not paying the tax were based on a “reasonable interpretation of the law.”

The Court also rejected various constitutional arguments the Taxpayer made against the imposition of the tax, including that the Cook County fuel tax constitutes an impermissible occupation tax and that the book-out transactions had no nexus to Cook County.

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