It should be obvious that a state may not impose sales tax where there is no sale. This maxim was reinforced in the case Asphalt Emulsion Industries LLC v. North Carolina Department of Revenue[1], 23 REV 04898 (N.C. OAH Nov. 21, 2024), where an administrative law judge found that transfers of property from an asphalt company to its parent without consideration did not constitute sales and therefore no sales tax was due.

The Facts: Asphalt Emulsion Industries, LLC (“AEI”), wholly owned by Slurry Pavers, Inc. (“Slurry”), was created to support its parent company’s road construction business. During the audit period from May 1, 2015 to May 31, 2021, AEI operated a facility in North Carolina where it manufactured emulsion products used in road construction.

Most of AEI’s emulsion products were transferred to its parent company and another affiliated entity, Whitehurst Paving Company, Inc. (“WPC”). These transfers were recorded in an accounting software program used in the construction industry called VISTA. VISTA records changes in inventory, prices, accounts receivable, accounts payable, and other accounting entries. Slurry used VISTA to keep records for itself and its subsidiaries. When a transfer occurred, a temporary entry was made in VISTA to reflect a change in inventory and an entry labelled “Due To/From” Slurry or WPC was created followed by a dollar amount. The dollar amount indicated was comparable to the sales price AEI charged to an unrelated party for emulsion product. As required under generally accepted accounting principles and as necessary for income tax reporting, every “Due To/From” Slurry or WPC entry was eventually reversed in the VISTA program.

Slurry reported use tax on AEI’s transfers to Slurry and WPC and paid use tax calculated based on AEI’s cost of raw materials used to produce the emulsion products. Slurry also reported (on its own sales and use tax returns) and paid sales tax for AEI’s sales of emulsion products to a third party and calculated the sales tax for such transfers based on the sales price paid by the third party. As a result of an audit of Slurry, the North Carolina Department of Revenue (“DOR”) contended that the transfers by AEI to Slurry and to WPC were taxable sales and calculated the amount due using the amount temporarily recorded in the VISTA program. The DOR credited AEI for the use taxes remitted by Slurry but assessed additional sales tax, penalties, and interest against AEI, totaling $2,560,594.37. AEI contested the assessment.

The Decision: The Administrative Law Judge (“ALJ”) found that AEI’s transfers of emulsion products to Slurry and WPC were not sales subject to sales tax. The key reason was the absence of consideration—no quid pro quo. The temporary accounting entries in VISTA had no value. The ALJ also rejected the DOR’s argument that Slurry’s payment of AEI’s employees and provision of accounting services to AEI constituted consideration. The ALJ found no intent by the parties to exchange the payroll payments or the accounting services for emulsion product and thus to engage in a sale. Rather, Slurry treated AEI as a division of Slurry and the parties’ conduct was consistent with such treatment.

While the ALJ found that the transfers between AEI and Slurry/WPC were not sales and no sales tax was owed on such transfers, the ALJ rejected AEI’s argument that AEI was not required to register as a retailer and file sales and use tax returns. AEI made sales of its emulsion product to an unrelated party, and the ALJ determined that it was a “retailer,” required to register as such.

Takeaway: While Slurry properly paid use tax for the emulsion product AEI transferred to Slurry, calculated based on the cost of AEI’s raw materials, under North Carolina law (and, indeed, under most, if not all states’ laws), a sale requires consideration. Where no consideration is provided in exchange for a transfer of property, there is no sale, and a state may not impose a sales tax.

[1] As of December 19, 2024, this case is not yet available through the OAH’s website.