In Matter of Sunoco Inc. (R&M) Combined Affiliates, a Division of Tax Appeals Administrative Law Judge (ALJ) determined that Sunoco’s sale of oil pursuant to buy/sell arrangements was not a “sale” for purposes of computing Sunoco’s New York State Article 9-A sales factor.   The ALJ’s determination was based upon her finding that Sunoco was exchanging the oil with the counterparty and that such exchange was not a “sale” for purposes of determining the New York State sales factor.

Background

Sunoco’s buy/sell arrangements were with other oil providers and allowed Sunoco to more efficiently fill orders from its customers.  If a customer wanted a certain type of oil at a certain geographical location and Sunoco did not have the inventory in that given location, Sunoco would, pursuant to the buy/sell contract, sell oil to its counterparty and purchase oil from its counterparty at the desired location for resale to its customer.  The buy/sell transactions often occurred concurrently, such that Sunoco would buy oil and sell oil to the counterparty simultaneously.  Nevertheless, the facts show that the sale of oil and the purchase of oil were two separate transactions.

Presumably to avoid the constant transfer and retransfer of cash between the parties to the buy/sell contract, some of petitioner’s buy/sell contracts were “net-out” agreements. Pursuant to a net-out agreement, the payment provisions of a buy/sell contract were amended so that only the net payable was transferred between the parties on a monthly basis. 

When Sunoco was on the sale side, the record demonstrates that “it transferred legal title to, possession of, and risk of loss for the Oil to the purchasing petroleum dealer….”  The parties invoiced each other for the oil, which was priced at fair market value.  Sunoco “recorded the gross invoice amount from the sale side in both its revenue and receivable accounts” and “did not offset the sale receipts with the purchase expense to record only a net entry for the sale.” 

For financial reporting and federal income tax purposes, however, Sunoco classified all amounts from the buy/sell contracts as costs of goods sold (the receipts from the sell side were used to offset costs of goods sold).   

Determination

The ALJ determined that Sunoco’s sale of oil under the buy/sell agreements was not a “sale” of tangible personal property for purposes of computing the New York State receipts factor.  In reaching that determination, the ALJ said:

The buy/sell agreements that petitioner participated in were exchanges of inventory and not receipts from the sales of tangible personal property. The word “sale” is not defined in Tax Law former § 210 (3) (a) (2) (A). Accordingly, it must be construed “according to its ordinary and accepted meaning at the time [of enactment]” (Matter of Catalyst Repository Sys., Inc., Tax Appeals Tribunal, July 24, 2019) (internal quotations omitted) quoting Gevorkyan v Judelson, 29 NY3d 452, 459 [2017]. Black’s Law Dictionary defines a sale as “[t]he transfer of property or title for a price” (see Sale, Black’s Law Dictionary 1337 [8th ed. 2004]).

Here, inventory was transferred, and other inventory was provided in return. According to petitioner’s response to the Division’s IDR number 6, there were occasions where the parties to a buy/sell agreement would also exchange the full monetary value of the Oil instead of the net difference between what was bought and what was sold. However, that does not change the substance of the transaction. The transaction at issue was not a sale for purposes of Tax Law former § 210 (3) (a) (2) (B). Oil would not have been provided in a buy/sell transaction if Oil was not also being acquired in return. Accordingly, petitioner’s sale side of the buy/sale transactions were not sales of tangible personal property constituting business receipts.

The ALJ essentially holds that a sale is not a “sale” for sales factor purposes unless cash is actually received in return for the property.  Sunoco sold the oil for a monetary price under the buy/sell arrangements, but collected only the net amount owed under the buy/sell on a monthly basis pursuant to the payment terms.  Nevertheless, the ALJ determined that there was no “sale.” 

This determination could have widespread, and probably unintended, results.  Imagine a person wants to return a sweater ($50 sales price) at a retail store and while at the store finds a pair of pants ($50 sales price) that she likes and wants to purchase.  Instead of returning the sweater, taking the $50, then purchasing the pants and passing that $50 back to the cashier, the person exchanges the sweater for the pants.  Under the rationale in Sunoco, the sale of the pants is not a “sale” by the retailer.   This is an extreme example, but there are many instances where counterparties to a transaction net payments to avoid the unnecessary trading of cash.

Sunoco’s motive for entering into the buy/sell arrangement was also considered in determining whether there was a “sale.”  But why one enters into a transaction should have no bearing on whether there is a sale.  Sunoco entered into the buy/sell contracts in order to acquire oil that it could more efficiently sell to its customers; that should not mean oil sold under the arrangements was not “sold.” 

The ALJ also focused on the fact that the receipts from the buy/sell contracts were reported on Sunoco’s federal returns as offsets to its cost of goods sold instead of on Line 1 as “receipts.”  But, as the taxpayer pointed out, whether the amount received on the sell side of the buy/sell contracts reduced the costs of goods sold deduction or increased its receipts had no impact on Sunoco’s federal taxable income. 

In addition to the it should be noted that this case may not be consistent with the 2022 decision of the Appellate Division in BTG Pactual NY Corp. v. N.Y. State Tax Appeals Tribunal, 165 NYS3d 149 (App. Div. 3^rd Dept., 2022).  In that case, the Appellate Division determined that the doctrine of federal conformity did not necessarily apply for New York apportionment issues because there is no apportionment at the federal level.   

Conclusion

While ALJ determinations are not precedential, practically speaking, this case could significantly impact the definition of “sale” for purposes of computing the Article 9-A receipts factor.