Can a retail petroleum distributor avoid New York's Article 13-A gross receipts tax on its retail markup by having a related corporation become the importer and pay the tax instead?

Plain-English summary

Reid Petroleum Corp. was a retail gasoline distributor that didn't import fuel into New York, so it wasn't subject to Article 13-A's gross receipts tax on petroleum businesses -- only to the separate Article 12-A motor fuel tax as a registered distributor. Reid wanted to start importing fuel directly, but that would pull its entire retail business (including the markup on fuel that was never taxed under Article 13-A before) into the 2.75% gross receipts tax. To avoid that, Reid proposed having one of its own shareholders form a brand-new sister corporation, "Trading," which would become the actual importer: Trading would get all the necessary import, distributor, and petroleum-business licenses, buy fuel from both in-state and out-of-state vendors, and sell it to Reid (and others) at a price that includes the Article 13-A tax Trading pays. Trading would lease its delivery trucks from Reid and another related company, and would use drivers on the Reid companies' payroll.

The Department walked through each piece of the plan. On the core question, since Reid would be buying petroleum that's already located in New York from Trading -- a genuine Article 13-A taxpayer -- Reid itself isn't "importing or causing to be imported" anything, so it isn't a taxable "petroleum business" under Article 13-A; only Trading is. On bonding, the statute requires the bond to reflect Trading's own financial condition, not a joint statement combining Trading's and Reid's finances through a cross-guarantee -- so the companies can't pool their credit strength to reduce Trading's required bond. On the remaining facts -- Trading leasing its trucks from Reid and a related company, and Reid keeping its old Article 12-A distributor registration -- the Department said neither changes the analysis, as long as all the intercompany arrangements (truck leases, sales between the companies) are conducted on an arm's-length basis.

What this means for you

Businesses restructuring around excise or gross-receipts taxes using related entities

Routing a taxable activity (like importing) through a properly licensed, properly taxed affiliate can genuinely keep the rest of the business out of that tax base -- but only if the affiliate is a real, independently operating taxpayer, and only if intercompany dealings are priced and conducted at arm's length. The ruling doesn't bless sham arrangements; it turned on Trading being licensed and actually paying the Article 13-A tax itself.

Anyone using cross-guarantees to satisfy a bonding or security requirement

A statutory bonding requirement tied to "the taxpayer's own financial condition" generally can't be satisfied by combining an affiliate's finances through a cross-guarantee -- each entity's bond must stand on its own numbers.

Common questions

Q: Does this mean any company can avoid Article 13-A tax by adding a related importer?
A: Not automatically -- this ruling depended on Trading actually being licensed, actually paying the tax, and all intercompany dealings being arm's-length. It's fact-specific and binds the Department only for this petitioner.

Q: Can Reid and Trading pool their finances to reduce Trading's bond?
A: No -- the Department was explicit that the bond must be based on the taxpayer's own statement of financial condition, not a joint statement with an affiliate.

Q: Does keeping the old Article 12-A distributor registration change anything?
A: No, based on the facts presented, as long as sales between the related companies remain arm's-length.

Citations and references

Statutes and regulations:

• Tax Law § 301 (Article 13-A imposition); § 300(c) (definition of "petroleum business")
• Tax Law § 302(c); Petroleum Business Tax Regulations Part 63; Motor Fuel Tax Regulations Part 414 (bonding)
• TSB-M-83(22)C (import threshold guidance)
• Tax Law Article 12-A (motor fuel distributor registration)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1987.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a87_30c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-87 (30) C
Corporation Tax
December 3, 1987

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C870803A

On August 3, 1987, a Petition for Advisory Opinion was received from Paul D. Reid and
Reid Petroleum Corp., 100 West Genesee Street, Lockport, New York 14094.
Issues
1.
Whether Reid Petroleum Corp. ("Reid") will be subject to the gross receipts tax
imposed by Article 13-A of the Tax Law if it purchases its petroleum products from Reid Trading
Corp. ("Trading"), a corporation owned and controlled by one of the shareholders of Reid, which
purchases its petroleum products from both interstate and intrastate vendors and is subject to tax
under ArticIe 13-A.
2.
Whether the financial condition of Reid and Trading will be considered jointly in
determining the bonding requirement of the Article 13-A corporation if the two corporations cross­
guarantee their tax obligations.
3.
Whether the answers to Issues 1 and 2 above will be affected by the fact that Trading
leases its trucks from both Reid and a second corporation related to Reid.
4.
Whether the answers to Issues 1, 2, and 3 above will be affected by the retention of
an Article 12-A distributor registration by Reid.
Facts
Reid is presently a distributor of motor fuel within the meaning of Article 12-A of the Tax
Law, but does not import such fuel into the state. Reid presently complies with the registration
provisions of Article 12-A of the Tax Law. Most of Reid's gross receipts are derived from retail sales
of petroleum. Reid would like to begin importing motor fuel and convert to a petroleum business
described in Article 13-A of the Tax Law. However, the bulk of Reid's gross receipts would still be
derived from retail sales of nonimported fuel. Reid does not want to pay a gross receipts tax on the
retail markup of the motor fuel which was not subject to such tax when Reid was not importing
motor fuel, and therefore, was not subject to the Article 13-A gross receipts tax. Reid thus proposes
that one of the shareholders of Reid form a new corporation ("Trading") which will be an importer
of such motor fuel and will be subject to tax under Article 13-A.
The proposal is as follows:
1.
One of the shareholders of Reid will form Trading for the purpose of purchasing all
petroleum products, from both within New York State and outside New York State.

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-87 (30) C
Corporation Tax
December 3, 1987

2.
Trading will meet all of the necessary registration and bonding requirements for
conducting a petroleum business, including, but not limited to, obtaining an importing transporter
license, an Article 12-A distributor license, an Article 13-A petroleum business license, and a federal
excise tax permit.
3.
Trading will lease trucks from both Reid and a second corporation related to Reid to
transport petroleum products interstate and intrastate primarily for delivery to Reid. Trading will
employ drivers to operate the trucks through the Reid companies payroll system.
4.
Trading will sell petroleum products to Reid, F.O.B. delivery point, and to others on
terms agreed upon by the parties.
5.
Trading will remit the prepaid sales tax, state motor fuel tax and other taxes required
by applicable statutes and regulations to the vendor for intrastate purchases, and to New York State
directly for interstate purchases, and will collect such taxes on its own sales.
6.
Reid will pay the prepaid sales tax and state motor fuel tax to Trading and will also
collect and remit to New York State the actual sales tax on retail sales. In addition, Reid will pay the
federal excise tax.
7.
Trading will remit to New York State the Article 13-A gross receipts tax calculated,
pursuant to TSB-M-83(22)C, to include the tax on gross receipts minus New York State and local
sales taxes (including the prepaid sales tax), New York State taxes on motor fuel and diesel fuel, and
any other taxes imposed directly on the purchaser.
8.
Reid will not register as an Article 13-A corporation and will not incur any gross
receipts tax liability, particularly upon the retail mark-up and federal excise tax component of Reid's
gross receipts.
Issue 1
Section 301 of Article 13-A of the Tax Law imposes "...upon every petroleum business, for
the privilege of engaging in business, doing business, employing capital, owning or leasing property,
or maintaining an office in this state, for all or any part of each of its taxable years, an annual tax
equal to two and three-quarters per centum of (i) its gross receipts from sales of petroleum where
shipments are made to points within the state .... "
The term "petroleum business" is defined in section 300(c) of the Tax Law as "every
corporation and unincorporated business formed for, engaged in or conducting the business, trade
or occupation of importing or causing to be imported (by a person other than one which is subject
to tax under this article) into this state for sale in this state, extracting, producing, refining,
manufacturing, or compounding petroleum .... "

-3­
TSB-A-87 (30) C
Corporation Tax
December 3, 1987

Technical Services Bureau Memorandum TSB-M-83(22)C provides that a petroleum
business is importing petroleum into New York State if it takes title to petroleum outside New York
State and ships or causes to be shipped into New York State 20,000 gallons or more of such
petroleum during its taxable year. Also, a petroleum business is deemed to be causing petroleum to
be imported into New York State if it purchases 20,000 gallons or more of petroleum located outside
New York State for delivery into New York State from a seller not subject to tax under Article 13-A
of the Tax Law.
Assuming Trading has an importing transporter's license under Article 12-A of the Tax Law
and is registered as a distributor under Article 12-A and registered as a petroleum business under
Article 13-A of the Tax Law, Reid is not importing petroleum or causing petroleum to be imported
into New York State when it purchases petroleum that is located in New York State from Trading,
a seller that is an Article 13-A taxpayer. It is presumed that Trading is paying the Article 13-A gross
receipts tax on its gross receipts from sales of petroleum and then passing along the cost of this tax
in the price of the products charged to its customers. Accordingly, Reid is not engaged in a petroleum
business subject to Article 13-A of the Tax Law.
Issue 2
Section 302(c) of the Tax Law and Part 63 of the Petroleum Business Tax regulations provide
that where the Department of Taxation and Finance deems it necessary to protect the revenue to be
obtained under Article 13-A of the Tax Law, it may require a petroleum business to file with the
Department a bond or other security. Whenever possible, the requirements of section 302(c) is to be
coordinated with the bonding requirement of Article 12-A of the Tax Law and Part 414 of the motor
fuel tax regulations. The bonding requirements under both Part 63 of the Petroleum Business Tax
regulations and Part 414 of the motor fuel tax regulations provide that the amount of the bond or
other security be determined according to the taxpayer's own statement of financial condition and
cannot be determined through the use of joint financial condition statements of it and its affiliate by
cross-guaranteeing each others tax obligations. Accordingly, Trading's bond requirement must be
determined according to its own statement of financial condition, not by using a joint statement of
financial condition with Reid.
Issue 3
Assuming all trucking arrangements with other corporations related to Reid are on an arm's
length basis, the answers to Issue 1 and Issue 2 will not be affected by the fact that Trading leases
its trucks from both Reid and another corporation related to Reid.

-4­
TSB-A-87 (30) C
Corporation Tax
December 3, 1987

Issue 4
Based on the facts presented, the answers to Issue 1, Issue 2 and Issue 3 will not be affected
by the retention of an Article 12-A distributor registration by Reid, assuming all sales by Reid to
other corporations related to Reid are on an arm's length basis.

DATED: December 3, 1987

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.