When a fuel terminal sells small, emergency amounts of untaxed No. 2 fuel oil to a commonly controlled affiliate through a pump nozzle that could fuel a vehicle, filling five-gallon cans, is that sale subject to New York's diesel fuel and petroleum business taxes?

Plain-English summary

Bayside Fuel Oil Depot Corp. is a terminal operator that wholesales oil products and is registered with the Department as a distributor of diesel motor fuel. It has a commonly controlled affiliate that sells home-heating products at retail and is also a registered diesel distributor. When one of the affiliate's customers runs out of home-heating fuel and needs an emergency delivery — but no delivery truck is available, especially on winter nights and weekends — the affiliate sends a repairman with a small amount of fuel (usually five to ten gallons) to get the customer running until a truck can fill the tank.

To supply that emergency fuel, Bayside sells the five to ten gallons of previously untaxed No. 2 fuel oil to the affiliate, dispensing it through a pump nozzle (fed by two 630,000-gallon tanks that also feed the truck loading racks) into five-gallon fuel cans. Bayside asked whether that sale is taxed under Articles 12-A and 13-A.

The answer: yes, the terminal-to-affiliate sale is taxable — but the affiliate's downstream heating sale can be relieved of the tax.

• The inter-distributor exemption does not apply. Normally a sale of previously untaxed, unenhanced diesel motor fuel from one registered distributor to another is exempt (Tax Law § 282-a(3)(b)(ii); § 301-b(e)(1)). But that exemption is lost when the fuel is delivered through a hose or apparatus by which it can be dispensed into a motor vehicle's tank. Here the fuel goes through a metered nozzle suitable for fueling a vehicle into five-gallon cans — a repository from which the fuel could be put into a vehicle — so the exemption is unavailable.
• The sale is therefore taxed at the time of sale: the Article 12-A diesel motor fuel excise tax (§ 282-a), plus the Article 13-A base petroleum business tax at the automotive-type diesel rate (§ 301-a) and the supplemental petroleum business tax (§ 301-j).
• Downstream relief for heating use. After the sale, the affiliate holds taxed, unenhanced diesel motor fuel that it plans to sell to retail customers for heating. The affiliate may sell those small quantities (under ten gallons) to retail customers for heating without passing through the Article 12-A excise tax — consistent with the Legislature's intent that heating fuel be exempt (L. 1988, Ch. 261, § 67) and with Important Notice N-88-50 — and the affiliate is eligible for a refund of the excise tax paid.
• The affiliate likewise need not pass through the Article 13-A base and supplemental petroleum business taxes and may claim reimbursement of them under § 301-c(a), provided the fuel is sold for residential heating.

What this means for you

A distributor-to-distributor sale of untaxed diesel is only tax-free if it isn't delivered in a way that could fuel a vehicle. The inter-distributor exemption is the workhorse that lets untaxed product move through the wholesale chain, but New York deliberately switches it off the moment the fuel passes through a hose or nozzle capable of filling a motor vehicle's tank — even if everyone involved is a registered distributor and the fuel is ultimately headed for a furnace. If your operation dispenses through vehicle-capable equipment, expect the sale to be taxed up front.

The tax can still wash out for genuine heating use — but through refund/reimbursement, not exemption at the pump. Because the fuel here ends up heating homes, New York doesn't want it to bear the diesel excise or petroleum business tax in the end. The mechanism, though, is that the tax is paid on the terminal-to-affiliate sale and then recovered downstream: the affiliate sells under ten gallons for heating without charging through the excise, and claims a refund of the excise plus reimbursement of the base and supplemental petroleum business taxes under § 301-c(a).

Keep the documentation. The reimbursement of the petroleum business tax under § 301-c(a) depends on the tax having been paid and absorbed by the claimant, with proof. Distributors relying on this treatment for emergency heating deliveries should track the taxed purchase, the under-ten-gallon heating resale, and the absorption of the tax.

Common questions

Q: Both companies are registered distributors — why isn't the sale exempt as an inter-distributor sale?
A: Because the fuel is dispensed through a metered nozzle suitable for fueling a motor vehicle, into five-gallon cans. Delivery through a hose or apparatus that can fill a vehicle's tank disqualifies the inter-distributor exemption under Tax Law § 282-a(3)(b)(ii) and § 301-b(e)(1).

Q: Which taxes apply to the terminal-to-affiliate sale?
A: The Article 12-A diesel motor fuel excise tax (§ 282-a) and the Article 13-A petroleum business tax — both the base tax at the automotive-type diesel rate (§ 301-a) and the supplemental tax (§ 301-j) — all at the time of the sale.

Q: Does the affiliate have to charge those taxes to the home-heating customer?
A: No. For small quantities (under ten gallons) sold for heating, the affiliate need not pass through the Article 12-A excise tax and may claim a refund of it, and it may claim reimbursement of the Article 13-A base and supplemental petroleum business taxes under § 301-c(a), provided the fuel is sold for residential heating.

Q: Where does the under-ten-gallon rule come from?
A: From New York's treatment of small home-heating sales — reflected in the legislative intent to exempt heating fuel (L. 1988, Ch. 261, § 67) and in Important Notice N-88-50, which lets a retail sale of under ten gallons for home heating, not dispensed into a vehicle tank, be made without passing through the excise tax.

Citations and references

Statutes and guidance:

• Tax Law § 282-a(1) — Article 12-A diesel motor fuel excise tax on the first sale or use
• Tax Law § 282-a(3)(b)(ii) — inter-distributor exemption for previously untaxed unenhanced diesel; unavailable where delivery is through a hose or apparatus that can fuel a motor vehicle
• Tax Law § 301-a — Article 13-A base petroleum business tax (automotive-type diesel rate); § 301-j — supplemental petroleum business tax
• Tax Law § 301-b(e)(1) — Article 13-A inter-distributor provision paralleling § 282-a(3)(b)(ii)
• Tax Law § 301-c(a) — reimbursement of petroleum business tax on diesel motor fuel sold to a consumer for residential heating
• L. 1988, Ch. 261, § 67 — legislative finding and intent to exempt heating fuel under Article 12-A
• Important Notice N-88-50 — under-ten-gallon retail sale for home heating, not into a vehicle tank, may be sold free of the passed-through excise tax

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/petrol_bus_ao.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/multitax/a99_1m.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-99(1)M
Motor Fuel Tax
Petroleum Business Tax
November 30, 1999

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M990730A

On July 30, 1999, the Department of Taxation and Finance received a Petition for Advisory
Opinion from Bayside Fuel Oil Depot Corp., 1776 Shore Parkway, Brooklyn, NY 11214. Additional
information related to the Petition was received on August 17, 1999.
The issue raised by Petitioner, Bayside Fuel Oil Depot Corp., is whether No. 2 fuel oil (high
sulfur content) that is dispensed by Petitioner through a metered nozzle which is suitable for use in
dispensing fuel into the fuel tank of a motor vehicle is subject to tax under Articles 12-A and 13-A
of the Tax Law, where such fuel is dispensed in such manner into five-gallon cans, and only on an
emergency basis, to a company that is commonly controlled with Petitioner.
Petitioner presents the following facts. Petitioner is a terminal operator which wholesales
various oil products. Petitioner is affiliated with another company that is in the business of selling
home heating products at the retail level ("Affiliate"). Petitioner states that both Petitioner and
Affiliate are registered with the Department of Taxation and Finance as distributors of diesel motor
fuel, and that both Petitioner and Affiliate are controlled by a common ownership. From time to
time, situations arise whereby a customer of Affiliate runs out of home heating fuel and is in need
of an emergency delivery. In the normal course of business, Affiliate would be able to send one of
its trucks to make the necessary delivery. However, there sometimes exist circumstances under
which a truck of Affiliate is not available to make such a delivery, especially during the winter
months or over nights and weekends year-round. Under such circumstances, Affiliate, in order to
provide its customers with good service, will often send a repairman with a small amount of fuel
(usually five to ten gallons) to get the customer up and running until a truck is available to fill the
customer's tank.
In these situations, the five to ten gallons of fuel will be sold by Petitioner to Affiliate. Such
sales will be made through a pump that is fed by two 630,000-gallon storage tanks, which also feed
the truck loading racks at Petitioner's facility, and the fuel will be dispensed into five-gallon fuel
cans. Petitioner states that such fuel has not been previously subject to tax. Additionally, Petitioner
states that Affiliate's records will show these small amounts of fuel were sold to Affiliate in this
manner and that the amounts of fuel so sold will equal the amounts ultimately delivered to Affiliate's
customers.
Applicable Law
Section 282-a(1) of Article 12-A of the Tax Law states, in part:

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Motor Fuel Tax
Petroleum Business Tax
November 30, 1999

There is hereby levied and imposed with respect to Diesel motor fuel an
excise tax . . . upon the sale or use of Diesel motor fuel in this state. The excise tax
is imposed on the first sale or use of Diesel motor fuel to occur which is not exempt
from tax under this article. . . .
Section 282-a(3)(b) of Article 12-A of the Tax Law provides, in part:
The tax on the incident of sale or use imposed by subdivision one of this
section shall not apply to . . . (ii) the sale of previously untaxed Diesel motor fuel
which is not enhanced Diesel motor fuel to a person registered under this article as
a distributor of Diesel motor fuel other than (A) a retail sale to such person or (B) a
sale to such person which involves a delivery at a filling station or into a repository
which is equipped with a hose or other apparatus by which such fuel can be
dispensed into the fuel tank of a motor vehicle. . . . (emphasis added)
Sections 301-a and 301-j of Article 13-A of the Tax Law impose a base tax and a
supplemental tax, respectively, on diesel motor fuel. Section 301-b(e)(1) of article 13-A of the Tax
Law contains provisions regarding inter-distributor sales similar to those contained in section
282-a(3)(b)(ii) of article 12-A.
Section 67 of Chapter 261 of the Laws of 1988 provides as follows:
Legislative intent. It is the finding of the legislature that the present Diesel
excise tax system results in administrative, collection and enforcement problems. To
curb the evasion of tax and for ease of administration of this tax, the legislature
proposes to place the incidence of taxation upon the first sale or use of Diesel motor
fuel in the state subject to the qualifications stated within the law. It is the intent of
the legislature that heating fuel, the sale of Diesel motor fuel to farmers for use in
farming, and the sale of kero-jet fuel to an airline for use in its airplanes shall be
exempt from taxation under article 12-A of the tax law. (emphasis added)
Important Notice N-88-50 concluded that diesel motor fuel being purchased by a consumer
for home heating purposes may be sold by a retail service station exempt from the pass-through of
the excise tax, provided that the quantity sold is less than ten (10) gallons and that the fuel is not
dispensed into the fuel tank of a motor vehicle.
Section 301-c of Article 13-A of the Tax Law provides, in part:

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TSB-A-99(1)M
Motor Fuel Tax
Petroleum Business Tax
November 30, 1999

A subsequent purchaser shall be eligible for reimbursement of tax with
respect to the following gallonage, subsequently sold by such purchaser in
accordance with subdivision (a), (b), (e), (h), (j) or (k) of this section . . . , which
gallonage has been included in the measure of the tax imposed by this article on a
petroleum business:
(a) Diesel motor fuel used for heating purposes. Diesel motor fuel purchased
in this state and sold by such purchaser to a consumer for use exclusively for
residential heating purposes but only where (i) such diesel motor fuel is delivered
into a storage tank which is not equipped with a hose or other apparatus by which
such fuel can be dispensed into the fuel tank of a motor vehicle and such storage tank
is attached to the heating unit burning such fuel, (ii) the tax imposed pursuant to this
article has been paid with respect to such diesel motor fuel and the entire amount of
such tax has been absorbed by such purchaser, and (iii) such purchaser possesses
documentary proof satisfactory to the commissioner evidencing the absorption by it
of the entire amount of the tax imposed pursuant to this article. . . .
Conclusions
The sale of fuel at issue herein from Petitioner to Affiliate would be subject to the tax under
articles 12-A and 13-A at the time of the sale. In making such a sale, the fuel is delivered through
a nozzle, which itself is suitable for use in fueling a motor vehicle, into a repository (i.e., a
five-gallon fuel can) from which the fuel can be dispensed into the fuel tank of a motor vehicle.
Such a sale would not be entitled to the benefit of the exemption from tax for an inter-distributor
sale (Tax Law, sections 282-a(3)(b)(ii) and 301-b(e)(1)). As a result, the fuel will be subject to the
excise tax, imposed by Article 12-A. The fuel is also subject to (1) the base petroleum business tax
under section 301-a of Article 13-A, imposed at the automotive-type diesel motor fuel rate; and (2)
the supplemental petroleum business tax under section 301-j. As a result of the transaction with
Petitioner, Affiliate would possess taxed, unenhanced diesel motor fuel, which it subsequently
planned to sell to its retail customers for heating purposes.
Under the circumstances described herein, Affiliate would be able to sell the small quantities
of fuel (i.e., less than ten gallons) to its retail customers without passing through the Article 12-A
excise tax, provided such sales are solely for heating purposes. This conclusion is consistent with
both the legislative intent regarding the taxability of diesel fuel sold for heating purposes, and also
with the conclusions reached in Important Notice N-88-50. Affiliate would be eligible for a refund
of the excise tax paid on such fuel.
Additionally, the Article 13-A petroleum business taxes imposed on the fuel (both the base
tax and the supplemental tax) need not be passed through to Affiliate's customers and Affiliate would

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Motor Fuel Tax
Petroleum Business Tax
November 30, 1999

be able to request a reimbursement of such taxes paid, pursuant to section 301-c(a) of the Tax Law,
provided the fuel is sold for purposes of residential heating.

DATED: November 30, 1999

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

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