The Alabama Tax Tribunal ruled that wholesale fuel sales entering and leaving the state via the Colonial Pipeline were subject to the state’s wholesale oil royalty. The sales in question were made to license holders in Alabama and concerned fuel imported from abroad. The fuel would either enter Alabama from out of state through the Colonial Pipeline or be injected into the pipeline at a point in Alabama. In both cases, the fuel was destined for final transportation out of Alabama, with no further point in Alabama for the fuel to exit the pipeline.
Taxpayers argued that the sales were made while the fuel was “at a shared carrier.” [the Pipeline] for transportation to another state” and therefore should not be taxed by Alabama as interstate sales under the Federal Commerce Clause. The Treasury Department disagreed, arguing that taxpayers’ purchase contracts did not support delivery location outside of Alabama because ownership of the fuel was transferred from taxpayers to Alabama buyers of the fuel, effectively removing the fuel from interstate commerce . The arbitral tribunal agreed that normally goods destined for shipment abroad are not taxable under the trade clause, but since the terms of the contract between taxpayers and buyers established ownership of the fuel transferred in Alabama, the sales were taxable.
The arbitral tribunal’s decision is a reminder of the importance of contractual delivery terms in sales transactions and the role they can play in determining tax application.