Opinion ID: 2552275
Heading Depth: 4
Heading Rank: 1

Heading: Applicable law and the department's decision

Text: Alaska's Motor Fuel Tax Act taxes all motor fuel sold [9] and all motor fuel consumed by a user. [10] The version of the act in force during the period at issue here taxed the sale or use of jet fuel at two and one-half cents a gallon [11] but exempted jet fuel sold for use in flights to foreign countries. [12] The act ordinarily required dealers to collect all sales tax at the time of transfer and required users to remit use taxes on a monthly basis. [13] But dealers were not responsible for collecting tax for sales to buyers who certified that the fuel was not intended for a taxable use. [14] The act distinguished a taxable sale from a taxable use by defining user to include any person consuming or using motor fuel, who ... purchases or receives fuel in the state that is not taxed at the time of purchase or receipt. [15] Thus, a buyer who avoided taxation by certifying that fuel was not intended for a taxable use but later consumed it for a taxable use became subject to tax as a user. This tax scheme created a complication for air carriers like UPS, who bought bulk jet fuel intended for use in both foreign and domestic flightsthat is, fuel intended for both exempt and non-exempt uses. Because these companies could not predict the exact portion of the bulk fuel that they eventually would use on exempt foreign flights, the state insisted that fuel dealers collect tax on the entire bulk sale, requiring buyers to apply for refunds later, based on actual use of the fuel in exempt flights to foreign countries. The Department of Revenue addressed this situation in 1984 by revising its regulations. Responding to complaints that the refund process caused air carriers cash flow problems and was a waste of administrative resources by both the airlines and the Department of Revenue, the department promulgated 15 AAC 40.020(b). For most bulk sales of fuel, subsection .020(b) preserved the existing system of full taxation upon sale subject to later refund based on actual exempt use. But the regulation made an exception for mixed-purpose bulk sales of jet fuel to air carriers who had direct foreign flights, expressly exempting these transactions at the time of the sale: Bulk sales of fuel to a person who uses a common storage tank servicing both taxable and nontaxable uses, except bulk sales of jet fuel to a person who flies directly from the state to a foreign country, are subject to the motor fuel tax under AS 43.40.010AS 43.40.100, but the portion actually used for nontaxable purposes is eligible for a tax refund upon application to the department. A dealer who makes bulk sales of motor fuel shall collect and remit the tax in accordance with this chapter, except that if the sale is a sale of jet fuel to a person who flies directly from the state to a foreign country the tax may not be collected. [16] In challenging the department's tax assessment, UPS invoked this regulation to support its claim that the company only owed taxes for the jet fuel that it actually burned on domestic flights in Alaska air space. Pointing out that the Motor Fuel Tax Act defines a motor fuel user to include any person who buys fuel that is not taxed at the time of purchase, [17] UPS reasoned that 15 AAC 40.020(b) made UPS a user because it prohibited collection of tax at the time of UPS's bulk purchases of jet fuel. Thus, according to UPS, the company was liable for tax as a user under the act's use tax provision, [18] rather than as a buyer under the act's sales tax provision. [19] Emphasizing that the use tax provision levies tax on motor fuel  consumed by a user, [20] UPS insisted that it should only have to pay for jet fuel that its aircraft actually burned in Alaska. Senior Revenue Hearing Examiner Diane Colvin rejected UPS's position and affirmed the department's assessment, observing that [UPS] apparently believes in magic. It is not transformed from a purchaser to a user through the wizardry of an exception created by regulation for purchasers of certain bulk fuels. 15 AAC 40.020(b) addresses collection and refund of the motor fuel tax for certain nontaxable purchases. It does not grant an exemption from the incidence of the tax. After reviewing relevant legislative history and the circumstances surrounding the department's promulgation and enforcement of 15 AAC 40.020(b), the hearing officer found it apparent that the legislature did not intend to exempt bulk aviation fuel sold for use in domestic flights, and that [i]t was obviously the intent of the legislature that fuel purchased for use in domestic flights be taxed. The hearing officer concluded that 15 AAC 40.020(b) relieves purchasers from the need to seek tax refunds, and dealers from the collection requirement, in bulk sales of aviation jet fuel, but it does not exempt purchasers from the tax levied on purchasers by AS 43.40.010(a). She therefore ruled that UPS was liable for sales tax on all of the jet fuel it purchased for use in its domestic flights. The department adopted this ruling.