The Illinois Supreme Court said Cook County may have improperly collected certain motor fuel tax dollars, in a dispute which could have had far-reaching implications statewide.
When the Cook County Revenue Department audited Marathon Petroleum in May 2014, it determined Marathon failed to collect motor fuel tax on certain transactions covering millions of gallons of fuel from January 2006 through July 2014, then assessed the unpaid revenue along with interest and penalties.
Marathon pushed back, asserting the transactions in question represented cash settlements of forward contracts but didn’t involve ownership change or movement of the fuel itself, which they asserted was necessary to trigger the tax.
That dispute called into question the county’s sales tax imposition procedure, which does not require collection at the point of retail sale. Marathon said the county improperly presumed the so-called “book transfers” of gasoline all happened within Cook County and would therefore be taxable, rather than understanding them as accounting paperwork.
Altogether, the county demanded Marathon pay more than $14.9 million for gasoline and diesel fuel sales, including interest and penalties.
After initial review, an administrative law judge within the Cook County Department of Administrative Hearings sided with the county's revenue department. On Marathon’s request for judicial review, a Cook County Circuit Court judge reversed and vacated the decision.
But then a state appellate court agreed with the county and reversed the judgment again, partially affirming the administrative law judge and sending the matter back to recalculate Marathon’s financial obligation.
Marathon then asked the state Supreme Court to intervene. The county then asked the court to reinstate the initial penalties as cross relief.
Justice Mary K. O’Brien wrote the court’s opinion, filed Nov. 21.
The court also allowed several briefs from industry groups and others supporting Marathon’s position.
Attorneys from Duane Morris filed a support brief for the Illinois Chamber of Commerce, siding with Marathon.
The organization said the appellate court’s decision, should it be allowed to stand, would “result in a historic reversal of tax policy in Illinois” that would devastate businesses, letting home rule governments “impose occupation taxes on businesses on a potential cornucopia of sales of intangibles, such as sales of option contracts, music or video copyrights, patents, bonds, mortgages, certificates of deposit, custom software, future services rights, sourcing contracts, commodity futures contracts, franchises, marketing rights, exploratory rights, licenses, trade secrets – to name just a few."
The Illinois Fuel and Retail Association, an organization which advocates for the interests of service stations and fuel sellers, used attorneys from the firm of HeplerBroom for its brief against Cook County's position.
It noted association members remit roughly $2 billion in annual gas taxes and noted “the consuming public” could never be involved in the type of sale or purchase at issue in the matter. It noted the county’s tax ordinance was designed to ultimately tax retail fuel purchases “regardless of what party collects and remits the tax.”
IFRA further noted the county’s “collection framework is substantially similar to the Illinois Motor Fuel Tax Law’s arrangement, which explicitly states that the ‘tax is imposed on the privilege of operating motor vehicles upon the public highways…’ not the distributor.”
The county argued the Supreme Court didn’t need to resolve Marathon’s argument the challenged transactions weren’t taxable sales but merely transfers of an intangible right.
Rather, the county said the administrative law judge wasn’t clearly wrong in deciding Marathon failed to provide enough evidence to rebut the revenue department’s standard. O’Brien said the court applied the “clearly erroneous” standard to analyzing the administrative law judge’s conclusion and did not find the ruling problematic.
That finding did not end the matter, however, as O’Brien explained Marathon could still prove the challenged transactions weren’t taxable. The county said Marathon lacked data for that position, notably a failure to present contracts showing terms of the book transfers, but the Supreme Court said both the county and the administrative law judge demanded more detail than was necessary for Marathon to stake its claim.
“The record plainly discloses that Marathon relied upon a comprehensive business record,” O’Brien wrote, referring to the company’s internal summary reports that recorded the transfers with specificity. Marathon also supplied contracts, letters and invoices the revenue department accessed during its audit. This record showed it documented all such transfers the same way.
“Each party invoiced on its own underlying sales contract, and the price and terms were dictated by those contracts. The exemplar invoices, which were included with the documentation that was available to the department during the audit, reflected the lack of the elements necessary to show the physical movement of fuel: specifically, there were no references to meter tickets or a transfer order,” O’Brien wrote. “Marathon’s witnesses testified as to how these transactions involved no change in possession or ownership of fuel but merely reflected a cash settlement of forward contracts, which rendered the transactions merely financial.”
The administrative law judge didn’t reach the issue of whether the county could prove the transactions were indeed taxable. The Supreme Court thus sent the matter back to the Cook County Department of Administrative Hearings to resolve that question.
The Illinois Fuel and Retail Association did not respond to a request for additional comment on the decision.