The opinion of the court was delivered by: Judge Simpson
Argued: November 13, 2012
BEFORE: HONORABLE ROBERT SIMPSON, Judge
HONORABLE PATRICIA A. McCULLOUGH, Judge HONORABLE JAMES GARDNER COLINS, Senior Judge
Senex Explosives, Inc. (Taxpayer) asks to be saved from the consequences of its inadequate record-keeping to avoid what it claims to be double taxation. Because Taxpayer's request for special treatment implicates a complex, nationwide tax and reporting system, careful attention is required.
Specifically, Taxpayer contests the tax liability calculated by the
Department of Revenue (Department) on a Notice of Determination of
fuel tax due under the Motor Carriers Road Tax Act (Act)*fn1
pursuant to its International Fuel Tax Agreement
(IFTA)*fn2 license. Taxpayer argues that it is
entitled to a credit for the taxes paid on bulk-fueled vehicles, and
challenges the audit methodology as not using the best available
information reflecting use of fuel by qualifying vehicles.
Taxpayer also contends the Department erred in including miles traveled by its drilling rigs in calculating fuel consumed, as such vehicles are exempt from IFTA.
This dispute involves interpreting IFTA regarding tax-paid credits for bulk-fueled vehicles, and allegedly improper calculation of fuel consumption by including miles traveled by vehicles exempt from tax (non-qualifying vehicles). The Board of Finance and Revenue (Board) agreed with the Department's determination that a credit is not supported by Taxpayer's records. The Board addressed the exempt vehicles in terms of a refund for off-road use. Upon de novo review, we affirm the Board as to the credit issue, and reverse as to the inclusion of exempt vehicles in the calculation of tax liability.
The Act imposes a tax on fuel consumed in Pennsylvania by qualifying motor vehicles, which includes certain trucks and tractor-trailers. See 75 Pa. C.S. §9603; R&R Express v. Commonwealth, 37 A.3d 46 (Pa. Cmwlth. 2012). In calculating the tax, credit is given for tax paid on fuel purchased in this state. 75 Pa. C.S. §9604(a); R&R Express. In order to administer and effectuate the imposition and collection of fuel taxes on interstate carriers, Pennsylvania joined IFTA. R&R Express. Pursuant to IFTA, a motor carrier based in Pennsylvania files one tax return with the Commonwealth, its "base" jurisdiction, on which the tax due to all participating jurisdictions is reported and paid. Id. Pennsylvania, as the base jurisdiction, then distributes motor fuel use taxes to the other member jurisdictions in which the taxpayer traveled and incurred liability. Id.
IFTA governing documents include the Articles of Agreement (Articles), which incorporate the Audit Manual and Procedures Manual. Stipulation of Facts (Stipulation) ¶4.
Taxpayer, licensed under IFTA, operates a drilling and blasting business. Taxpayer's work consists of drilling blast holes for explosive placement as part of road and railway construction. As a licensee, Taxpayer files quarterly tax reports regarding its fuel use. The Department audits the quarterly reports for compliance with IFTA. The Department conducted an IFTA Road Tax audit of Taxpayer for the period from July 1, 2002, to June 30, 2006 (Audit).
The auditor found Taxpayer reported travel in 16 jurisdictions during the audit period. The Audit concluded Taxpayer was not in compliance with IFTA record-keeping requirements related to proof of tax paid fuel credit and had no system of measuring the fuel used in bulk fueling tanks as required by the Act. The disallowed credits mainly related to Taxpayer's operation of the bulk fueling tanks. This was because Taxpayer had no meters on the tanks before 2005. Taxpayer also did not record the amount of fuel moving from the bulk tank to any individual vehicle. Taxpayer had both qualifying and non-qualifying vehicles which were fueled by the bulk tank; therefore, the auditor had no means of apportioning the amount of consumed tax paid fuel between qualifying and non-qualifying vehicles. Thus, the Audit disallowed credit for 364,798 gallons of tax-paid Pennsylvania diesel fuel disbursed from Taxpayer's bulk storage tanks absent records identifying the specific vehicle or type of vehicle being fueled.
In addition, Taxpayer's drivers purchased gasoline and diesel fuel at public service stations with Taxpayer-issued credit cards. However, the purchases were not always identified to a specific vehicle, and Taxpayer did not assign credit cards to specific vehicles. Therefore, there was no means of identifying for which vehicle fuel was purchased.
The Department does not dispute that Taxpayer paid all taxes on the fuel in its bulk storage tanks. However, as the bulk tank also fuels non-qualifying vehicles, and the fuel disbursed could not be attributed to specific vehicles and is not the sole source of fuel, the Department determined the tax liability using mileage of qualifying vehicles without permitting a credit for miles traveled on bulk fuel. Essentially, the Audit disallowed tax credits given the lack of records to show the allocation of fuel to each qualifying vehicle.
The Audit also revealed that Taxpayer failed to follow required procedures in decaling its vehicles. For example, in 2006 Taxpayer obtained 48 IFTA decals. Of them, Taxpayer placed 13 of the decals on vehicles operated as "special mobile equipment" (SME) that perform drilling functions. See Stipulation, Ex. A, Narrative Report of Audit Findings, p. 2. As a part of the auditing method, the auditor included mileage of Taxpayer's IFTA-decaled drilling rigs in calculating the fuel consumed. Although drilling rigs are SME, and should be exempt from tax, Taxpayer placed IFTA decals on this equipment and used the equipment in multiple jurisdictions. Because Taxpayer placed decals on the SME, the auditor included the miles in the Audit. Thus, the auditor included SME in its calculation of tax liability.
As a result, the Audit concluded Taxpayer failed to report 79,642 miles for the SME drilling rigs. Taxpayer did not report miles traveled by SME, believing SME-licensed vehicles are exempt from taxable miles. The auditor applied the statutory rate of four miles per gallon and calculated the fuel tax liability according to the mileage shown by odometers on SME and qualifying vehicles. See R&R Express, 37 A.3d at 50 n.8 (explaining method of calculation using statutory default average m.p.g).
Following the Audit, the Department issued a Notice of Determination of tax due relating to Taxpayer's reporting under its IFTA license. Taxpayer was assessed tax in the amount of $127,405.03, plus interest in the amount of $32,267.06.
Taxpayer filed a Petition for Redetermination with the Department's Board of Appeals, appealing the assessment. The Board of Appeals sustained the assessment in its entirety. Taxpayer timely appealed the Board of Appeals' decision to the Board.
On October 16, 2007, the Board issued an order sustaining the Board of Appeals Decision, (BF&R Docket No. 0700689). The Board addressed Taxpayer's contentions that all relevant motor fuel taxes were paid to suppliers at the time of purchase, and that a significant amount of tax paid fuel was consumed in off-road activities.
The Board concluded that the Audit was conducted in a reasonable manner given the lack of documentation to support reported figures. The Board recited the statutory and regulatory record-keeping requirements under the Act and IFTA. The Board determined that Taxpayer did not maintain proper records as required by the Act and regulations under 61 Pa. Code §§313.12-.13. Absent fuel logs or other proper documentation as required by the IFTA Procedures Manual, the Board could not determine the amount of the credit to which Taxpayer could be entitled since Taxpayer has both qualifying and non-qualifying vehicles that used the bulk fuel tank. The Board thus sustained the order below.
Taxpayer timely petitioned this Court for review of the Board's Order.*fn3 In its petition, Taxpayer asserts it paid tax upon all fuel used, either at the time of purchase at the public service stations, or when purchased for the bulk fuel tanks.
The parties filed the Stipulation, which, together with the exhibits, including the Audit, is the record before this Court.*fn4
Relevant to this proceeding, the parties stipulated as follows:
In this matter  Taxpayer contests the amount of tax [the Department] claims is due and relating to [T]axpayer's reporting under its [IFTA] license. Stipulation ¶3.
The Notice of Determination was issued by the [Department] following an audit of Taxpayer's reports which covered the period July 1, 2002 to June 30, 2006. In the Notice of Determination the additional tax due was found to be $127,405.03, and interest due as of the date of the Determination was found to be $32,267.06. The Notice of Determination followed an audit of
[T]axpayer's records for this period .. Stipulation ¶3.
Taxpayer sought from the [Department] and was issued an IFTA license. Taxpayer filed quarterly tax reports during the period audited, and those reports were ...