Deficiency Assessment • Nontaxable Sales to School District • Excessive Stock Loss

Luther P. Miller, Inc. v. Commonwealth, PICS Case No. 14-0462 (Pa. Commw. March 20, 2014) Colins, S.J. (15 pages).

Auditor correctly assessed tax deficiency and denied exemption to distributor of petroleum products who did not make sales directly to school district, did not prove that head start was a commonwealth agency and did not prove reason for excessive stock loss. Affirmed.

Petitioner, a distributor whose business operations include wholesale and retail sale of petroleum products, was audited and assessed deficient in taxes in an amount of approximately $35,000. Three principal issues formed the assessment of deficiency against petitioner. The first involved diesel fuel sales recorded as nontaxable sales to school district. While sales made to a school district normally qualify as exempt sales to a political subdivision, auditor disallowed the exemption because the sales were not actually received by or billed to the school district. Instead, sales were made to bus operator companies that contracted with school district to provide busing for its students. Because the bus operators were neither political subdivisions nor registered distributors, auditor disallowed the approximately 15,000 gallons of diesel fuel recorded as exempt sales to school district.

The second issue related to 6,005 gallons of gasoline sales made to a county head start program, which provided services for children aged three to five from low income or foster families and other disadvantaged situations. Auditor disallowed these sales as exempt because a head start program was not a political subdivision of Pennsylvania eligible for tax-exempt gasoline purchases.

The third basis for the assessment of deficiency was excessive stock loss. Petitioner claimed a stock loss of 1.4 percent for gasoline loss and of 0.8 percent of total loss for diesel. The maximum allowable stock loss is 0.5 percent. Auditor was unable to determine a reason for excessive loss.

The Board of Appeals concurred with the assessment of deficiency. The Board of Finance and Review affirmed. The Commonwealth Court affirmed.

To qualify as non-taxable sales to school districts, sales must be made directly to and placed in bulk storage facilities leased or owned by the exempt entity. Petitioner, who bears the burden of proving exemption from tax, has not presented any evidence that it made sales directly to bulk storage facilities owned or leased by school district as required by regulation. Contracts between school district and bus operators only show that the school district purchased transportation services from the bus operators. These contracts do not provide that school district would pay for the diesel fuel directly.

Petitioner also argued that its sales to the head start program were exempt because the program was run by a “community action agency,” that, as recipient of government funding and provider of social service programs on behalf of commonwealth and local government, is an instrumentality or agency of the commonwealth. However, the mere fact that program activities were government funded was insufficient to show that head start was a commonwealth agency, rather than simply a contractor that received funds and provided service to the commonwealth.

As to the stock loss, auditor found that the stock control worksheets prepared by petitioner did not separate fuel stock by storage location and were thus insufficient to allow for a temperature analysis. Auditor did attempt a temperature analysis for gasoline fuel based on the average temperature in the counties in which petitioner’s facilities were located, but the results did not justify a stock loss in excess of 0.5 percent. On appeal, petitioner did not present any additional evidence—or offer any alternate explanation, such as slippage, accident or theft—that would remedy his deficient recordkeeping. Because petitioner failed to produce sufficient evidence to substantiate its stock loss, auditor correctly determined that the stock loss in excess of 0.5 percent was excessive.