92-0878 - Motor fuel





Petitioner, ) FINDINGS OF FACT,






) Account Nos. XXXXX

Respondent. : and XXXXX



This matter came before the Utah State Tax Commission for a formal hearing on XXXXX. Alan Hennebold, Presiding Officer, heard the matter for and on behalf of the Commission. XXXXX, of XXXXX, represented Petitioner. XXXXX, Assistant Utah Attorney General, represented Respondent.

Based upon the evidence presented at the hearing, the Tax Commission hereby makes its:


1. The tax in question is special fuels tax arising from Petitioner's sales of diesel fuel.

2. The period in question is XXXXX through XXXXX.

3. Petitioner sells gasoline and diesel fuel to the public at two different "XXXXX" service stations. Each station has its own special fuel tax account.

4. Respondent audited both of Petitioner's special fuel tax accounts for the period in question. On XXXXX, Respondent issued its statutory notice assessing additional special fuel tax of ($$$$) to account number XXXXX. On XXXXX, Respondent issued its statutory notice assessing special fuel tax of ($$$$) was assessed with respect to account number XXXXX.

5. Petitioner filed timely appeals of each of the foregoing assessments with the Commission. For purposes of hearing and decision, the Commission consolidated both appeals into this proceeding.

6. The audits in this matter impose additional tax according to four separate schedules. Petitioner concedes the assessments made in schedules two through four. Petitioner contests only the tax imposed under schedule one, arising from a discrepancy between the gallons of diesel Petitioner reported

selling, and the gallons recorded on Petitioner's pump meters.

7. Schedule one was computed as follows: XXXXX was selected as a test period. The diesel fuel sales from Petitioner's returns were subtracted from the amount registered on Petitioner's pump meters. The result was converted to a factor that was applied to reported sales during the other portions of the audit period. With respect to account XXXXX, the projection factor was 0.331%. For account XXXXX, the factor was 0.552%.

8. Petitioner does not challenge the data or computations upon which Respondent's projection factors are calculated.

9. Prior to being audited, Petitioner filed special fuel tax reports each month, as required. In completing the reports, Petitioner followed the instructions and the report form itself, which required Petitioner to determine its total fuel available for sale during the month, then subtract its exempt sales and inventory available at the end of the month. The difference, "net gallons", was then subject to the special fuel tax of 19 cents per gallon.

Each month, Petitioner paid tax on the amount shown as due on the report.

10. Petitioner did not reconcile the "net gallons" shown

on its reports with the quantity of diesel metered through Petitioner's pumps. Neither the special fuel report form or associated instructions required Petitioner to undertake such a reconciliation.

11. Petitioner suggests several possible explanations for the discrepancy between its tax reports and its meters. Occasionally, individuals fail to pay for their fuel. Some small amount may be spilled. Approximately three times each year, pumps are tested for accuracy, which takes about ten gallons per test. Also, diesel fuel expands when warm and contracts when cool, thereby affecting volume measurements. Petitioner purchases its fuel on a "gross" basis in the winter and a "net" basis during the summer. Consequently, the natural expansion of the fuel works to Petitioner's benefit and tends to allow Petitioner to pump more gallons of diesel than records would indicate it had purchased.


Utah's Motor and Special Fuel Tax Act imposes a tax of 19 cents per gallon on the sale or use of special fuel. (Utah Code Ann. 59-13-301(1).)

The "user-dealer" must pay the special fuel tax "in all cases where the special fuel is sold within the state and delivered directly into the fuel supply tank of a motor vehicle", subject to certain exceptions not material here. (Utah Code Ann. 59-13-301(3).)

"User-dealer" is defined as any person who delivers special fuel into the fuel supply tank of any motor vehicle operated or propelled upon the public highways of the state. (Utah Code Ann. 59-13-102(9).)

"Use," is defined as the consumption of special fuel for the operation or propulsion of a motor vehicle upon the public highways of the state and includes the reception of special fuel into the fuel supply tank of a motor vehicle. (Utah Code Ann. 59-13-102(7).)

Each user-dealer must file a monthly report on forms prescribed by the Commission showing the amount of fuel sold during the preceding month and any other information the Commission may require. (Utah Code Ann. 59-13-307(1).)

Every user-dealer must maintain complete records as prescribed by the Commission on all purchases, sales, and inventories of special fuels. (Utah Code Ann. 59-13-309.)

The Commission is charged with the enforcement of the special fuels tax and may prescribe rules relating to its administration and enforcement. If the Commission has reason to question a user-dealer's report, it may compute the amount to be paid based upon the best information available to it. (Utah Code Ann. 59-13-313.)


Petitioner has been assessed with additional special fuels tax based upon Respondent's audit, which relied upon Petitioner's pump meters to determine the amount of diesel fuel Petitioner had sold. The amount so determined was only 0.5% more than Petitioner had previously reported. Even though the percentage of difference is small, it produces a substantial additional tax liability because of Petitioner's high volume of sales.

The essence of Petitioner's appeal is that it is fundamentally unfair for Respondent to establish one method for determining tax liability (the "inventory" method hereafter), then audit that tax liability using a different method (the "meter" method).

Utah's Motor and Special Fuels Tax Act requires Petitioner to pay the special fuel tax on every gallon of special fuel "sold and delivered" by Petitioner, unless such sales are to certain excluded customers or for certain excluded uses. While Respondent has established the "inventory" method for reporting such sales, it is the sale and delivery of the fuel that remains the taxable event. Section 59-13-313of the Act specifically authorizes Respondent to "compute the amount to be paid based upon the best information available to it", if reason exists to question a user-dealer's report. In this case, Respondent used the "meter" method as an audit tool to check the accuracy of Petitioner's special fuel reports.

The meter method indicated an inaccuracy in the reports which Respondent's audit corrected by reference to both the inventory" and "meter" methods. Petitioner argues that because Respondent required Petitioner to compute its special fuels tax on the inventory method, Respondent is barred from using the meter method to audit Petitioner's tax liability. The Utah Supreme Court considered a similar argument with resect to sales tax in Hinckley Inc. v. State Tax Commission, 404 P.2d 662 (1965). In Hinckley, the Commission established a "bracketing" system for vendor's use in charging sales tax. The bracketing system did not charge tax on sales less than 14 cents. As a result of the bracket system, Hinckley did not charge tax on its sales of less than 14 cents. On audit, it was assessed a sales tax deficiency for the cumulative tax due on such small transactions. Hinckley argued that because the Commission's own bracketing system did not require it to charge tax on the small transactions, the Commission could not, at audit, impose a different standard for computing the tax. The Utah Supreme Court did not agree, concluding instead that the tax was levied by statute on even the small amount sales and that if the bracket system did not provide a proper method for calculating such tax, it need not be the exclusive method. In conclusion, the Court held Hinckley liable for the full amount of tax due on the small sales. Applying the logic of Hinckley to this case, Petitioner is liable for the full amount of tax due, even if Respondent's reporting forms were not completely accurate in establishing that liability. At audit, Respondent has a duty to determine and assess the correct amount of tax, using the best information available to it.

As a secondary matter, Petitioner points to several possible events where diesel might be pumped, and therefore recorded on the meters, but not "sold and delivered". One such instance is diesel pumped for the purpose of testing the accuracy of the pump meters themselves. No specific documentation was provided regarding the number of such tests, but it appears to approximate 30 gallons per pump per year. This amount is inconsequential when compared to the audit deficiency. Nonetheless, Respondent concedes such amount are not properly taxable if sufficient documentation is provided.

Another instance of fuel pumped, but not sold, is that of "drive-offs". In such cases, individuals take fuel from the pump, then drive off without paying for it. Respondent argues that such events are taxable. The Commission reaches no conclusion on that point, since no documentation was provided to establish the extent to which drive-offs happen. The Commission notes, however, that to the extent such drive offs occur, they would be reported as sales on the inventory method just as they were on the meter method.

Finally, both parties concede that diesel fuel expands as it warms, and that Petitioner's purchasing patterns are designed to take advantage of that fact. In effect, Petitioner tries to buy denser "cold" fuel and sell less dense "warm" fuel. The result of this would be that Petitioner pumps and sells more gallons of diesel than it purchases, and collects special fuel tax on the

larger amount sold. Consequently, to the extent that the 0.5% difference between Petitioner's inventory based reports and Respondent's meter based audit results from the expansion of the diesel fuel, there is no injustice in requiring Petitioner to remit the special fuel tax collected on the expansion gallons.

Based upon the foregoing, the Tax Commission affirms Respondent's audits with respect to both account number XXXXX and XXXXX. It is so ordered.

DATED this 10th day of June, 1993.


R. H. Hansen Roger O. Tew

Chairman Commissioner


Joe B. Pacheco S. Blaine Willes

Commissioner Commissioner