Koch Fuels, Inc. v. State ex rel. Oklahoma Tax Com'n
| Decision Date | 26 October 1993 |
| Docket Number | No. 75943,75943 |
| Citation | 1993 OK 140,862 P.2d 471 |
| Parties | KOCH FUELS, INC., Appellant, v. STATE of Oklahoma, ex rel. OKLAHOMA TAX COMMISSION, Appellee. |
| Court | Oklahoma Supreme Court |
Appeal from Order of the Oklahoma Tax Commission.
Koch Fuels protested a sales tax assessment to the Oklahoma Tax Commission. The Tax Commission denied the protest and Koch appealed. The Supreme Court granted Koch's motion to retain the appeal.
Order 90-06-07-028 of the Tax Commission Reversed.
Stephen P. Friot, Spradling, Alpern, Friot & Gum, Oklahoma City, Kelley D. Sears, Rick E. Bailey, Wichita, KS, for appellant.
Joe Mark Elkouri, Gen. Counsel, Marjorie L. Welch, Asst. Gen. Counsel, Oklahoma City, for appellee.
The question is whether Koch Fuels, Inc. must pay a sales tax to the State of Oklahoma on certain fuel oil it sold to Burlington Northern, Inc., a railroad. The Oklahoma Tax Commission made a sales tax assessment, finding the transaction to have been a sale of tangible personal property occurring within the state, and taxable under 68 O.S.Supp.1984 § 1354. Koch Fuels appeals, claiming (1) there was no sale of tangible personal property, and (2) if there was, any sales tax on it was in violation of the U.S. Constitution under Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 97 S.Ct. 1076, 51 L.Ed.2d 326 (1977). The amount in dispute is $136,568.00 plus interest and penalties. We conclude that although the transaction did amount to a sale as statutorily defined, one section of the Sales Tax Code impermissibly discriminates against interstate commerce, and therefore the tax does not pass the four-prong test established in Complete Auto, supra. The Order of the Tax Commission must be reversed.
Koch's motion to retain the appeal in this Court was granted, in part because the case presented an issue of first impression involving the application of the Oklahoma Sales Tax Code and Commerce Clause of the United States Constitution to fuel oil sales where the fuel is transported by a common carrier to an out-of-state location. Koch does not collect sales taxes on any of these sales. We also note that the Tax Commission Order on appeal, No. 90-06-07-028, was published by the Commission and given precedential effect. With the pronouncement of this opinion the discriminatory section of the statute falls, and Koch is saved from paying the sales tax as assessed. But the larger issue of whether these types of sales are subject to a sales tax, apart from the offending section, remains as an issue in controversy. This latter issue is the substance of the published Commission Order, and the taxpayer has vigorously objected to the Commission's assertion that the tax is valid.
A similar circumstance came before the United States Supreme Court in Tyler Pipe Industries, Inc. v. Washington Department of Revenue, 483 U.S. 232, 107 S.Ct. 2810, 97 L.Ed.2d 199 (1987) where the Court said:
Compliance with our holding on the discrimination issue, however, would not necessarily preclude the continued assessment of a wholesaling tax. Either a repeal of the manufacturing tax or an expansion of the multiple activities exemption to provide out-of-state manufacturers with a credit for manufacturing taxes paid to other States would presumably cure the discrimination. We must therefore also consider the alternative challenge to the wholesale tax advanced by Tyler and other appellants that manufacture products outside of Washington for sale in the State.
Id., 483 U.S. at 248-249, 107 S.Ct. at 2820.
While the discriminatory aspect of the Oklahoma sales tax scheme is cured by our opinion today we agree with the United States Supreme Court that the Commerce Clause challenge should be addressed in its entirety.
In the final three months of 1984 Koch and Burlington Northern entered into three separate contracts for the sale of No. 2 fuel oil. The terms of the contracts were agreed upon over the telephone, the parties being in Wichita, Kansas (Koch) and St. Paul, Minnesota (Burlington Northern). The contracts appear on Koch's printed forms titled "Sales Agreement", and include provisions for quantity and type of oil, price per gallon, passing of title, taxes, freight charges, credit, payment, limitation of liability, billing, non-assignability of the contract, etc.
In all three contracts the oil was to be delivered F.O.B. "Group III" and shipped via Williams Pipeline. The testimony before the Commission was that Group III included several refineries in Oklahoma and Kansas that are hooked up to the Williams Pipeline. Williams operates an interstate pipeline connecting several states, and Burlington Northern could extract the oil from any of the Williams' Pipeline terminals.
Because Williams Pipeline at Tulsa, Oklahoma was the actual F.O.B. point of delivery, if Burlington Northern extracted the oil from any location other than Tulsa a transportation charge or "tariff" from Williams would be paid by Burlington Northern. 1 Burlington Northern extracted the fuel oil in Nebraska, Missouri, Illinois, South Dakota, Minnesota, Iowa, and North Dakota, and was charged a transportation tariff. The record also shows that Williams Pipeline delivered to Burlington Northern some oil in 1984 and 1985 in Oklahoma City, but there is no evidence that this oil came from the Koch sales at issue.
Oil is transported in the Williams Pipeline by shipment, consignment, or Product Transfer Order (PTO). A shipment originates with a particular company, such as Koch, and that company ships the product through the pipeline and pays the transportation charge. A portion of a shipment can "be consigned to another company if the originating company such as Koch did not want to take title to the entire batch entering the system." The company to which the oil is consigned receives its portion of the product, but the originating company still pays the transportation charge or tariff.
In this transaction Koch used a PTO to record the delivery or transfer of oil from Koch to Burlington Northern. Once the agreement to sell the oil occurs the scheduling department of Koch contacts Williams and Burlington Northern to agree upon a time for the product transfer to be scheduled. The shipper "who holds title to the product" contacts the pipeline by telephone or mails the PTO to the pipeline. An employee of Williams testified that a PTO was "a tool for a custody transfer between shippers operating within the Williams Pipeline system." Oil may be PTOed at any location on the pipeline system, and Koch "PTOed the barrels at West Tulsa." Oil PTOed at a specific location is carried on Williams' books as the receiving company's (Burlington's) oil at that location.
The exact PTO location is mutually agreed upon by the buyer and seller of the oil. Koch could no longer control the disposition of the oil once it was PTOed by Koch to Burlington Northern. However, Burlington Northern could control the disposition of the oil transferred, and could decide to withdraw the oil in Tulsa or other locations "down the pipeline" and in other states. The record does not show whether sales tax or use tax was collected on the sale or the fuel oil by any other State. 2
Koch argues that it really never owned any fuel oil and that a sale of oil never occurred. It argues that it owned an intangible contract right to receive oil from the pipeline, and that it transferred this right. This argument is made because of the language of the sales tax statutes:
"Sale" means the transfer of title of either title or possession of tangible personal property for a valuable consideration regardless of the manner, method, instrumentality, or device by which the transfer is accomplished in this state, including but not limited to:
"Tangible personal property" means personal property which may be seen, weighed, measured, felt, or touched or which is in any other manner perceptible to the senses.
Koch thus seeks to avoid the tax by showing that no sale of tangible personal property occurred.
An obvious response to such an argument is that the contracts do not specify the sale of "a right to take oil", but facially show the sale of a certain amount of fuel oil at an agreed per gallon price. See 15 O.S.1981 § 160 and Mercury Inv. Co. v. F.W. Woolworth Co., 706 P.2d 523, 529 (Okla.1985), explaining that words in a contract are to be understood in their ordinary sense unless used by the parties in a technical sense, or unless a special meaning is given to them by usage. 3
Tangible property is defined by statute for the purpose of sales tax as "personal property which may be seen, weighed, measured, felt, or touched or which is any manner perceptible to the senses." 68 O.S.Supp.1983 § 1352(N). The object of the contracts, fuel oil, may be measured, felt and touched, and is tangible property. Koch recognizes this in principle, but claims it does not apply since it owned no oil and no oil changed owners.
In support of its theory Koch argues that only a right to take the oil was transferred to Burlington Northern, and points to testimony by an employee of Williams that the "risk of loss" of the oil in the pipeline was upon Williams. But this same employee testified that the title of the oil was held by the shipper (Koch) prior to the PTO. The Sales Agreement between Koch and Burlington Northern provides that "Title and risk of loss shall pass from SELLER to BUYER upon delivery of said petroleum products at the F.O.B. delivery point." (Emphasis added).
One witness stated that the oil in the pipeline was transferred from the inventory of Koch to the inventory of Burlington Northern upon receipt of the product transfer order. Additionally, Burlington Northern was billed the tariff for the oil from Tulsa to where Burlington Northern took the oil off the pipeline--an act consistent with transferring title from Koch...
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