Does a retailer that imports petroleum products from out of state and sells them in its Connecticut stores owe Connecticut's petroleum products gross earnings tax — and is it measured on its sales or on what it paid?

Plain-English summary

Connecticut's petroleum products gross earnings tax (Conn. Gen. Stat. § 12-587 et seq.) taxes companies "engaged in the refining or distribution" of petroleum products that distribute them in the state. A retail department-store company bought petroleum products out of state, warehoused them out of state, then trucked them into Connecticut and sold them at retail to consumers in its Connecticut stores. It asked two things: does it "distribute" products so the gross-earnings tax in § 12-587(b) applies, and does it "import" products so the consideration-based tax in § 12-587(c) applies?

Subsection (b) applies — the company owes the tax. The tax reaches earnings from the "first sale within this state" of a petroleum product (§ 12-587(a)(3)). DRS explained that "distribute" is not defined in the Act, but its longstanding practice is to read "distribute" to mean "sell." So it makes no difference whether the company is technically a wholesale "distributor" or a "retailer" — the definitions of "distributor" in other statutes (§§ 12-455a, 14-318) don't control here. DRS relied on George E. Warren Corp. v. Groppo, which held the tax "is imposed on one who distributes the petroleum product," with no limitation to a formal "distributor," and that only the first sale in Connecticut is taxed. Because this company sells petroleum products in Connecticut — its retail sale to consumers being the first Connecticut sale — it's squarely within § 12-587(b) and owes 5% of the gross earnings from those sales.

Subsection (c) does not apply. Section 12-587(c) imposes an alternative tax on companies that import petroleum products "for [their] use and consumption," measured on the consideration paid, when that consideration tops $100,000 per quarter. It was enacted (1991 Conn. Pub. Acts 3, § 146, June Spec. Sess.) after George E. Warren to stop the incentive to buy out of state for in-state consumption. DRS explained that (b) and (c) create alternative liability — (b) taxes the seller on gross earnings; (c) taxes the importer/buyer on consideration unless the seller is subject to and paid the tax under (b). Because this company sells the products in the regular course of business, (b) governs and (c) doesn't — so the tax base is the company's Connecticut sales earnings, not the consideration it paid its out-of-state vendors. DRS illustrated the line with the three examples in SN 91(11).

One more point DRS made in passing: following Texaco Refining & Marketing Co. v. Commissioner (1987), "gross earnings" includes any amount of this tax the company passes through to its customers — there's no statutory exclusion for it — and, likewise, sales-tax "gross receipts" include petroleum-products-gross-earnings-tax amounts passed through (§§ 12-408(1), 12-407(9)).

What this means for you

Retailers selling fuel, oil, or other petroleum products in Connecticut

If you sell petroleum products in Connecticut, you can owe the petroleum products gross earnings tax even if you consider yourself a retailer, not a distributor. DRS reads "distribute" as "sell." Selling the product in-state — including the ordinary retail sale to a consumer — is the taxable first sale.

The tax is on your sale, not your purchase

For a company that sells in Connecticut, the measure is gross earnings from the first sale here under § 12-587(b), not the consideration you paid your suppliers under § 12-587(c). The import-based (c) tax is the fallback for importers who use/consume without a taxable in-state sale — not for resellers.

Importer vs. seller — one taxes the buyer, one the seller

Subsections (b) and (c) are alternatives. If your out-of-state supplier isn't subject to and paying the tax, an importer/consumer can be liable under (c) on what it paid; but if there's a taxable Connecticut sale, the seller pays under (b) on gross earnings and (c) drops out. Figure out which side of that line your transactions fall on.

Tax passed through is still in your base

Amounts of this tax you pass through to customers are included in your gross earnings (and in sales-tax gross receipts), because there's no statutory carve-out. Don't net them out.

Common questions

Q: I'm a retailer, not a distributor — do I still owe the petroleum products gross earnings tax?
A: Yes, if you sell petroleum products in Connecticut. DRS interprets "distribute" to mean "sell," so your status as retailer or distributor doesn't matter — the in-state sale is the taxable first sale under § 12-587(b).

Q: Is the tax based on what I paid for the products or what I sell them for?
A: For a seller, it's 5% of the gross earnings from your first Connecticut sale under § 12-587(b) — not the consideration you paid. The consideration-based tax in § 12-587(c) doesn't apply when you make a taxable in-state sale.

Q: When does the import-based tax in § 12-587(c) apply?
A: To a company that imports petroleum products for its own use and consumption (over $100,000/quarter) where no seller has paid the tax under (b). It's an alternative to (b), aimed at eliminating the incentive to buy out of state for in-state consumption.

Q: Do I include the tax I pass through to customers in my gross earnings?
A: Yes. Following Texaco, there's no statutory exclusion, so pass-through amounts are part of gross earnings (and of sales-tax gross receipts).

Citations and references

Statutes and regulations:

• Conn. Gen. Stat. § 12-587(b) (5% quarterly tax on gross earnings from the first sale of petroleum products in Connecticut by a company that distributes them here)
• Conn. Gen. Stat. § 12-587(c) (alternative 5% tax on consideration for imported products used/consumed in-state, over $100,000/quarter; enacted by 1991 Conn. Pub. Acts 3, § 146 (June Spec. Sess.))
• Conn. Gen. Stat. § 12-587(a)(3) ("gross earnings" — earnings from the first sale within this state)
• Conn. Gen. Stat. § 12-587(a)(4) ("petroleum products"); Conn. Agencies Regs. § 12-602-1a(b) (SIC Major Group 29)
• Conn. Gen. Stat. § 12-408(1), § 12-407(9) (sales-tax gross receipts include petroleum-products-gross-earnings-tax pass-through)
• Conn. Gen. Stat. §§ 12-455a, 14-318 ("distributor" definitions held inapplicable to this tax)

Cases and guidance cited:

• George E. Warren Corp. v. Groppo, Super. Ct., No. 86-0319672 (1989) (tax is on one who "distributes"; only the first sale is taxed)
• Texaco Refining and Marketing Company, Inc. v. Commissioner of Revenue Services, 202 Conn. 583 (1987) (tax is operating overhead measured by gross earnings; pass-through tax included)
• Mobil Oil Corp. v. Dubno, 492 F. Supp. 1004 (D. Conn. 1980)
• New England Petroleum Corporation v. Groppo, 214 Conn. 444, 572 A.2d 970 (1990)
• SN 91(11) (Department guidance with three importation examples)

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 95-5

Original ruling text

Ruling 95-5, Petroleum Products Gross Earnings Tax

FACTS:

The Company purchases petroleum products outside Connecticut from vendors who ship them to the Company's warehouses located outside of Connecticut. Thereafter, the Company transports the petroleum products into Connecticut and sells them to consumers at retail at its department stores in Connecticut.

ISSUES:

Whether the Company "distributes" petroleum products within the meaning of Conn. Gen. Stat. §12-587(b) so that the petroleum products gross earnings tax is imposed on the "earnings derived from the first sale within this state of a petroleum product."

Whether the Company imports petroleum products or causes petroleum products to be imported within the meaning of Conn. Gen. Stat. §12-587(c), so that the petroleum products gross earnings tax is imposed on the "consideration given or contracted to be given" for a petroleum product.

DISCUSSION:

The petroleum products gross earnings tax, Conn. Gen. Stat. §12-587 et seq., provides that "[a]ny company which is engaged in the refining or distribution or both, of petroleum products, and which distributes such products in this state shall pay a quarterly tax at the rate of five percent of its gross earnings derived from the sale of petroleum products within this state." Conn. Gen. Stat. §12-587(b). With certain exceptions, "petroleum products" are those products which contain or are made from petroleum or a petroleum derivative; Conn. Gen. Stat. §12-587(a)(4); more specifically, those products that are described in Major Group 29 of the Standard Industrial Classification Manual of 1972. Conn. Agencies Regs. §12-602-1a(b). "Gross earnings" means "those earnings derived from the first sale within this state of a petroleum product." Conn. Gen. Stat. §12-587(a)(3).

As the Connecticut Supreme Court explained in Texaco Refining and Marketing Company, Inc. v. Commissioner of Revenue Services, 202 Conn. 583 (1987), the petroleum products gross earnings tax is to "be treated as an item of operating overhead measured by gross earnings derived from the sale of petroleum products in Connecticut." Id . at 596. See also Mobil Oil Corp. v. Dubno, 492 F. Supp. 1004, 1006 (Conn. 1980). The court in Texaco held that in the absence of a specific statutory exemption for tax receipts, Conn. Gen. Stat. §12-587 includes within "gross earnings" the amounts collected by the plaintiff as taxes passed through to its customers. Accordingly, a company that is subject to the petroleum products gross earnings tax may collect the tax from its customers, but it must include the amount collected in its gross earnings.

In contrast, for sales and use tax purposes, the definition of "gross receipts" expressly excludes some taxes and expressly includes "all receipts . . . of any kind." There is no specific statutory exclusion that extends to petroleum products gross earnings tax receipts. Thus, following Texaco, supra , "gross receipts" includes the amount of petroleum products gross earnings tax payments that a retailer has collected from its customers. See Conn. Gen. Stat. §§12-408(1) and 12-407(9).

The question of who is subject to the petroleum products gross earnings tax was presented in George E. Warren Corp. v. Groppo, Super. CT., No. 86-0319672 (1989). In that case the George E. Warren Corp. purchased petroleum products in Connecticut from a company that was not required to be registered to do business in Connecticut, and then resold the petroleum products in Connecticut. The George E. Warren Corp. challenged the Department's contention that it was liable for petroleum products gross earnings tax on the gross earnings from its sale in Connecticut of those petroleum products.

First, the court found that the definitions of "distributor" found in Conn. Gen. Stat. 12-455a and 14-318 were inapplicable for purposes of the petroleum products gross earnings tax. The court pointed out that "nowhere in the statute is there a limitation on the imposition of the tax to one who is a 'distributor.' The tax is imposed on one who distributes the petroleum product." Id., at 5 (emphasis added).

Ultimately the court held that the Department was precluded from collecting the tax on the gross earnings derived from the George E. Warren Corp.'s sale of petroleum products in Connecticut because "the first sale," the only sale that may be taxed, was the sale by the unregistered company to George E. Warren Corp. The court was unpersuaded that the first sale should mean the first sale by a registered company. Id .

Although George E. Warren Corp. stands for the proposition that any company that distributes petroleum products within Connecticut is subject to the petroleum products gross earnings tax imposed by Conn. Gen. Stat. §12-587(b), the term "distribute" is not defined in the Petroleum Products Gross Earnings Tax Act or in the regulations promulgated thereunder. However, for purposes of the petroleum products gross earnings tax, it has been the longstanding practice of the Department to interpret "distribute" as having the same meaning as "sell," making it unnecessary to determine whether the company making the sale is a distributor (ordinarily defined as one who supplies goods to retailers), or a retailer (ordinarily defined as one who sells goods in small quantities directly to consumers). Accordingly, because the Company sells petroleum products in Connecticut, it falls within the scope of Conn. Gen. Stat. §12-587(b).

Conn. Gen. Stat. §12-587(c) provides in part:

Any company which imports or causes to be imported into this state petroleum products for its use and consumption, other than a company which is subject to and which has paid the tax on such petroleum products in accordance with subsection (b) of this section, shall pay a quarterly tax at the rate of five percent of the consideration given or contracted to be given for such petroleum product if the consideration given or contracted to be given for all such deliveries during the quarterly period for which such tax is to be paid exceeds one hundred thousand dollars. For the purposes of this subsection, "use" includes the sale of imported petroleum products in the regular course of business . . .

Conn. Gen. Stat. §12-587(c) was adopted by 1991 Conn. Pub. Acts 3, §146 (June Spec. Sess.), in response to the outcome in George E. Warren Corp. v. Groppo and, because the tax was imposed only if a sale was in Connecticut; New England Petroleum Corporation v. Groppo , 214 Conn. 444, 449-450, 572 A. 2d 970 (1990); to eliminate the incentive to purchase petroleum products out-of-state for consumption within the state. Accordingly, Conn. Gen. Stat. §12-587(c) applies in two situations.

It follows, therefore, that Conn. Gen. Stat. §12-587(b) and (c) operate to create alternative liability for the tax. For example, Conn. Gen. Stat. §12-587(b) and (c) would impose liability on the buyer and the seller in a situation like that in George E. Warren Corp. Thus, a company that causes the petroleum products to be imported (the buyer) is liable for tax on the consideration it paid by virtue of Conn. Gen. Stat. §12-587(c), unless the seller is subject to and has paid the tax, and, in the alternative, the seller is liable for tax on its gross earnings by virtue of Conn. Gen. Stat. §12-587(b).

Thus, even though the Company imports petroleum products into this state for sale in the regular course of business, Conn. Gen. Stat. §12-587(c) was not intended, and does not apply, to such circumstances. See SN 91(11).

The intent of Conn. Gen. Stat. §12-587(c) was reflected in the examples set out in SN 91(11), which are restated below.

Example 1. A company purchases outside Connecticut petroleum products that it imports into Connecticut. The consideration given or contracted to be given by the company for its purchases during the calendar quarter exceeds $100,000. The purchased products are consumed by the company inside Connecticut. The company is subject to the petroleum products gross earnings tax. SN 91(11), Ex.1.

Example 2. The facts are the same as in Example 1except that the company sells the products in the regular course of its business during the same calendar quarter. The company is subject to and pays the petroleum products gross earnings tax on its gross earnings derived from such sales. The company's importation of the petroleum products will not also be subject to the tax. SN 91(11), Ex.2.

Example 3. The facts are the same as in Example 1 except that the company purchases inside Connecticut the petroleum products that it causes to be imported. Unless the seller is subject to and has paid the petroleum products gross earnings tax on the products, the company is subject to the petroleum products gross earnings tax. SN 91(11), Ex.3.

RULING :

Any company that distributes petroleum products within Connecticut and makes the first sale of those products in Connecticut is subject to the petroleum products gross earnings tax imposed by Conn. Gen. Stat. §12-587(b). "Distributes" is interpreted to mean the same as "sells." Accordingly, regardless of its status as a "retailer" or a "distributor," the Company is subject to the petroleum products gross earnings tax imposed by Conn. Gen. Stat. §12-587(b).

Moreover, where a company imports into, and sells, petroleum products in Connecticut, subsection (b) of Conn. Gen. Stat. §12-587 applies to the seller and, in the alternative, subsection (c) of Conn. Gen. Stat. §12-587 applies to the buyer. Thus, because the Company sells petroleum products in Connecticut, Conn. Gen. Stat. §12-587(b) applies and the measure of the tax is the gross earnings derived from the first sale of such petroleum products, i.e., the Company's sale of petroleum products to consumers from its Connecticut department stores. Even though the company imports the petroleum products that it sells, the measure of the tax is not the consideration paid by the company because subsection (c) of Conn. Gen. Stat. §12-587 does not apply to that type of transaction.

LEGAL DIVISION

April 20, 1995