For a Texas refiner shipping fuel out of state through a common-carrier pipeline, are the sales Texas receipts, and when does the franchise tax throwback rule apply?

Plain-English summary

A Texas refiner sold gasoline, jet fuel, and diesel to customers across the United States, shipping the product through an independent common-carrier pipeline at the buyer's direction. The buyer decided where and how much product came off the system; the seller was not a party to that and often did not know the final destination. Over several rounds of correspondence, the Comptroller explained how these sales are apportioned for the (pre-2008) franchise tax. Two questions drive the result: where does delivery occur, and if it is not in Texas, does throwback apply.

Step 1: Where is delivery? (care, custody, and control)

• Delivery is complete when possession or control passes to the purchaser. Under Rules 3.549(e)(41)(A) and 3.557(e)(37)(A), delivery is complete upon transfer of possession or control to the purchaser (or the purchaser's employee or leased/owned vehicles).
• If the buyer has care, custody, and control once the product is injected into the pipeline in Texas, delivery is in Texas and the sales are Texas receipts. Possession or control by the purchaser in Texas is the determining factor.
• Common-carrier caveat. Generally a purchaser does not have care, custody, and control when product is injected onto a common carrier, so the "delivery to an independent/common carrier hired by the purchaser" provisions (Rules 3.549(e)(41)(C) and 3.557(e)(37)(C), which yield gross receipts everywhere) are distinguishable from the (A) provisions.

Step 2: If delivery is not in Texas, is there throwback?

• If the buyer does not control the product at injection and does not otherwise take delivery in Texas, the (A) delivery rules do not apply - but that does not preclude throwback.
• Throwback criteria come from Tax Code Sections 171.103(1) and 171.1032(a). The relevant questions are: (1) Was it a sale of tangible personal property? (2) Was the property delivered from Texas? (3) Is the seller subject to taxation in the state where the purchaser took delivery? Yes-yes-no means throwback applies (the receipt is treated as a Texas receipt).
• What is not determinative. The facts the taxpayer emphasized - that the buyer decides where product is taken off, that the seller is not a party, and that the seller cannot obtain records from the pipeline - are not determinative under the plain language of Sections 171.103(1) and 171.1032(a).
• Burden of proof. In throwback situations the corporation bears the burden of proving it is subject to taxation in another state (Rules 3.549(e)(41)(I) and 3.557(e)(37)(I)). The Comptroller recommended the seller obtain the necessary destination information from its buyer, or have the buyer authorize the pipeline company to provide it, so the seller can comply.

The correspondence also references an earlier letter ruling (identified in the exchange as 9205L1216F08), where throwback was not considered because the sales there were represented as not delivered from Texas - a distinction from this Texas-refiner situation - and cites Comptroller's Decision Nos. 30,561; 30,634; 37,518; and 38,716.

Currency note: This applies the pre-2008 franchise tax's delivery and throwback rules, replaced by the current margin tax (House Bills 3 and 3928) effective January 1, 2008, which sources receipts under its own rules. Treat as historical.

What this means for you

Texas refiners and fuel sellers shipping by pipeline

Whether your out-of-state pipeline sales were Texas receipts hinged on who controlled the product at the Texas injection point. If the buyer took control there, you had Texas receipts. If not, you were not automatically in the clear - the throwback rule could still pull the receipt back to Texas unless you could show you were taxable in the destination state. Not knowing the destination did not excuse the analysis; it just made your burden harder.

Accountants and tax professionals

Sequence the analysis: (1) determine care/custody/control at injection to fix the place of delivery; (2) if delivery is outside Texas, run the three-part throwback test under Sections 171.103(1)/171.1032(a); (3) remember the taxpayer's burden to prove taxability elsewhere. Because the seller carries that burden, build a records path - buyer certifications or pipeline authorizations - to document destinations and out-of-state taxability.

Common questions

Q: Are the pipeline sales Texas receipts?
A: They are if the buyer has care, custody, and control of the product once it is injected into the pipeline in Texas - then delivery is in Texas.

Q: What if the buyer does not take delivery in Texas?
A: Then the delivery rules for Texas delivery do not apply, but the sale may still be subject to throwback.

Q: When does throwback apply?
A: When there is a sale of tangible personal property, delivered from Texas, and the seller is not subject to taxation in the state where the purchaser took delivery.

Q: Does it matter that the seller cannot find out the destination?
A: Not for whether throwback applies - that fact is not determinative under the statute. But the seller bears the burden of proving it is taxable in another state, so it should obtain destination information from the buyer or pipeline.

Citations and references

Statutes, rules, and decisions:

• Tex. Tax Code Secs. 171.103(1), 171.1032(a) (throwback criteria for tangible personal property sales)
• 34 Tex. Admin. Code Secs. 3.549(e)(41)(A), 3.557(e)(37)(A) (delivery complete on transfer of possession or control to the purchaser)
• 34 Tex. Admin. Code Secs. 3.549(e)(41)(C), 3.557(e)(37)(C) (delivery to an independent/common carrier hired by the purchaser yields gross receipts everywhere)
• 34 Tex. Admin. Code Secs. 3.549(e)(41)(I), 3.557(e)(37)(I) (corporation's burden of proving it is subject to taxation in another state)
• Comptroller's Decision Nos. 30,561; 30,634; 37,518; 38,716 (throwback and delivery)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200308078L

Original ruling text

ALERT: For specific guidance relating to the care, custody and control of TPP when providing a taxable service, please see Rule 3.285, Resale Certificates; Sales for Resale (amended 11/01/2017.

August 27, 2003

Dear **,

If the statement, "care, custody, and control of the products shipped via the
pipeline lie with the buyer once the product is injected into the pipeline in
Texas" from your message of July 15, 2003 is correct, then the sales in
question would be Texas receipts. As indicated in my response of August 8,
2003, possession or control of the property in Texas by the purchaser is the
determining factor in establishing delivery in Texas for apportionment
purposes. Franchise Tax Rules 3.549(e)(41)(A) and 3.557(e)(37)(A).

If the buyer does not have control of the products when they are injected in
the pipeline in Texas and does not otherwise take delivery of the products in
Texas, then the above-referenced rule provisions would not be applicable. This
result, however, does not preclude the sales in question from being subject to
throwback.

Tax Code Sections 171.103(1) and 171.1032(a) set out the criteria for
throwback. Based on these statutory provisions, the relevant questions
concerning a transaction and the seller are:

(1) Did the transaction involve the sales of tangible personal property?

(2) Was the property delivered from Texas?

(3) Is the seller subject to taxation in the state in which the purchaser took
delivery?

If the answer to the first two questions is yes and the answer to the third
question is no, then throwback will be applied for apportionment purposes.

In your most recent message, you state that the buyer determines how much and
where the product is to be taken off the system by contacting the pipeline
company. The seller is not a party to this transaction and holds no standing
to receive or demand records from the buyer or the pipeline company as to where
and how much product was delivered.

The above facts set out the terms relating to the delivery of the product.
Under the plain language of Sections 171.103(1) and 171.1032(a), these factors
are not determinative of whether throwback applies to the transaction.

This response is based on the facts presented and current law. If there are
different or additional facts, the response may change.

If you need any additional information, please feel free to call me at
1-800-531-5441, extension 3-4496.

Sincerely,

Jerry Bobbitt
Tax Policy Division

August 12, 2003

Dear Jerry:

I am writing to clarify a misunderstanding that has arisen on who has care ,
custody and control of the product shipped via a common carrier pipeline. The
buyer in our case does not take delivery of the product in Texas. Our client,
(refiner) is directed by the buyer to inject the product onto a specific
pipeline system hired by the buyer. The pipeline is an independent common
carrier, the buyer does not own the pipeline system nor does the seller.
Clearly the provisions of Rule 3.549(e)(41)(C) apply, in that the sale of
tangible personal property which is delivered in Texas to an independent
contract carrier, common carrier, or freight forwarder hired by the purchaser
of the results only in gross receipts everywhere as the carrier transports or
forwards the property to the purchaser outside of Texas. Consequently, the
throwback principles do not apply. Even if- contrary to the plain language of
Rule 3.549(e)(41)(C) - the throwback principles were held to apply, it is
inequitable to apply them in this context. It is the buyer that determines how
much and where the product is to be taken-off the system by contacting the
pipeline company. Our client, (seller)is not a party to this transaction and
holds no standing to receive or demand records from the buyer or the pipeline
company as to where and how much product was delivered.

Please reconsider your response of 08/08/03, based upon this clarification

Thank you

August 8, 2003

Dear **:

Thank you for the additional information provided in your follow-up message to
our opinion concerning pipeline shipments. In this message, you state:

Care, custody, and control of the products shipped via the pipeline lie with
the buyer once the product is injected into the pipeline in Texas.

Franchise Tax Rules 3.549(e)(41)(A) and 3.557(e)(37)(A) address the sales of
tangible personal property delivered to a purchaser in Texas. These rules
provide that delivery is complete upon transfer of possession or control of the
property to the purchaser, an employee of the purchaser, or to transportation
vehicles leased or owned by the purchaser.

Based on your statement that the buyer has care, custody, and control of the
products once they are injected into the pipeline in Texas, the sales would be
apportioned to Texas in accordance with the above rules. Possession or control
of the property in Texas is the determining factor in establishing delivery in
Texas for apportionment purposes.

The original ruling request indicated that the pipeline was a common carrier
pipeline and cited Rule 3.549(e)(41)(C). Generally, a purchaser will not have
care, custody, and control of the products when they are placed/injected on a
common carrier. Thus, Rules 3.549(e)(41)(C) and 3.557(e)(37)(C) are
distinguishable from Rules 3.549(e)(41)(A) and 3.557(e)(37)(A).

Your follow-up inquiry also expressed concerns about application of the
throwback rule because the seller does not have access to information that
would indicate the destination of the products it sold. You indicate that the
pipeline company will not share this information with the seller because the
pipeline company was hired by the buyer.

Based on the above fact representation, throwback would not be applicable
because delivery occurred in Texas. However, if throwback did come into play,
we would recommend that the seller obtain the necessary information from the
buyer that it does business with or have that buyer authorize the pipeline
company to provide the information to the seller so that it can be in
compliance with the applicable tax law.

As noted in the original response, the burden of proof is on the corporation in
throwback situations. Also, see Comptroller Decision Nos. 30,561; 30,634;
37,518; and 38,716.

This response is based on the facts presented and current law. If there are
different or additional facts, the response may change.

If you need any additional information, please feel free to call me at
1-800-531-5441, extension 3-4496.

Sincerely,

Jerry Bobbitt
Tax Policy Division

On Tue, 15 Jul 2003 10:46:03 -0500 "**" wrote:

Jerry:

I have read your response to the shipments by pipeline and offer this
additional information;

(1) Care, custody, and control of the products shipped via the pipeline lie
with the buyer once the product is injected into the pipeline in Texas.

(2) The buyer directs the pipeline to delivery the product to a point outside
the state. The product could be taken off at any point along the pipeline
system, all outside of Texas. The product may be sold to another party while in
transit. The product could be exchanged with another buyer and taken off the
pipeline at any point along the pipeline route, or traded for product on
another pipeline system.

(3) The final destination of the product is unknown to the seller. The pipeline
company will not share this information with the seller since the pipeline
company was hired by the buyer not the seller.

As you can see, the above transactions make it impossible for the seller to
determine the destination of the product. If throwback is an issue how would
you propose the taxpayer apportion the sales out to the various pull points
along the pipeline route? The client has retail outlets in some of the states
in which the pipeline has an product pull point.

Thank You

June 20, 2003

Dear **:

Thank you for your inquiry concerning the throwback provision. In letter
ruling 9205L1216F08, throwback was not considered because of the representation
that the sales in question were not delivered from Texas.

In the situation you describe, the selling corporation is a refiner located in
Texas. It sells gasoline, jet fuel, and diesel to customers throughout the
United States. If the items sold are delivered from Texas, then those sales
would be subject to throwback under Texas Tax Code Sections 171.103(1) and
171.1032(a)(1).

For throwback purposes, the corporation has the burden of proving that it is
subject to taxation in another state. Please see Franchise Tax Rules
3.549(e)(41)(I) and 3.557(e)(37)(I).

The statutes and rules mentioned above, as well as other related information,
are available online at
http://www.window.state.tx.us/taxinfo/franchise/index.html.

This response is based on the facts presented and current law. If there are
different or additional facts, the response may change.

Our goal is to provide you with prompt, professional service. Please take a
moment to complete our on-line survey at
http://aixtcp.cpa.state.tx.us/surveys/tpsurv/.

If you have questions about this, my internet address is
, or you may call toll-free at 1-800-531-5441,
extension 3-4496.

Sincerely,

Jerry Bobbitt
Tax Policy Division

On Fri, 13 Jun 2003 14:54:09 -0500 "**" wrote:

Dear Mr. Bobbitt:

On behalf of our client, we request a letter ruling on the following situation:

A refiner located in Texas, is selling gasoline, jet fuel and diesel to
customers throughout the US. The product is shipped by pipelines to locations
outside the State of Texas. The pipelines do not have any locations in Texas
from which the customer could pull off any product. The pipelines are not owned
or affiliated with the seller (refiner) or buyer. The buyer directs the seller
to inject the product onto the pipeline, without revealing the final
destination, the pipeline delivers to a point outside of Texas.

(1) Rule 3.549(e)(41)(C) states in part, "The sale of tangible personal
property which is delivered in Texas to an independent contract carrier, common
carrier, or freight forwarder hired by a purchaser of the property results only
in gross receipts everywhere if the carrier transports or forwards the property
to the purchaser outside this state.

(a) Are these sales subject to the throwback provision?

(2) A previous letter ruling (9205L1216F08) with similar facts indicates the
receipts are not Texas Receipts but Gross Receipts only. The only difference,
is that our client is located in Texas, but all facts remain the same. The
product is delivered to an common carrier pipeline which transports the
property outside the state to a point as directed by the buyer.

If you have any questions, or need additional information please call me at the
number below.

Thanks