As we reported in earlier editions of PA Tax Law News, the Commonwealth Court issued two decisions last year upholding tax liabilities imposed on motor carriers that failed to comply with IFTA mileage and fuel documentation requirements. Appeals are currently pending before the Pennsylvania Supreme Court in both of those cases (R&R Express v. Commonwealth and Southern Pines Trucking v. Commonwealth). In Senex Explosives, Inc. v. Commonwealth, No. 703 F.R. 2007 (December 19, 2012), a three judge panel of the Commonwealth Court extended the court’s rationale in R&R Express to bulk fuel purchases. The panel upheld the Department of Revenue’s denial of credit for tax paid on bulk fuel used by a taxpayer’s IFTA-qualifying vehicles because the taxpayer employed inadequate record-keeping procedures. The panel did, however, agree with the taxpayer that tax was improperly imposed on “special mobile equipment” (“SME”) which is exempt from Pennsylvania Motor Carriers Road Tax. The Department of Revenue had imposed tax on the SME (drilling rigs) because the taxpayer had obtained IFTA decals for the disputed units.
Senex Explosives operates a drilling and blasting business. Its work consists of drilling blasting holes for the placement of explosives as part of road and railway construction. Bulk fuel was used to power most of Senex’s motor vehicles, which consisted of both IFTA-qualifying and non-qualifying vehicles. There was no dispute that Senex had paid tax on all of its bulk fuel purchases. Nevertheless, credit for the tax paid on the bulk fuel purchases was disallowed because Senex did not maintain sufficient records to show the amount of fuel dispensed from its bulk tanks to individual vehicles. The court also rejected Senex’s argument that its audit liability should have been computed based on quarterly reports that it filed for periods subsequent to the audit period because those reports represented the “best information available” for determining its proper tax liability for the audit period.
The Commonwealth acknowledged that SME units are exempt from Pennsylvania Motor Carriers Road Tax. SME also is not subject to decal requirements in Pennsylvania. The Department of Revenue, however, imposed tax on all miles traveled by Senex’s decaled SME units on the basis that placing decals on the SME units vitiated the tax exemption. The court agreed with Senex that the SME mileage should not have been included in the audit deficiency. Some other states do impose tax on, and require IFTA decals for, SME units. The Commonwealth had asserted that Senex benefited from having IFTA-decaled vehicles in that such vehicles would be permitted to travel over the highways into other jurisdictions. The court rejected that argument on the basis that there was insufficient information in the case record to support an inference that Senex’s SME units traveled over interstate highways to reach out-of-state work destinations (as opposed to being transported there). The court further determined that the Commonwealth had failed to explain why a decaling violation should be punishable by a tax consequence.
The court’s decision would not prohibit the Department of Revenue from imposing IFTA taxes on SME units on behalf of another state if there is evidence that the SME units traveled on the other state’s highways.