State v. Midstream Fuel Service, Inc.

Citations: 521 So. 2d 75; 1988 Ala. Civ. App. LEXIS 37; 1988 WL 5144Docket: Civ. 5938-X

Court: Court of Civil Appeals of Alabama; January 26, 1988; Alabama; State Appellate Court

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On February 28, 1985, the Alabama Department of Revenue assessed Midstream Fuel Service, Inc. with additional sales taxes, interest, and penalties totaling $550,776.44. Midstream paid the amount and subsequently appealed to the Circuit Court of Mobile County under Code 1975, § 40-2-22. The circuit court issued a final decree on April 8, 1987, affirming that $14,855.34 of the sales taxes was due while ordering the refund of $506,106.01 of the assessed taxes. The Department appealed the decision, and Midstream cross-appealed. 

Central to the case is the interpretation of Code 1975, § 40-23-4(a)(10), regarding sales tax exemptions for fuel and supplies sold for use on vessels engaged in interstate or foreign commerce. The court addressed whether the exemption applies when vessels enter Alabama's inland waterways, and whether Midstream proved its entitlement to the exemption for specific sales transactions.

Midstream primarily sells diesel fuel, oils, and marine supplies to vessels in the Gulf of Mexico, the Gulf Intracoastal Waterway, and Alabama's inland waterways. The sales in question are categorized, with both parties agreeing on the categories in a stipulation of facts. The first category includes sales to vessels operating in trade between Alabama and other states or foreign ports, which the circuit court deemed exempt under the statute.

The Department contended that the statute requires an apportionment of sales based on whether the fuel was consumed in Alabama's inland waters, arguing that only fuel consumed outside these waters is exempt. However, the court rejected this interpretation, stating that the Department's position does not align with the statute's explicit language. The trial court's conclusion emphasized that the exemption does not necessitate apportionment based on the geographic consumption of fuel.

The exemption outlined does not allow for pro rata application; rather, it provides a full exemption if specific criteria are met. These criteria include: 1) a sale of fuel or supplies; 2) intended for use aboard ships or towing vessels; 3) operating in high seas or intracoastal waterways; 4) involved in intercoastal trade between Alabama ports and other states; or 5) engaged in foreign commerce with Alabama ports. The statute indicates that once a vessel qualifies for the exemption on a trip, it is not subject to apportionment for any portion of the trip using Alabama inland waterways. The Department interprets its Sales and Use Tax Regulation S8-011 to suggest that the exemption only applies to the portion of a trip outside Alabama rivers; however, the regulation does not explicitly mention apportionment. The Department acknowledges the regulation lacks clarity on this point.

Judicial precedent indicates that while exemptions are typically interpreted against the taxpayer, they should not undermine the intent of the statute. During the audit period from January 1, 1980, to July 31, 1983, Midstream secured certificates from vessel owners affirming that their purchases were for use aboard ships as specified. The Department required Midstream to verify these claims during the audit. Midstream complied, substantiating many transactions, leading to the Department removing those from consideration. Where disputes arose over the validity of the claims, Midstream maintained that verifying all customers was challenging due to their unavailability or bankruptcy. The contested transactions are those where the Department accepted the exemption claims, but Midstream disagreed.

Greer Radcliff, vice president of Midstream and former operations manager, testified about his direct involvement with the sale of fuel and supplies to vessels engaged in interstate trade or foreign commerce. His testimony, supported by exemption certificates obtained during transactions, faced no opposing evidence, leading the trial court to conclude that Midstream was entitled to a sales tax exemption under Rule S8-011.

The court evaluated the eligibility of specific transactions for the exemption, particularly those involving the Diamond M Drilling Company. Fuel sales for drilling rigs and vessels transporting supplies to a rig, which were towed from Mobile to offshore Brazil, were scrutinized. The Department contended that these rigs were not defined as "ships" under Alabama law. However, the trial court referenced federal maritime law, which classifies even non-self-propelled drilling rigs as "vessels." The court also determined that the transportation of goods across state and national boundaries constitutes "foreign commerce." Therefore, it upheld the exemption for sales to Diamond M Drilling Company.

Additionally, sales to Petromar Marine, which involved offshore supply vessels transporting personnel and materials to foreign oil fields, were also deemed to engage in "foreign commerce," confirming their tax-exempt status. Lastly, sales of fuel to tugs pushing empty barges between Alabama ports and neighboring states were affirmed as exempt, reaffirming that the emptiness of the barges does not alter their involvement in intercoastal trade. The court consistently ruled in favor of the tax exemption across all categories reviewed.

The trial court correctly assessed sales taxes on transactions between Findley Towing Company and Metzger Towing Company, as these did not qualify for exemption under 40-23-4(a)(10). Midstream's cross-appeal contended that the sales tax on fuel and supplies sold to purchasers engaged in interstate or foreign commerce violated the commerce clause and the import-export clause of the U.S. Constitution. However, the court found that the Alabama sales tax did not impose an undue burden on interstate commerce, as the sales occurred entirely within Alabama and were not considered interstate transactions, citing Complete Auto Transit, Inc. v. Brady and Rite Tile Co. v. State. The court also dismissed the argument regarding the import-export clause, noting that the assessed sales taxes were not levied on imports or exports, as the fuel and supplies were not classified as such. Consequently, the trial court's decision was affirmed, with Judges Bradley and Holmes concurring.