The Ohio Supreme Court rejected a Sunoco gasoline middleman’s argument that the company was entitled to a $417,000 commercial activities tax (CAT) refund. The Court found the company is not exempt from paying state tax on the more than 11 billion gallons of fuel it sold to northern Ohio retail stations annually.

The Supreme Court affirmed an Ohio Board of Tax Appeals (BTA) decision denying the exemption sought by Willoughby Hills Development and Distribution (WHDD), which argued that for CAT purposes, it acted as a Sunoco agent by enforcing retail stations’ use of Sunoco-approved signs, colors, and logos.

In a per curiam opinion, the Court majority rejected the company’s argument that it acted as Sunoco’s agent by supporting the Sunoco brand. The majority explained that, for tax purposes, the law focuses on what WHDD did to earn “gross receipts.” The majority determined that the company’s taxable gross receipts were solely generated by WHDD’s resale of gasoline to retail stations, not its representation of the Sunoco brand.

Chief Justice Maureen O’Connor and Justices Terrence O’Donnell, Judith L. French, Patrick F. Fischer, R. Patrick DeWine, and Mary DeGenaro joined the opinion. Justice Sharon L. Kennedy concurred in judgment only.

Distributor Seeks Refund
Ohio’s CAT is levied on every entity and person with taxable gross receipts above a certain minimum amount for the privilege of doing business in Ohio. WHDD claimed that under R.C. 5751.01(F)(2)(l) it was an agent of Sunoco and was exempt from the tax.

WHDD is a Wickliffe-area distributor that negotiated an agreement with Sunoco in 2004 to purchase Sunoco “branded motor fuel” for the purpose of resale under exclusive Sunoco trademarks and trade names. The 10-year agreement specified the amounts WHDD had to purchase, ranging from 11.5 billion to 15.5 billion gallons a year.

WHDD agreed to sell the fuel to retailers that consistently followed the Sunoco brand and image requirements, and the agreement between the two required that WHDD understand and enforce Sunoco’s “image standards manual.” Retailers had to comply with standards such as painting buildings, poles, and curbs on their premises with Sunoco-approved colors.

Distributor’s Role as Agent Disputed
The agreement between Sunoco and WHDD described WHDD as an independent contractor and forbade the company from both acting as Sunoco’s agent and from making “any commitments or incur[ring] any expense or obligations of any kind on behalf of Sunoco in the absence of Sunoco’s approval.”

WHDD provided state tax authorities with a copy of a negotiated agreement with Sopinski, a Sunoco retailer, which was representative of the agreements WHDD made with retail stations. Sopinski agreed to purchase all its fuel from WHDD at the price Sunoco charged to WHDD plus additional charges added by WHDD. The contract prevented WHDD from having any control over Sopinski, but, as noted, WHDD received instruction from Sunoco about how the Sunoco brand guidelines should be followed by retail stations such as Sopinski.

In 2012, WHDD filed for a $417,228 CAT refund claim with the Ohio tax commissioner for the period of October 2007 through September 2011. The company claimed the refund based on its alleged agency relationship with Sunoco.

The tax commissioner, relying on the agreement describing WHDD as an independent contractor, denied the refund claim and the company appealed to the BTA. The company argued before the BTA that it was a Sunoco agent as defined by the state tax law because it enforced Sunoco’s brand guidelines at retail stations.

The BTA affirmed the tax commissioner’s opinion and the company appealed to the Supreme Court, which at the time was required to hear the case.

Court Determines Distributor’s Role
The Court majority stated that to determine if WHDD is an agent of Sunoco, it had to address which of WHDD’s activities matter for the purpose of the CAT. WHDD argued that because it was responsible for managing and protecting Sunoco’s brand images and trademarks, it was an agent. A company representative noted a provision in the agreement between Sunoco and WHDD indicating that if WHDD sold products to a retailer that was not in compliance with Sunoco’s “minimum image standards and requirements,” then WHDD would be out of compliance with its Sunoco contract.

The tax commissioner argued those image-compliance duties had nothing to do with how WHDD generated its gross receipts. Those receipts, the tax commissioner maintained, were generated from the sale of gasoline.

The Court determined that WHDD generated gross receipts from selling gasoline, and that WHDD would need to show that it acted as Sunoco’s agent in performing this activity. Based largely on the terms of WHDD’s contract with Sunoco, the Court determined that WHDD was not Sunoco’s agent.

“The terms of WHDD’s contract with Sunoco confirm that WHDD was selling its own gasoline to Sopinski. In the contract’s preamble, Sunoco agreed it would ‘sell’ and WHDD agreed it would ‘purchase’ Sunoco gasoline,” the opinion stated.

WHDD also argued that the gasoline and the trademarks were essentially one product, and that two federal courts have found that gasoline and its trademark name should not be viewed separately. But the Ohio Supreme Court’s opinion noted those cases dealt with the issue of antitrust.

The opinion stated that WHDD’s entitlement to an exemption must turn on its sale of gasoline. The Court found nothing in the agreement between Sunoco and WHDD that made WHDD an agent of Sunoco for gas sales, and agreed with the tax commissioner’s position that WHDD was not entitled to a refund of CAT taxes previously paid.

2016-1137. Willoughby Hills Dev. & Distrib., Inc. v. Testa, Slip Opinion No. 2018-Ohio-4488.

Hear oral argument audio of this case.

Please note: Opinion summaries are prepared by the Office of Public Information for the general public and news media. Opinion summaries are not prepared for every opinion, but only for noteworthy cases. Opinion summaries are not to be considered as official headnotes or syllabi of court opinions. The full text of this and other court opinions are available online.

PDF files may be viewed, printed, and searched using the free Acrobat^® Reader
Acrobat Reader is a trademark of Adobe Systems Incorporated.