Illinois Motor Fuel Tax Threatens Clarity Around Transactions

The transfer at issue in Marathon Petroleum v. Cook County wasn’t a classic “buy now, pay later” type of transaction, but Cook County, Ill., is trying to tax it like it is.

The Illinois Supreme Court is considering whether to reverse the state appellate court’s unfortunate decision in the case, holding that certain “book-out transactions” involving fuel, which can’t reasonably be characterized as transactions subject to Cook County’s fuel tax are, in fact, taxable transfers of fuel.

Let’s hope the court gets it right. The oil and gas industry shouldn’t have to face the uncertainty that will result otherwise. The outcome may also impact similar commodity trades in any other industries that use forward or futures contracts to protect against fluctuations in price or availability of precious metals and crops.

In the Marathon case, the transactions at issue don’t fit within the plain language of the ordinance imposing the fuel tax, which is clearly intended to tax the retail “sale” of motor fuel—that is, “transfer of ownership or possession or both” of fuel.

Unless fuel is purchased for onward sale to consumers, no Cook County residents are powering their jalopies with it. The book-out transactions at issue allow only for cash settlement of a buy-sell contract to deliver fuel at a future date and price, and no actual delivery of fuel occurs coincident with the payment.

States and localities that impose fuel taxes do so on actual sales of fuel, and none so far have attempted to tax book-out transactions in fuel that occur on public commodities markets or elsewhere. Until the Marathon controversy, it would have been safe to say that none were taxing commodity trades such as forward contracts when they resulted in a cash settlement.

Of great concern is that Cook County is stretching any reasonable understanding of the true object of the transaction to defend the assessment issued in this case. If book-out transactions are seen as involving transfers of ownership rights in underlying tangible personal property, rather than as financial transactions, then similar trades involving any type of underlying physical commodity could be susceptible to the imposition of sales tax.

Taxpayers deserve more certainty as to when a tax is applicable. This is necessary for, among other reasons, determining which jurisdiction may tax the transaction. To allow taxpayers a realistic opportunity to comply with complex and burdensome tax laws, and to have a reasonable amount of certainty when planning their affairs, “[c]ourts should make a conscious effort to minimize the burden by refraining from any action that would destabilize an understanding of the tax laws,” as US Supreme Court Justice Lewis Powell once wrote.

Hopefully, the Illinois Supreme Court will right this situation, because it’s a battle worth fighting.

The case is Marathon Petroleum Co. v. Cook Cnty., Ill., No. 129562, oral arguments held 9/12/24.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Jaye A. Calhoun is partner with Kean Miller, where she provides clients with full service representation on tax matters.

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