- In Matter of Sunoco, Inc. (R&M) Combined Affiliates v. Tax Appeals Tribunal1 , the New York Supreme Court, Appellate Division, Third Department affirmed the denial of Sunoco R&M LLC’s claim for a corporation franchise tax refund of more than $2.6 million.
- The court concluded that certain buy/sell transactions were properly characterized as inventory exchanges rather than separate sales for receipts factor purposes.
Background
Sunoco (R&M), LLC, formerly known as Sunoco, Inc. (R&M), is a subsidiary of Sunoco LP. For purposes of this alert, Sunoco (R&M), LLC is referred to as “Sunoco.” Sunoco engaged in transactions designed to efficiently supply petroleum products to customers located near third-party petroleum dealers. These arrangements allowed Sunoco to minimize transportation costs while meeting customer demand.
The Issue
The issue centered on a series of buy/sell transactions. When Sunoco needed to fulfill a customer order in a location where a third-party petroleum dealer maintained inventory closer to the customer, Sunoco would purchase product from the other dealer. In exchange, Sunoco would sell an equivalent quantity of product to the other dealer at a different location.
For tax years 2007 through 2010, Sunoco included amounts attributable to the sell-side portion of these transactions in both the numerator and denominator of its receipts factor. The New York Division of Taxation determined that these amounts should not have been included, resulting in a higher proportion of Sunoco’s business activity being apportioned to New York.
Following the assessment and payment of additional tax, Sunoco sought a refund of approximately $2.6 million, plus applicable interest.
Sunoco’s Position
Sunoco argued that the transactions should be treated as separate and independent sales. According to the company, the sell-side component generated receipts from the sale of tangible personal property and therefore should be included in the receipts factor calculation.
The company maintained that each purchase and corresponding sale represented a distinct transaction and that excluding the sell-side receipts improperly distorted its apportionment percentage.
The Decision
The New York Supreme Court, Appellate Division, Third Department affirmed the Tax Appeals Tribunal’s determination and denied Sunoco’s refund claim. The court found that the Tribunal’s decision was rational and supported by substantial evidence in the record. Based on the facts presented, the court concluded that the transactions were more appropriately viewed as inventory exchanges rather than separate sales.
The court also relied on the step transaction doctrine, which permits related transactions to be viewed collectively when evaluating their overall economic substance. Under this approach, the court found that Sunoco was not entitled to the requested refund.
Significantly, the court noted that even if Sunoco’s characterization of the transactions as independent sales was accepted, including both the sell-side transactions and the subsequent customer sales could overstate the company’s business activity and fail to accurately reflect its economic activity in New York.
Implications
This decision illustrates that New York courts and tax authorities may look beyond the form of a transaction and instead focus on its economic substance when evaluating apportionment issues.
Taxpayers engaging in reciprocal exchange arrangements, inventory balancing transactions, or other coordinated commercial activities should carefully evaluate whether receipts generated by such transactions appropriately reflect actual economic activity. The case also reinforces the taxpayer’s burden of proving entitlement to a refund and demonstrates the challenges associated with overturning a Tribunal determination on appeal.
Businesses with significant multistate operations should consider the treatment of similar transactions to ensure that receipts factor calculations are supportable and consistent with applicable state apportionment principles.
How Forvis Mazars Can Help
Forvis Mazars can help businesses evaluate whether their apportionment methodologies appropriately reflect the economic substance of their transactions, particularly where reciprocal exchanges, inventory transfers, or similar arrangements are involved. Our state and local tax professionals can assist with considerations regarding receipts factor treatment, documentation, identifying potential exposure, and developing supportable positions for filing, audit, refund, or controversy purposes.
- 1Matter of Sunoco, Inc. (R & M) Combined Affiliates v. Tax Appeals Trib., 2026 NY Slip Op 04540 (App. Div. 3d Dep’t 2026).