Buy/Sell “Net-Out” Oil Transactions Treated as Inventory Exchanges (Not Business Receipts) for Article 9-A BAP; Tribunal May Apply Step-Transaction to Prevent Distorted Receipts Factors
1. Introduction
In Matter of Sunoco, Inc. (R & M) Combined Affiliates v Tax Appeals Trib. of the State of N.Y.
(3d Dept, July 23, 2026), the Appellate Division, Third Department, reviewed (via CPLR article 78) a
determination of the New York State Tax Appeals Tribunal denying a corporate franchise tax refund under
Tax Law article 9-A for tax years 2007–2010.
The petitioner, a petroleum refiner/marketer and chemical manufacturer headquartered in Pennsylvania,
used “buy/sell transactions” with third-party petroleum dealers. These paired transactions were designed
to reduce transportation costs or obtain needed grades/volumes near customers where petitioner lacked
supply. The agreements included a monthly “net-out” feature to settle only the net value difference.
The central issue was how to treat the “sell side” of these buy/sell transactions in calculating New York’s
business allocation percentage (BAP) under the then-applicable receipts-factor formula—specifically,
whether the “sell side” amounts were “business receipts” includible in the receipts factor numerator and
denominator, thereby reducing New York apportionment and generating refunds.
2. Summary of the Opinion
The Third Department confirmed the Tribunal’s determination and dismissed the petition.
It held that the Tribunal rationally concluded—supported by substantial evidence—that petitioner’s buy/sell
arrangements functioned as inventory exchanges (not true “sales” generating “business receipts”
includible in entire net income (ENI)) and thus the “sell side” amounts were properly excluded from the
receipts factor. The court further agreed that even if the transactions were formally labeled as sales,
including both the sell-side and the end-customer sale would risk an apportionment distortion, and the
Tribunal could analyze the integrated series of steps under the step transaction doctrine.
3. Analysis
3.1 Precedents Cited
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Matter of Apple, Inc. v Tax Appeals Trib. of the State of N.Y., 204 AD3d 1173 (3d Dept 2022)
Influence: Provided the governing deference framework: the Tribunal’s determination stands if it has a
rational basis and substantial evidence supports it, even if another outcome is plausible. The court used this
as the lens through which it evaluated competing characterizations of the buy/sell agreements.
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Matter of Black v New York State Tax Appeals Trib., 41 NY3d 131 (2023)
Influence: Reinforced the “substantial evidence” test—reviewing courts do not decide whether they find the
proof convincing, but whether the agency could. This bolstered affirmance given the record evidence (controller’s
characterization, contract terms, and accounting treatment).
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Matter of Ciardullo v McDonnell, 241 AD3d 45 (3d Dept 2025) and
Matter of We Care Transp. v Tax Appeals Trib. of State of N.Y., 298 AD2d 717 (3d Dept 2002)
Influence: Confirmed the taxpayer’s burden to prove entitlement to a refund/credit. The court repeatedly framed
the dispositive question as whether petitioner met its burden to show the “sell side” constituted includible “business receipts.”
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Matter of Walt Disney Co. & Consol. Subsidiaries v Tax Appeals Trib. of the State of N.Y., 42 NY3d 538 (2024), cert denied 145 S Ct 1125 (2025)
Influence: Supplied general Article 9-A context: corporations doing business in New York owe annual franchise tax.
The citation anchored the discussion in the structure of the corporate franchise tax regime.
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Matter of Stewart's Shops Corp. v New York State Tax Appeals Trib., 172 AD3d 1789 (3d Dept 2019)
Influence: Supported the proposition that New York ENI was presumed aligned with federal ENI under the former statute,
framing why federal treatment and includibility in ENI mattered to whether an item could be a “business receipt.”
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GKK 2 Herald LLC v City of N.Y. Tax Appeals Trib., 154 AD3d 213 (1st Dept 2017), lv denied 32 NY3d 905 (2018)
Influence: Critical authority for New York’s acceptance of the step transaction doctrine in state/local tax contexts.
The court relied on it to validate the Tribunal’s ability to look past form and treat linked steps as one transaction when
substantially connected.
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Matter of Brooks v Tax Appeals Trib. of State of N.Y., 196 AD2d 140 (3d Dept 1994)
Influence: Reinforced that the Tribunal and courts may “look beyond the specific form” of multiple steps to determine
the reality of a single taxable transaction—supporting the analysis that the buy/sell chain served the overall customer-fulfillment plan.
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Barnes Group, Inc. & Subsidiaries v Commissioner of Internal Revenue, 593 Fed Appx 7 (2d Cir 2014) and
True v United States, 190 F3d 1165 (10th Cir 1999)
Influence: Offered general step-transaction doctrine background from federal jurisprudence, supporting the doctrine’s
legitimacy as an analytic tool when transactions are structured as interdependent steps.
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Bullock v Marathon Oil Co., 798 SW2d 353 (Tex Ct of Appeals, Austin 1990)
Influence: Used as persuasive context: petitioner’s practices aligned with long-standing treatment in another oil-and-gas
jurisdiction (Texas) excluding oil “exchanges” from gross receipts. The court used this not as controlling law but to corroborate
the plausibility of the auditor’s characterization and petitioner’s historical reporting approach.
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Matter of CS Integrated, LLC (2003 WL 22827169, 2003 NY Tax LEXIS 295 [NY St Div of Tax Appeals DTA No. 817548, Nov. 20, 2003], confirmed 19 AD3d 886 [3d Dept 2005])
Influence: Petitioner relied on this decision to argue that sale-indicia were present. The court distinguished it:
CS Integrated involved one party transferring its entire inventory with the taxpayer able to sell to third parties and without
the mandatory reciprocal exchange and monthly balancing features present here. The distinction limited petitioner’s analogy and
supported the Tribunal’s conclusion that these buy/sell transactions were qualitatively different.
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Matter of Von-Mar Realty Co. v Tax Appeals Trib. of State of N.Y., 191 AD2d 753 (3d Dept 1993), lv denied 82 NY2d 655 (1993) and
Matter of Exchange Plaza Partners v City of New York, 159 AD2d 333 (1st Dept 1990), lv denied 76 NY2d 702 (1990)
Influence: Additional New York authority endorsing substance-over-form/step-transaction approaches in tax settings, used to
rebut petitioner’s claim that the Tribunal lacked authority to collapse steps.
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Matter of Global Cos. LLC v New York State Tax Appeals Trib., 227 AD3d 1197 (3d Dept 2024), lv denied 43 NY3d 904 (2025) and
Matter of Strata Skin Sciences, Inc. v New York State Tax Appeals Trib., 225 AD3d 953 (3d Dept 2024), lv denied 42 NY3d 906 (2024)
Influence: Recent Third Department applications of the substantial evidence/rational basis standard in Tribunal reviews,
reinforcing the court’s consistent deference to the Tribunal’s tax determinations when supported by the record.
3.2 Legal Reasoning
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Framework: limited judicial review and taxpayer’s burden.
The court emphasized that Article 78 review of Tribunal decisions is narrow. The key question was not whether a different
classification might also be reasonable, but whether the Tribunal’s classification was rational and supported by substantial evidence.
Because the case involved a refund claim, petitioner bore the burden of proving entitlement.
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Statutory/regulatory hinge: “business receipts” must be includible in ENI.
Under 20 NYCRR former 4-4.1 (a), “business receipts” means gross income received in the regular course of business
provided such receipts are includible in the computation of ENI. Thus, even large dollar flows would not qualify if, in
substance and reporting, they were not receipts contributing to ENI.
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Substance of the buy/sell agreements: reciprocal exchange and netting.
The Tribunal and court focused on transaction mechanics:
- Paired obligations: petitioner’s purchase was tied to an equal purchase by the dealer.
- Monthly balancing of volume and cost, reinforced by the “net-out” provision.
- The oil purchased did not remain in inventory and was immediately resold to the end customer at petitioner’s price.
This supported the conclusion that the arrangement was not ordinary dealer-to-dealer sales activity but an exchange mechanism
to position product efficiently for customer delivery.
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Admissions and accounting treatment as substantial evidence.
The court highlighted record evidence that petitioner itself described the transactions as “exchange agreements” and “viewed as
exchanges under the book accounting rules.” Even more importantly, petitioner treated the receivables from the purported “sell side”
as “negative costs of goods sold” and reported them as “cost of goods sold” on federal form 1065—not as “gross receipts or sales.”
The Tribunal could rationally infer that the sell-side amounts were effectively “zeroed out,” and therefore not “gross income”
includible in ENI as “business receipts.”
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Distinguishing Matter of CS Integrated, LLC.
Although petitioner argued that Matter of CS Integrated, LLC supported treating certain structured inventory arrangements
as sales, the court agreed with the Tribunal that CS Integrated lacked the defining features here:
a mandatory reciprocal exchange and contractual mechanisms ensuring periodic balancing. In short, CS Integrated involved
meaningful transfer of inventory with resale discretion, while Sunoco’s buy/sell was a tightly linked exchange designed to facilitate
customer fulfillment.
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Alternative ground: preventing distorted apportionment via step-transaction analysis.
The court further reasoned that even if petitioner’s formal characterization as independent sales were accepted, counting both
(i) the dealer “sell side” and (ii) the end-customer sale risked misrepresenting petitioner’s economic activity for BAP purposes.
Tax Law former § 210 (8) empowered adjustments where the BAP does not properly reflect New York activity. Invoking New York
precedent approving the step transaction doctrine, the court accepted collapsing the steps to reflect the integrated plan:
obtaining oil near the customer to reduce transport costs, rather than generating independent revenue streams from dealer-to-dealer sales.
3.3 Impact
The decision’s practical significance is concentrated in three areas:
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Receipts-factor apportionment and “gross receipts” in commodity logistics structures.
Taxpayers using buy/sell, exchange, swap, or “net-out” mechanisms should expect New York to examine whether purported
“sales” amounts are truly “gross income” includible in ENI, particularly where contractual netting and reciprocal obligations
effectively eliminate economic gain on intermediate legs.
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Evidence selection: internal descriptions and financial statement/tax reporting matter.
The court treated the controller’s characterization and federal reporting (negative COGS rather than sales) as powerful indicators
of substance. Future litigants should anticipate that “how the taxpayer itself describes and books the transaction” can heavily
influence receipts-factor characterization.
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Step-transaction doctrine as an apportionment integrity tool.
By reaffirming that the Tribunal may apply step-transaction reasoning (and by linking it to the former § 210 (8) distortion
safeguard), the decision strengthens the state’s ability to reject receipts-factor computations that inflate denominators through
intermediate, economically offsetting steps.
4. Complex Concepts Simplified
- ENI (Entire Net Income)
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A corporation’s taxable income base for New York franchise tax purposes during the relevant period, generally tied to federal income.
Items must be includible in ENI to qualify as “business receipts” under the receipts factor regulation.
- BAP (Business Allocation Percentage)
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The apportionment percentage used to determine what share of a multistate corporation’s ENI is taxable by New York.
During these years, one key component was a receipts factor comparing New York receipts to total receipts.
- Receipts factor (numerator/denominator)
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A fraction: New York business receipts (numerator) divided by total business receipts everywhere (denominator). Increasing
the denominator with out-of-state receipts can reduce the New York apportionment percentage.
- “Net-out” provision
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A contractual method of settling only the monthly net difference between reciprocal deliveries/values rather than paying gross
invoice amounts each way. Economically, this can indicate an exchange/swap rather than revenue-generating sales.
- Inventory exchange vs. sale
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A “sale” generally implies a meaningful transfer for consideration producing gross receipts. An “exchange” (especially with
reciprocal obligations and netting) can function as swapping equivalent inventory positions, generating little or no gross income.
- Step transaction doctrine
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A substance-over-form principle allowing a tax authority to treat a series of formally separate steps as one integrated transaction
when the steps are substantially linked and serve a single plan. Here, it supported viewing the buy/sell steps as part of one
customer-fulfillment strategy rather than independent sales generating separate receipts.
- Substantial evidence / rational basis review
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A deferential standard used in reviewing administrative determinations. The court asks whether the agency had enough evidence
to reasonably reach its conclusion—not whether the court would have decided differently.
5. Conclusion
Matter of Sunoco, Inc. (R & M) Combined Affiliates v Tax Appeals Trib. of the State of N.Y. confirms that,
for Article 9-A apportionment in the relevant period, “buy/sell” petroleum transactions featuring reciprocal obligations and monthly
“net-out” balancing may be treated as inventory exchanges, not “business receipts” includible in the receipts factor—
especially where the taxpayer’s own accounting and federal reporting depict the intermediate leg as offsetting cost rather than gross revenue.
The decision also reinforces the Tribunal’s authority to apply the step transaction doctrine and the distortion safeguard to prevent
receipts-factor computations from overstating economic activity through formally separate but economically unified steps.