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Tax Imposed on Exported Oil Is Not Merely a User Fee

Dec. 1, 2020, 8:01 AM

Commodity trader Trafigura Trading LLC convinced a federal trial court in Texas that the fees paid by oil exporters for the Oil Spill Liability Trust Fund was an unconstitutional tax. The case may encourage many taxpayers that have paid the tax to pursue refunds, which the IRS will likely deny, leading to further litigation and possibly the Supreme Court.

Trafigura is an independent commodity trading and logistics house. As part of its business, Trafigura purchased and exported domestic crude oil from the U.S. by vessel and truck. From 2014 through 2017, Trafigura exported approximately 50 million barrels of crude oil that was produced in oilfields in Texas, Louisiana, and North Dakota. Over those four years, Trafigura contended it paid a total of $4.22 million in taxes pursuant to tax code Section 4611(b).

Trafigura requested a refund of the taxes it paid under Section 4611(b), arguing that the taxes were unconstitutional under the Export Clause of the U.S. Constitution. The government argued that the burden was a constitutionally valid user fee. The U.S. District Court for the Southern District of Texas found for Trafigura. The tax, in fact, is an unconstitutional tax the imposition of which violates the aforesaid Export Clause (Trafigura Trading LLC v. United States, No. 4:19-cv-00170, 2020 BL 435493 (S.D. Tex. 9/8/20)).

Under Section 4611(b)(1), a tax is imposed on domestic crude oil if it is: “used in or exported from the United States.” The funds derived from this provision are “appropriated” to the Oil Spill Liability Trust Fund.“ The fund is administered by the U.S. Coast Guard and serves much like insurance for the oil transportation industry in the sense that ”responsible parties“ have their liabilities for oil spill damages capped as a result of the workings of the fund.

The Export Clause of the U.S. Constitution states: “No Tax or Duty shall be laid on Articles exported from any State.” This clause was proposed to alleviate the “fear that the Northern States would control Congress and would use taxes and duties on exports to raise a disproportionate share of federal revenues from the South.” The U.S. Supreme Court has held that “the Export Clause strictly prohibits any tax or duty…that falls on exports during the course of exportation.” See United States v. Int’l Bus. Machines Corp.

The Supreme Court has carved a narrow exception where the charge is actually a “legitimate user fee.” Congress may impose a fee that is “simply the compensation given for services properly rendered” by the government. However, in determining whether a charge on an export is a tax or a legitimate user fee, the Supreme Court has instructed courts “to guard against…the imposition of a tax under the pretext of fixing a fee.”

Based upon Pace v. Burgess and United States v. U.S. Shoe Corp. the court found that the test for whether a charge is tax as opposed to a valid user fee, can be effectuated by a two-party inquiry:
1. whether the charge is determined based on its proportion to the quantity or value of the package; and
2. whether the charge is excessive or whether it fairly matches the exporter’s use of the services provided by the funds raised from the charge.

Charges that are proportionate and excessive are more likely to be considered taxes on exports, the court said. Charges that are not based on their proportion to the quantity or value of the export and which fairly match the cost of exporter’s use of the services provided are more likely to be considered legitimate user fees.

The court found that on its face, the tax imposed under Section 4611(b) failed the first prong. The charge, by its own terms, was equal to “the Oil Spill Liability Trust Fund financing rate.” That rate was equivalent to eight or nine cents per barrel of crude oil. The term “barrel” means 42 U.S. gallons. The charge imposed was determined based on its proportion to the quantity of the oil exported. Therefore, the first prong of the Pace inquiry suggests that the charge imposed under Section 4611(b) is a tax, not a user fee.

The government argued that the payments into the fund were premiums paid for the government’s administration of an oil spill liability insurance program in exchange for the liability cap found in 33 U.S.C. Section 2704, and therefore, were not taxes.

Public Fisc

Trafigura argued to the contrary that the charges paid into the fund could not be considered valid user fees because the fund is available for a wide range of objectives aside from the liability cap. The court agreed with Trafigura. It was evident, the court said, that the fund was set up more as a “public fisc” than an insurance fund. It was clearly a way for the government to make private industry fund a wide-ranging oil spill relief program. The fund appropriates millions of dollars for research and development of oil spill technology, studies on the effects of pollution, marine simulation research, simulated environmental testing, and founding the Oil Spill Recovery Institute. “While each of these projects may be laudable, they have little to do with providing exporters a ’government service’ that justifies a per-barrel fee,” the court said.

The court also found that Congress did not tailor the charge imposed under Section 4611(b) to “fairly match the exporters’ use of the government service.” The government argued that the charge imposed here—a flat per barrel fee—fairly matched the use. The court disagreed. A number of other factors, it noted, could, and should, have been considered with respect to the charge on oil exporters. The court found the following factors could have been considered to structure a fee which more closely matches the services rendered:

  1. the route taken by the vessel,
  2. the route’s proximity to places with higher risk,
  3. the time the vessel will spend in “navigable waters,”
  4. the quantity of oil carried on the cargo ship,
  5. the statutory limit applicable to the cargo ship carrying the oil, and
  6. the characteristics of the exporter.

This list demonstrates Congress’s failure to tailor the charge in a way that fairly matches the governmental service that the tax/fee is supposed to support, the court said.

But a bigger problem existed. Some portion of Trafigura’s exports traveled by truck from North Dakota to Canada. Trafigura paid the same per barrel fee on those exports. The limitation of liability contained in the Oil Pollution Act does not apply to oil being trucked over land. There is no provision distinguishing the manner by which oil exports travel. Trafigura received no benefit at all for the fee it paid on those land-based oil exports. The limits on liability is limited to oil spills or discharges into navigable waters or adjoining shorelines. The tax, therefore, raises money from exports leaving the country from landlocked states to subsidize “benefits” enjoyed by exports leaving the country from states enjoying port access. This clearly violates the original intent of the Export Clause and the court finds this issue alone is decisive, the court said.

The tax imposed under Section 4611(b) is a tax because it is based on its proportion to the quantity or value of the package; and it does not fairly match the exporter’s use of the services provided by the funds raised from the charge. The tax imposed by Section 4611(b) is an unconstitutional tax on exports, the court ruled.

The court granted Trafigura’s motion for summary judgment. The court tabled the issue of the proper remedy to redress the violation, which will be decided at a later trial. In the meantime, oil exporters might want to urgently consider filing protective refund claims for the Section 4611(b) tax that the court has determined has been erroneously paid.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Robert Willens is president of the tax and consulting firm Robert Willens LLC in New York and an adjunct professor of finance at Columbia University Graduate School of Business.

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