District Court Finds Oil Spill Liability Tax on Exports Unconstitutional

A constitutional challenge to the federal oil spill liability tax could have significant implications for the oil and gas industry. In Trafigura Trading, LLC v. U.S., 4:19-cv-00170, the United States District Court for the Southern District of Texas found the oil spill tax under IRC Section 4611(b) to be unconstitutional when imposed on exports of crude oil. The court also ordered the Internal Revenue Service (IRS) to refund the federal oil spill tax paid by the company. The government is appealing the case.

The outcome of the case will have a significant impact on oil and gas taxes, as the recent Consolidated Appropriations Act of 2021 extended the oil spill liability tax to December 31, 2025.

Section 4611

Section 4611 imposes a tax of nine cents per barrel on domestic crude oil received at a United States refinery and on petroleum products entered into the United States for consumption, use, or warehousing. Section 4611(b) imposes the tax on domestic crude oil that is “used in or exported from the United States” unless the tax was previously imposed before use or exportation. The oil spill liability tax is used to fund the Federal Oil Spill Tax Liability Trust Fund, which reimburses a company that is responsible for an oil spill for expenses above the statutory cap on liability.

Recent case

In 2019, Trafigura Trading LLC filed suit against the IRS for a refund of the tax on crude oil exported from the United States. The company argued that Section 4611(b) is unconstitutional under the Export Clause of the Constitution, which states that “No Tax or Duty shall be laid on Articles exported from any State.” The IRS responded that Section 4611(b) is not a tax but a user fee paid by exporters in exchange for the statutory cap on liability.

The Supreme Court has recognized an exception to the export clause for a “legitimate user fee” and has developed a two-part test for whether a charge is a tax or a user fee. The first part of the test is whether the charge is determined based on its proportion to the quantity or value of the export. The second part of the test is 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.

Under the test, charges that are proportionate to the quantity or value of the export and that are excessive with respect to the exporter’s use of the service provided are more likely to be considered taxes. Charges that are not proportionate to the quantity or value of the export and that fairly match the cost of exporter’s use of the services provided are more likely to be considered legitimate user fees.

The District Court determined that Section 4611(b) is an unconstitutional tax on exports because it is determined based on its proportion to the quantity or value of the export and it does not fairly match the exporter’s use of the liability cap services provided by the funds raised from the charge.

What does this mean for oil exporters?

If the Appeals Court upholds the District Court’s decision, companies that paid the tax may be entitled to a refund. If the court finds for the United States, companies that did not pay the tax will owe the tax along with interest and a late penalty. Refund claims that are filed now will likely not be processed until the court makes a decision. In the meantime, oil exporters should pay the tax to avoid any possible penalties and file protective claims for a refund of the amount paid.

For information about the outcome of the case, the oil spill liability tax, or help preparing and filing your protective refund claims, contact us. We are here to help.

© 2021