Federal Oil Spill Tax Imposed on Exports Found Unconstitutional

Sep 09, 2020
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The United States District Court for the Southern District of Texas has found the federal oil spill tax unconstitutional when imposed on exports of crude oil from the United States. The Court deferred judgment on the question of refunding taxes paid to a later date.

26 U.S.C. § 4611(b) states:

(A) any domestic crude oil is used in or exported from the United States, and
(B) before such use or exportation, no tax was imposed on such crude oil under subsection (a), then a tax at the rate specified in subsection (c) is hereby imposed on such crude oil.

For years, this provision wasn’t imposed as exports of crude oil from the United States were heavily controlled and licenses rarely issued. When the export ban was lifted at the end of 2015, exports of domestic crude oil rose significantly, and the IRS started collecting the oil spill tax on these exports.

Plaintiff, Trafigura Trading, LLC filed suit, arguing that under the decision in United States v. U.S. Shoe Corp., 523 U.S. 360 (1998) the tax as imposed was unconstitutional as being in violation of the Export Clause. The U.S. Shoe case concerned the imposition of the Harbor Maintenance Fee (a Customs ad valorem charge on the value of cargo loaded at U.S. ports) on cargoes that were loaded at U.S. ports for export out of the United States. The Export Clause of the U.S. Constitution states that “No Tax or Duty shall be laid on Articles exported from any State.” In a unanimous opinion, the U.S. Supreme Court held that “the [Harbor Maintenance Tax], which is imposed on an ad valorem basis, is not a fair approximation of services, facilities, or benefits furnished to the exporters, and therefore does not qualify as a permissible user fee.”  U.S. Shoe applied the principals from a much older case, Pace v. Burgess, 92 U.S. 372 (1875). There, the Supreme Court upheld a stamp charge on exported tobacco on the basis that it was a set fee not contingent on the quantity or value of the package and was not excessive taking into account the costs involved in giving the exporter an exemption from the tobacco tax and to ensure against fraud.

Applying the U.S. Shoe case, the District Court determined that the federal oil spill tax is a tax that “does not fairly match the exporter’s use of the services provided by the funds raised from the charge.” (Funds from the oil spill tax go into the Oil Spill Liability Trust Fund to be used to assist in spill cleanup). The Court found that it failed both prongs of the Pace test, namely that the tax is proportionate to the quantity or value (it is a per barrel tax rather than a set fee) and that it was excessive with respect to the exporter’s use of the service provided. Granting Trafigura’s motion for summary judgment, the District Court held that the oil spill tax as imposed on exports is unconstitutional.

See “View PDF” for the full text of the decision.