A recent challenge to the constitutionality of the federal excise tax on domestic crude oil exported from the United States proved successful in the US Court of Appeals for the Fifth Circuit. While the US Department of Justice will seek to defend the tax in other circuits, the ruling could lead to a competitive advantage for domestic crude oil exporters located within the Fifth Circuit’s jurisdiction.
Earlier this year, in Trafigura Trading LLC v. United States, the US Court of Appeals for the Fifth Circuit held that a federal excise tax on domestic crude oil exported from the United States is unconstitutional.[1] The Fifth Circuit found that the oil export tax violated the US Constitution’s Export Clause, which bans taxes or duties on articles exported from any state.[2]
The US Department of Justice (DOJ) filed a petition for rehearing en banc, which the Fifth Circuit denied. After filing multiple requests for extensions of time to file a petition for a writ of certiorari with the US Supreme Court, the DOJ confirmed in an October 13, 2022, letter to House Speaker Nancy Pelosi that, while it did not agree with “certain aspects” of the Fifth Circuit’s conclusion, it would not file a petition for a writ of certiorari.[3] At the same time, the DOJ reaffirmed its commitment to defending the tax in other circuits.
The Fifth Circuit’s holding in Trafigura, coupled with the DOJ’s decision to not appeal, creates both opportunities and uncertainty for US taxpayers that export domestic crude oil.
The Internal Revenue Code imposes a tax on domestic crude oil used in or exported from the United States at a rate of eight or nine cents per barrel, depending on the year.[4] This excise tax, considered an “environmental tax,” is due quarterly and reported on Internal Revenue Service (IRS) Form 720, Quarterly Federal Excise Tax Return.
Proceeds from this tax go to the Oil Spill Liability Trust Fund (the Fund), which under 33 U.S.C. § 2702 assists in covering cleanup costs of an oil spill.[5] The Fund is intended to cover costs for natural resource damage assessment and restoration, and it also supports research and development on resolving oil pollution.[6]
Trafigura Trading, a commodity trading company, exported domestic crude oil, remitted tax as required by Section 4611(b), and sought a refund for the Section 4611(b) taxes it paid between 2014 and 2017. The basis for Trafigura’s refund claims was that the tax was unconstitutional under the Export Clause. The IRS disagreed.
After the IRS denied the refund, Trafigura filed a refund suit in the US District Court for the Southern District of Texas, which agreed with Trafigura that the tax assessed on the oil exported is unconstitutional.[7] The government appealed, but the Fifth Circuit affirmed that the tax is unconstitutional.[8]
In considering whether the tax under Section 4611(b) is a prohibited tax on exports as opposed to a permissible “user fee,” the Fifth Circuit relied on the two-part test that the Supreme Court previously articulated in United States v. U.S. Shoe Corp., 523 U.S. 360 (1998), and Pace v. Burgess, 92 U.S. 372 (1875). First, the Fifth Circuit considered whether the charge imposed is based on the quantity or value of the oil exported, making it more akin to a tax than a user fee. Second, the court considered the connection between the Fund’s services to exporters and what is paid by exporters. According to the court, a user fee must “fairly match” or “correlate reliably with” the Fund’s services to exporters.[9]
The Fifth Circuit held that the tax failed both parts of the test. First, the charge is based on the volume of oil exported, which the government admitted. Accordingly, the court found that the charge was, by design, more like a tax than a user fee. Second, because the tax is mainly used to cover costs for oil spill cleanup and governmental costs for natural resource damage assessment and restoration, as well as to support research and development on resolving oil pollution, the court found that it was not a charge for a specific service provided to, and used by, the payor. As the court put it, the charge and associated services were not a “value-for-value transaction.”[10]
For these reasons, the court affirmed the decision of the district court. In doing so, it held that the charge under Section 4611(b) is a tax and not a “user fee,” and that the tax violates the Export Clause and as a result, could not be enforced by the government here.
After filing several requests for an extension of time to file a petition for a writ of certiorari, DOJ explained in its letter to Nancy Pelosi that in the present circumstances, such filing was “unwarranted” because there was not yet any disagreement in the US Courts of Appeals as to whether the tax imposed under Section 4611(b) is unconstitutional. The Fifth Circuit had been the first US Court of Appeals to address the constitutionality of Section 4611(b)’s oil export tax. In the letter, the DOJ also noted the possibility of a legislative remedy to correct the “putative constitutional infirmity” identified by the Fifth Circuit.
Taxpayers in Fifth Circuit
Taxpayers in the Fifth Circuit should timely file refund claims related to past periods for which they paid tax under Section 4611(b). The statute of limitations for filing a refund claim expires the later of three years from the date the return was filed or two years from the date the tax was paid.[11] As this tax is paid quarterly, the period of limitations for an associated refund is calculated by reference to the date of the filing of the Form 720 for each quarter.[12] For taxpayers that have not filed a claim for refund, but timely filed Forms 720 for each quarter, a brief window of time remains to file claims for taxes paid during the fourth quarter of 2019.
For taxpayers in the Fifth Circuit that filed protective refund claims under Treas. Reg. § 301.6402-2, pending the outcome of the Trafigura litigation, these claims should be promptly perfected. To perfect a claim, the taxpayer should file a complete refund claim under the normal rules and enclose a letter explaining that the contingency for the claim (the Trafigura litigation) has been resolved. The filing also should include a copy of the previously filed protective claim and a copy of the associated proof of mailing.
Taxpayers Outside Fifth Circuit
For taxpayers located outside of the Fifth Circuit, the DOJ has confirmed a commitment to defend the excise tax imposed by Section 4611(b) in other circuits. Should a taxpayer wish to challenge the constitutionality of Section 4611(b) in other circuits, the taxpayer must first timely file a refund claim with the IRS.[13]
In instances where the IRS has formally denied a claim or has taken no action on a claim within six months of filing, a taxpayer can file suit in the US District Court where its principal place of business is located[14] or in the US Court of Federal Claims.[15] The taxpayer has two years from the date of the notice of claim disallowance to bring a refund suit.[16]
Until the constitutionality of Section 4611(b) is ultimately resolved, whether by the courts or Congress, taxpayers should consider continuing to file refund claims for open periods. Taxpayers also should monitor any proposed amendments to Section 4611(b).
Any taxpayer that has filed, or is considering filing, a claim for refund should retain the associated substantiation documents with respect to the Section 4611(b) payments that it makes. This substantiation will be critical in proving the right to recover these amounts should it be requested by the IRS during an examination or the DOJ during litigation.
The DOJ’s decision to not appeal the Fifth Circuit’s opinion has resulted in differing tax consequences for taxpayers with materially similar business operations and facts depending on the circuit in which they have a principal place of business. This could create a competitive disadvantage as the tax might be imposed and enforced against all taxpayers outside the Fifth Circuit’s jurisdiction.
Taxpayers impacted by Section 4611(b) and the Trafigura holding should consider the implications of the Inflation Reduction Act of 2022’s (IRA’s)[17] amendments to Section 4611. Effective January 1, 2023, the IRA resurrects a long-expired—since 1995—Hazardous Substance Superfund (Superfund) excise tax on oil and petroleum under Section 4611.[18] The purpose of the excise tax will be to replenish the Superfund, which provides the federal government with resources to respond to environmental threats related to hazardous substances not otherwise addressed by responsible parties. It will apply to any exported domestic crude oil.
In addition to resurrecting the Superfund tax, the IRA also increases the tax rate for domestic crude oil from 9.7 cents per barrel to 16.4 cents per barrel—an amount that will be adjusted annually for inflation. The current oil spill liability tax, which is imposed at 9 cents per barrel under Section 4611(b) and which the Fifth Circuit held to be unconstitutional, remains intact.[19] In other words, the stakes for those taxpayers impacted by Section 4611’s environmental excise taxes will soon be far greater.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following:
[1] Trafigura Trading LLC v. United States, 29 F.4th 286 (5th Cir. 2022).
[2] U.S. Const. art. I, § 9, cl. 5.
[3] Letter from Elizabeth B. Prelogar, Solicitor General, DOJ, to Nancy Pelosi, Speaker, US House of Representatives (Oct. 13, 2022).
[4] IRC § 4611(c)(2)(B). Unless otherwise stated, all Section references are to the Internal Revenue Code of 1986, as amended (IRC or the Code), and Treas. Reg. § references are to the regulations thereunder.
[5] IRC § 9509(b)(1).
[6] 33 U.S.C. § 2702(b).
[7] Trafigura Trading LLC v. United States, 485 F. Supp. 3d 822 (S.D. Tex. 2020).
[8] 29 F.4th at 294.
[9] Id. at 292.
[10] Id. at 293.
[11] IRC § 6511.
[12] Internal Revenue Manual 25.6.1.6.4 (Oct. 3, 2022).
[13] United States v. Clintwood Elkhorn Mining Co., 553 U.S. 1 (2008).
[14] 28 U.S.C. §§ 1346(a)(1), 1402(a).
[15] 28 U.S.C. § 1491(a)(1).
[16] IRC § 6532(a).
[17] Pub. L. No. 117-169, 136 Stat. 1818 (2022).
[18] 136 Stat. at 1981-82.
[19] Section 4611(f)(2) does provide that “The Oil Spill Liability Trust Fund financing rate shall not apply after December 31, 2025.”