Louisiana voters on Saturday will consider adding another tax break to the state’s lengthy constitution, this time to exempt some of the equipment used by the offshore oil-and-gas industry.
At issue is property that companies say is being stored on land for use in the Gulf of Mexico’s outer continental shelf (OCS), such as offshore drilling equipment. The OCS is outside the jurisdiction of the state or any parish.
Amendment 1 would grant a property tax exemption on goods stored in Louisiana warehouses for maintenance or positioning but ultimately destined for use in the OCS, clarifying an ambiguous portion of the state tax code, supporters say. But skeptics worry about adding yet another tax break to the state’s already convoluted system and say the ambiguity should be settled in court.
Historically, those materials have not been subject to property tax because they were considered exempt under the U.S. Constitution’s interstate commerce clause, said Tyler Gray, president and general counsel of the Louisiana Mid-Continent Oil and Gas Association. But during the past two years, he said, some coastal parishes began seeking to tax that property, arguing that it is not exempt if it comes to rest long enough.
“You can’t tax property that’s in interstate commerce,” Gray contends. “It’s not a length-of-time argument; it’s a destination argument.”
Gray adds that it isn’t practical to expect companies to store, for example, replacement parts for an offshore oil rig on the rig itself. He says “millions” of dollars are at stake for the industry.
“The assessors were worried about property that may never be used offshore,” said Jason DeCuir, a tax attorney and former executive counsel with the Louisiana Department of Revenue who worked with LMOGA on the bill, which acquired the necessary two-thirds majority in both houses of the Louisiana legislature to get on the ballot.
If the amendment is approved, assessors will be able to participate in the rule-making process to decide how the change will be enforced to ensure property being exempted is, in fact, bound for the OCS, he said.
“We can clearly define it [and] we can clearly mark it,” he said.
Wendy Thibodeaux is the assessor for Lafourche Parish, a coastal parish that is home to Port Fourchon. She says the change would cost the parish at least $1.6 million to $3 million annually it can’t afford to lose, but the bigger concern is that companies might abuse the exemption because assessors have no way to verify whether equipment truly is being used offshore.
“It just leaves a big loophole,” she said, adding that every tax exemption shifts more of the burden of paying for government to taxpayers who don’t get the exemption.
Assessments are based on the “honor system,” Thibodeaux said. Companies were not reporting equipment that they said were for use in the OCS.
Recently her office took a closer look at the practice and found that some property owners seemed to have a loose interpretation of what being OCS-bound means. In one case, equipment had been sitting dockside for 20 years, she said.
Brian Eddington, general counsel for the Louisiana Assessors’ Association, said several assessors conducted audits and found companies claiming exemptions for property that was not in transit. When assessors started putting that property on the tax rolls, as they felt they were legally required to do, the oil and gas industry “screamed bloody murder” and threatened lawsuits, he said.
But instead, they got lawmakers to approve a new exemption, possibly because they expected to lose in court. Eddington says legal precedent indicates when property ceases to be in transit due to a business decision by its owner, it is no longer exempt under the interstate commerce clause of the state or U.S. constitutions.
While neither the U.S. nor the state Supreme Court has weighed in on the question, Eddington provided a copy of a 1993 state attorney general’s opinion that supports his view. If the industry believes assessors are incorrectly interpreting the law, the proper forum to settle that issue is a courtroom, he said.
“This is very much a new exemption,” Eddington said. “The oil and gas industry is not bashful about filing lawsuits when they think they’re right.”