Shell Oil Co. v. Iowa Dept. Of Revenue, 488 U.S. 19 (1988)

Shell Oil Co. v. Iowa Department of Revenue

No. 87-984

Argued October 4, 1988
Decided November 8, 1988
488 U.S. 19

APPEAL FROM THE SUPREME COURT OF IOWA

Syllabus

Between tax years 1977 and 1980, a portion of Shell Oil Company’s gross revenues was derived from the sale of oil and natural gas extracted from the Outer Continental Shelf (OCS). Shell sold all of its OCS gas directly at the OCS wellhead platform, but piped most of its OCS crude oil inland, where it was either sold to third parties or refined, which typically involved commingling it with non-OCS oil. Shell’s principal business in Iowa during the years at issue was the sale of oil and chemical products which were manufactured and refined elsewhere and included commingled OCS oil. In computing its Iowa corporate income taxes for those years, Shell adjusted the apportionment formula the State uses to calculate in-state taxable income -- under which that portion of overall net income that is "reasonably attributable to the trade or business within the state" is taxed -- to exclude a figure which Shell claimed reflected income earned from the OCS. The Iowa formula had previously been upheld against Due Process and Commerce Clause challenges in Moorman Mfg. Co. v. Bair, 437 U.S. 267. The Iowa Department of Revenue rejected Shell’s modification of the formula and found the tax payments deficient, which decision was affirmed by a county district court and by the Iowa Supreme Court. Both courts rejected Shell’s contention that the Outer Continental Shelf Lands Act (OCSLA) preempts Iowa’s apportionment formula, and therefore prevents the State from taxing income earned from the sale of OCS oil and gas.

Held: The OCSLA does not prevent Iowa from including income earned from the sale of OCS oil and gas in its apportionment formula. In adopting for the OCS the civil and criminal laws of "each adjacent state," the OCSLA does provide that "[s]tate taxation laws shall not apply" and further specifies that such adoption "shall never be interpreted as a basis for [a State’s] claiming any interest in [the OCS] or the revenues therefrom." However, the above-quoted provisions, when read in the context of the entire section in which they appear, and the background and legislative history of the OCSLA, establish that Congress was exclusively concerned with preventing adjacent States from asserting, on the basis of territorial claims, jurisdiction to assess on the OCS those direct taxes commonly imposed by States adjacent to offshore production sites, and did not intend to prohibit a State from taxing income from OCS-derived oil and gas, provided that it does so pursuant to a constitutionally permissible apportionment scheme such as Iowa’s. The inclusion of OCS-derived income in the unitary tax base of such a formula does not amount to extraterritorial taxation prohibited by the OCSLA. Shell’s argument that, even if the OCSLA allows a State to include in its preapportioned tax base the sales of OCS crude oil which occur off the OCS, the taxing State may not include in that base the value of the natural gas sales made at the OCS wellhead is rejected, since, on its face, the OCSLA makes no such distinction, and, in general, it is irrelevant for the makeup of the apportionment formula’s unitary tax base that third-party sales occur outside of the State. Pp. 24-31.

414 N.W.2d 113, affirmed.

MARSHALL, J., delivered the opinion for a unanimous Court.