Court Upholds Income Tax on Offshore Oil, Gas

A unanimous Supreme Court ruled Tuesday that states may tax income that oil companies earn from the offshore production of oil and gas on federally leased property.

The ruling, written by Justice Thurgood Marshall, was a defeat for Shell Oil Co., a unit of Dutch/Shell Group, which challenged a corporate tax in Iowa as it applied to income from offshore oil and gas.

The high court’s 9-0 ruling affirmed a decision by the Iowa Supreme Court that upheld the state tax imposed on that portion of a company’s worldwide income, based on the size of its business in Iowa.

Iowa has a unitary tax system under which the state assesses the tax it is owed by companies headquartered elsewhere but doing business in the state using a special formula. Iowa’s system addresses the worldwide earnings of the company doing business in Iowa but not subsidiaries that have no business in the state.

Under the tax, landlocked Iowa includes offshore oil and gas income in Shell’s total sales. A portion of the income from the sales is taxed because the company sells gasoline and chemicals in the state.

Administration Backed Tax

At issue in the case were state taxes paid by Shell between 1977 and 1980 totaling $240,000.

The Reagan Administration and 14 states had filed legal briefs urging the Supreme Court to uphold the tax.

Arguing against the tax, Shell said it was improper for state officials to include revenue from offshore oil and gas in determining the company’s taxable income.

But Marshall ruled in his 12-page opinion that Congress did not intend to bar states from taxing income earned from offshore oil and gas.