Shell Oil Company v. Iowa Department of Revenue, 87-984

• Decision Date: 08 November 1988
• Docket Number: No. 87-984,87-984
• Citation: 109 S.Ct. 278,488 U.S. 19,102 L.Ed.2d 186
• Parties: SHELL OIL COMPANY, Appellant v. IOWA DEPARTMENT OF REVENUE
• Court: U.S. Supreme Court

488 U.S. 19

109 S.Ct. 278

102 L.Ed.2d 186

SHELL OIL COMPANY, Appellant

v IOWA DEPARTMENT OF REVENUE.

No. 87-984.

Argued Oct. 4, 1988.

Decided Nov. 8, 1988.

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, 98 S.Ct. 2340, 57 L.Ed.2d 197. 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) pre-empts 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 constitu- tionally 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 (Iowa 1987), affirmed.

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

Kenneth S. Geller, Washington, D.C., for appellant.

Harry M. Griger, Des Moines, for appellee.

Lawrence G. Wallace, Washington, D.C., for U.S. as amicus curiae in support of appellee.

Justice MARSHALL delivered the opinion of the Court.

In this appeal, we must decide whether the Outer Continental Shelf Lands Act (OCSLA), 67 Stat. 462, 43 U.S.C. § 1331 et seq. (1982 ed. and Supp. III), prevents Iowa from including income earned from the sale of oil and gas extracted from the Outer Continental Shelf (OCS) in the apportionment formula it uses to calculate in-state taxable income. We hold that it does not.

I

Shell Oil Company (Shell) is a unitary business,¹ incorporated in Delaware. Its activities include producing, transporting, and marketing oil and gas and the products that are made from them. Shell extracts oil and gas not only within various States but also on the OCS, which is defined by the OCSLA as all those submerged lands three or more geographical miles from the United States coastline.² Between 1977 and 1980, the tax years at issue in this case, a portion of Shell's gross revenues was derived from the sale of oil and gas extracted from the OCS and the sale of products made from OCS oil and gas.

During the years at issue, Shell sold all of its OCS natural gas directly at the wellhead platform located above the OCS. Nearly all of its OCS crude oil, by contrast, was transferred via pipelines to the continental United States, where Shell either sold it to third parties or refined it. The refining process typically involves the commingling of OCS crude oil with crude oil purchased or drawn by Shell from other places. Thus, the original source of oil in any Shell-refined product is indeterminable.

Shell's principal business in the State of Iowa during the years at issue was the sale of oil and chemical products which it had manufactured and refined outside of Iowa. These products included OCS crude oil that had been commingled with non-OCS crude oil.

Iowa imposes an income tax on corporations doing business in Iowa. Iowa Code § 422.33(2) (1987). For a unitary business like Shell, that income tax is determined by a single-factor apportionment formula based on sales. Under that formula, Iowa taxes the share of a corporation's overall net income that is "reasonably attributable to the trade or business within the state." Ibid. ³ We have previously upheld Iowa's sales-based apportionment formula against Due Process and Commerce Clause challenges in Moorman Mfg. Co. v. Bair, 437 U.S. 267, 98 S.Ct. 2340, 57 L.Ed.2d 197 (1978).

Between 1977 and 1980, Shell filed Iowa tax returns in which it adjusted the Iowa formula to exclude a figure which it stated reflected "income earned" from the OCS.⁴ The Iowa Department of Revenue audited Shell's returns and rejected this modification. Accordingly, the Iowa Department of Revenue found Shell's tax payment deficient. Shell challenged that determination, claiming at a hearing before the Iowa Department of Revenue that inclusion of OCS-derived income in the tax base of Iowa's apportionment formula violated the OCSLA. The hearing officer rejected that contention. Shell appealed to the Polk County District Court, which affirmed the administrative decision, No. AA952 (Oct. 3, 1986), App. to Juris. Statement 15a (Polk County opinion), and to the Iowa Supreme Court, which also affirmed. Kelly-Springfield Tire Co. v. Iowa State Board of Tax Review, 414 N.W.2d 113 (1987).⁵ Both courts concluded, based upon an examination of the text and history of the OCSLA, that the OCSLA did not pre-empt Iowa's apportionment formula. We noted probable jurisdiction, 484 U.S. 1058, 108 S.Ct. 1010, 98 L.Ed.2d 976 (1988), and now affirm.

II

We have previously held that Iowa's apportionment formula is permissible under the Commerce Clause. Moorman Mfg. Co. v. Bair, supra. Shell's argument here is purely one of federal statutory pre-emption. It contends that, in passing the OCSLA, Congress intended to impose stricter requirements on a taxing State's apportionment formula than those imposed by the operation of the Commerce Clause alone. Shell points to the text and history of the OCSLA which it believes evince a clear congressional intent to preclude States from including in their apportionment formulas income arising from the sale of OCS oil and gas. In assessing this claim, we review first the text and then the history of the OCSLA.

Shell's argument is that the plain language of the OCSLA enacts an "absolute and categorical" prohibition on state taxation of income arising from sales of OCS gas and oil. Brief for Appellant 13. Shell relies specifically on subsections 1333(a)(2)(A) and (a)(3) which provide, in pertinent part, as follows:

"(2)(A) To the extent that they are applicable and not inconsistent with this subchapter or with other Federal laws and regulations . . ., the civil and criminal laws of each adjacent State . . . are declared to be the law of the United States for that portion of the subsoil and seabed of the outer Continental Shelf, and artificial islands and fixed structures erected thereon, which would be within the area of the State if its boundaries were extended seaward to the outer margin of the outer Continental Shelf. . . . All of such applicable laws shall be administered and enforced by the appropriate officers and courts of the United States. State taxation laws shall not apply to the outer Continental Shelf.

* * * * * "(3) The provisions of this section for adoption of State law as the law of the United States shall never be interpreted as a basis for claiming any interest in or jurisdiction on behalf of any State for any purpose over the seabed and subsoil of the outer Continental Shelf, or the property and natural resources thereof or the revenues therefrom." 43 U.S.C. §§ 1333(a)(2)(A) and (a)(3) (emphasis added).

It is, of course, well settled that "when a federal statute unambiguously forbids the States to impose a particular kind of tax . . ., courts need not look beyond the plain language of the federal statute to determine whether a state statute that imposes such a tax is pre-empted." Aloha Airlines, Inc. v. Director of Taxation of Hawaii, 464 U.S. 7, 12, 104 S.Ct. 291, 294, 78 L.Ed.2d 10 (1983). But the meaning of words depends on their context.⁶ Shell reads the italicized language above without reference to the statutory context when it argues that these statutory words ban States from including income from OCS oil and gas...