The Louisiana Hydrocarbon Processing Tax

• Author: James C. Exnicios
• Position: Shareholder, Liskow & Lewis, A Professional Law Corporation, New Orleans, Louisiana

Shareholder, Liskow & Lewis, A Professional Law Corporation, New Orleans, Louisiana.

I Introduction

One of the most controversial measures considered by the Louisiana Legislature during the 2000 Regular Session was Senate Bill Number 1,¹ which was proposed to amend the Louisiana Constitution to repeal the severance tax imposed on the extraction of oil and gas in Louisiana² and to commence levying a tax on the use of hydrocarbon processing facilities located in Louisiana. The hydrocarbon processing tax concept was opposed by the oil and gas industry that declared that the new tax "would add a cost to their operations that would make their products uncompetitive and speed the decline of the refining industry in Louisiana."³Proponents hailed the hydrocarbons processing tax as the answer to Louisiana's recurring fiscal problems, noting that "[a]fter accounting for the elimination of severance taxes, the state would have about $700 million a year to take care of the budget problems and education, including teacher pay raises."⁴

Both sides made presentations to the Louisiana State Law Institute Tax Study Committee⁵ that was charged with the responsibility to "study and investigate particular areas of tax laws in Louisiana at the direction of and in consultation with the joint committee (House Ways and Means/Senate Revenue and Fiscal Affairs) and report to the joint committee in the manner and as requested by the joint committee."⁶ Ultimately, the Tax Study Committee rejected the hydrocarbon processing tax idea.⁷

Louisiana's recent effort to impose a tax on hydrocarbon processing in Louisiana was not new. It had its vestiges in two failed past efforts to implement such a tax-the 1978 "First Use Tax"⁸ and the 1982 "Coastal Wetlands Environmental Levy" ("CWEL").⁹ The former measure was declared unconstitutional by the United States Supreme Court in Maryland v. Louisiana.¹⁰The latter measure did not make it out of the 1982 Regular Session of the Louisiana Legislature.¹¹ The 2000 Regular Session of the Louisiana Legislature likewise rejected Senate Bill Number 1.¹²

Despite the defeat of Senate Bill Number 1, few observers believe a tax levied on hydrocarbon processing is dead. Because of its potential economic impact on the State of Louisiana, the concept of a hydrocarbon processing tax will undoubtedly be refined and reintroduced again. Pretermitting the political and economic soundness of Senate Bill Number 1, passing contemporary constitutional muster remains one of the formidable obstacles to future efforts to levy a tax on hydrocarbon processing in Louisiana.

Evaluating the constitutionality of a hydrocarbon processing tax begins with an understanding of the approach taken in Senate Bill Number 1. Its drafters attempted to address the constitutional infirmities of the First Use Tax identified in Maryland v. Louisiana and the academic debate surrounding the constitutionality of CWEL. Whether those remedial measures would have been sufficient for Senate Bill Number 1 to sustain a constitutional challenge requires an appreciation of the development of the jurisprudence surrounding federal constitutional limitations on a state's authority to tax over the past two decades. After a survey of this jurisprudence, one can then frame and measure the constitutional issues emanating from Senate Bill Number 1.

II The Taxing Schemes

A Scope and Characteristics of the Hydrocarbon Processing Tax

The scope of the hydrocarbon processing tax was intended to extend to the "use of hydrocarbon processing facilities in Louisiana by the owners of the hydrocarbons processed therein."¹³ The term "use of hydrocarbon processing facilities" was defined as processing, or causing to be processed, hydrocarbons in a hydrocarbon processing facility in Louisiana.¹⁴ The term "hydrocarbon processing facility" meant any plant, building, construction, structure, or equipment located in Louisiana and used to perform all or part of the processes, procedures, or operations involved in "hydrocarbon processing."¹⁵ However, the terms did not include motor vehicles, railway cars, ships, barges, or vessels.¹⁶ "Hydrocarbon processing" was broadly defined to include any process, procedure, or operation by which a hydrocarbon or mixture of hydrocarbons undergoes any one of more than thirty specifically described events in Louisiana, ranging from very specific and complex chemical treatments such as catalytic reactions to very general physical processes such as measurement by pressure, velocity, or flow.¹⁷ The direct venting or flaring into the atmosphere of gas produced from oil and gas wells was specifically excluded from the definition of "hydrocarbon processing."¹⁸

The term "owner" referred to the person or persons having title to the hydrocarbons at the time they are processed in hydrocarbon processing facilities in Louisiana.¹⁹ The term "hydrocarbon" was specifically defined as a chemical compound containing atoms of both carbon and hydrogen, including, but not limited to crude oil, condensate, natural gas, natural gas liquids, and any refined petroleum products.²⁰ The term "hydrocarbon" specifically excluded petrochemicals, coal, lignite, materials derived from agriculture or forestry products, or nitrogenous fertilizers.²¹ "Refined petroleum products" included any substances derived from refining petroleum which have commercial value such as oils, gasoline, diesel, jet fuel, naphtha, kerosene or asphalts.²² The term "petrochemicals" meant any products other than refined petroleum products and were typically single chemical compounds produced from a chemical process in which petroleum was used.²³

The tax was to be levied at the rate of six cents per thousand cubic feet of natural gas and natural gas liquids which undergo hydrocarbon processing in a hydrocarbon processing facility within Louisiana.²⁴ It was to be levied at the rate of $1.25 per barrel of condensate, crude oil, and natural gas liquids or condensate contained therein, which had undergone hydrocarbon processing in a hydrocarbon processing facility within Louisiana.²⁵ The rate was 1.15 times the rate for crude oil, per barrel of refined petroleum products that underwent hydrocarbon processing in a hydrocarbon processing facility.²⁶ The initial rates of the tax were to be only a floor and would have been indexed and adjusted annually based on the price of hydrocarbons during the previous year.²⁷ The rates would have only been reduced below the floor rates upon a vote of two-thirds of the Legislature.²⁸ The Legislature also had the ability to increase or decrease the price-index rates with a two-thirds vote of each house.²⁹

The owner or operator of the facility in which the hydrocarbons were processed would have had to collect the tax due from the owner of the hydrocarbons and remit them monthly.³⁰ Owners and operators of hydrocarbon processing facilities who neglected, failed, or refused to collect or remit the tax due would have been liable for the full amount of such taxes, interest and penalties that should have been collected and remitted.³¹ Purchasers of hydrocarbons upon which the tax had not been paid would have had to deduct the tax due from the amount due to the owner.³² Purchasers who failed to deduct or withhold the amount of taxes due also would have been liable for the full amount of such taxes, interest and penalties that should have been deducted and withheld.³³ The tax liability due would have operated as a first lien and privilege on the hydrocarbons of the owner from whom the tax was due.³⁴ The first lien and privilege of the hydrocarbons would have followed the hydrocarbons into the hands of third persons regardless of good or bad faith and regardless of whether the hydrocarbons were in a manufactured or unmanufactured state.³⁵

Once an owner of hydrocarbons had paid the tax, no further tax would have been due from that owner or any subsequent owner of the processed hydrocarbons.³⁶ This provision essentially limited the imposition of the processing tax to the first processing of the hydrocarbons within Louisiana. Owners who had paid a similar tax to another state for using hydrocarbon processing facilities to process hydrocarbons subsequently imported into Louisiana would have received a credit against the tax.³⁷ The Louisiana tax credit only would have been valid if the other state, which had imposed the original processing tax, granted a similar credit.³⁸

The tax provided exemptions for "wells with minimal production capabilities,"³⁹which were intended to encourage "national oil and gas production from wells with minimal production capabilities."⁴⁰ For the exemptions to apply, the owners of the hydrocarbons that were processed at Louisiana facilities must have obtained the hydrocarbons from one of four specifically identified categories of wells including: (1) any well incapable of producing more than twenty-five barrels of oil per producing day during an entire month of operation and which produces at least fifty percent salt water per day,⁴¹ (2) any well determined to be a "stripper well,"⁴² (3) gas produced from a well with a "well head pressure" of fifty pounds per square inch gauge or less under operating conditions, or, gas rising in a vaporous...