Back in May, Earth Track teamed up with Oil Change International and NRDC to look at the tar sands exemption from tax used to finance the US' Oil Spill Liability Trust Fund.  We estimated that the exemption was worth nearly $400 million between 2010 and 2017, despite the fact that tar sands have higher expected spill liabilities than conventional crude.  We concluded that the exemption made no logical sense, and should be repealed or replaced with a separate charge (potentially at a higher rate) on products.  You can read our analysis here.

Tar Sands Exemption is Getting More Attention

In an article published today in Inside Climate News (Is Dilbit Oil? Congress and the IRS Say No), Lisa Song reviewed the tax exemption and solicited input from industry, the trade press, and the Internal Revenue Service.  Among the interesting findings:

  • Esa Ramasamy, an editorial director at trade publication Platts, noted that "[o]il sands tend tAlberta syncrude siteo be more acidic and corrosive than conventional crude.  It takes a special kind of refinery to process them, because of the toxicity of [the] crudes. So I find it hard to believe there is no environmental tax on those crudes."
  • The industry wasn't willing to speak on the exemption at all.  "InsideClimate News also contacted three pipeline companies (TransCanada, Enbridge and Kinder Morgan), three refineries that process tar sands crude (Valero, Suncor Energy U.S.A. and BP Whiting), and the Canadian Association of Petroleum Producers (CAPP) to ask about possible taxes on tar sands imports.  Spokesmen from TransCanada and CAPP said questions about tax policy should be directed to tar sands refiners, producers or the IRS. Enbridge, Kinder Morgan and the refineries did not respond."

As noted in our piece, the basis for all of the attention on the oil spill tax exemption is an IRS Technical Advice Memorandum (TAM) released in 2011.  A TAM provides technical guidance in response to questions from internal staff on how to apply particular tax rules to the circumstances of a specific taxpayer.1   In this case, the TAM was unambiguous, concluding that tar sands were not required to pay into the fund. 

In conversations with reporter Song, IRS spokesman Anthony Burke pointed out that the memo in question applied only to a specific set of facts and therefore only to the single refinery mentioned. Unlike tax court decisions, these memoranda would not set a precedant for all taxpayers.

But Burke and tax professionals dealing with complex tax issues know that many, many, tax issues are not black and white.  Often, firms must decide whether to take a filing position on how a particular statute applies to them.  Thus, precedant or no, this letter has nearly the same impact.  Because the conditions covered in the TAM were fairly general and common across the industry, it's release has likely given all of the firms confidence that they don't need to pay into the oil spill liability fund.

Questioning the IRS' Decision on the Applicability of the Spill Tax on Tar Sands Oil

Also released today was a report by the Democrats on the House Natural Resources Committee (not by the full Committee), led by Congressman Ed Markey of MA.  In addition to a review of current law and tax losses, Tax Free Tar Sands also interviewed the IRS staff who prepared the TAM and assessed the Congressional intent behind the oil spill trust fund. The conclusions:

The IRS lawyers who drafted the TAM told Democratic Committee staff that they did not consult with subject-matter experts or survey industry and government documents in deciding whether tar sands is crude oil or a petroleum product. Had they done so, they would have found that petroleum companies, their trade associations, and government agencies consider tar sands to be crude oil...

The Democratic Committee Staff argue that the IRS mis-interpreted Congressional Intent in their TAM:

Congress created the spill response fund in the wake of the Exxon Valdez oil spill when the enormous costs of cleaning up oil spills became better understood. Congress’s purpose in creating the spill response fund was clear: Petroleum companies that produce or handle dangerous products should pay for cleaning up their spills and insure against the risks they impose on the American people.

Congress’s intent is clear in the Oil Pollution Act, which authorized the fund. In defining oil covered by the fund, it states that “‘oil’ means oil of any kind or in any form, including, but not limited to, petroleum, fuel oil, sludge, oil refuse, and oil mixed with wastes other than dredged spoil.” Further, the presidential signing statement for the fund says, “The Act addresses the wide-ranging problems associated with… oil spills. It does so by creating a comprehensive regime for dealing with vessel and facility-caused oil pollution.”

Congress’ objective in creating the spill response fund has been severely hampered by the IRS’s position excluding tar sands from the definition of crude oil. As a matter of public policy, it is important that all oil companies be held  responsible for the disasters associated with the products they sell and that taxpayers not be forced to pay the bills of cash rich oil companies.

Not only does the IRS’s TAM misread congressional intent and fail on technical grounds; it also runs contrary to both public policy and common sense. If the oil spill response fund is to pay for costly tar sands spills, as required by law, then common sense dictates that Congress intended for the excise tax to apply to those responsible for importing it.

The Committee concludes:

The IRS’s conclusion that tar sands oil is neither crude oil nor a petroleum product is wrong. The TAM effectively creates a tax loophole and a subsidy for the refiner subject to the TAM and for others who might use the TAM as justification for avoiding the excise tax, potentially costing the oil spill response fund tens of millions of dollars a year.

Had the IRS lawyers performed more robust research and analysis, they should have concluded that the law is sufficiently clear and that the excise tax applies to all crude oil and petroleum products, including crude oil derived from tar sands. For this reason, the IRS should revisit its research and analysis and provide guidance and/or regulations to ensure that the IRS’s position comports with the law.

Congressman Markey also sent a letter to Treasury Secretary Timothy Geithner explaining why the current interpretation by the IRS was incorrect and requesting that it be corrected.

Update history:  This posting was updated 8/1/12 to clarify the difference between IRS Technical Advice Memoranda and Private Letter Rulings.

  • 1The IRS also issues Private Letter Rulings that provide clarity to specific taxpayer issues as well. However, whereas a TAM results from staff questions, the tax issues within Private Letter Rulings are brought to the IRS by taxpayers.