Legal ruling 396

Franchise Tax Board - Legal Division

August 9, 1976

Taxation of Income Generated by the Offshore Oil Operations of a Unitary Business -- Modification of Legal Ruling No. 366

Facts and Discussion

In Legal Ruling 366 it was concluded that the outer Continental Shelf Lands Act (67 Stat. 462, 43 U.S.C. §§ 1,331, et seq.), hereinafter called "the act," did not apply to the operations of floating drilling barges. This conclusion was reached upon the basis of a number of federal cases which considered wrongful death or injury actions under the Jones Act (46 U.S.C. § 688), and which held such structures to be vessels rather than "artificial islands and fixed structures" expressly covered by the act. See e.g., Offshore Company v. Robison, 266 Fed.2d 769 (1959). Upon further consideration and for the reasons set forth below, it has now been concluded that for purposes of state income taxation such drilling barges are covered by the act and, consequently, the operations of such barges which are conducted on the outer continental shelf are exempt from state taxation.

43 U.S.C. § 1,333 provides in part:

(a)(i) The constitution and laws and civil and political jurisdiction of the United States are extended to the subsoil and seabed of the outer Continental shelf and to all artificial islands and fixed structures which may be erected thereon for the purpose of exploring for, developing, removing, and transporting resources therefrom, . . . .

(2) . . . state taxation laws shall not apply to the outer Continental shelf
. . . . (Emphasis added.)

From the above it seems clear that exploring for resources on the outer Continental shelf is an activity covered by the act. And the fact is that exploring for oil thereon usually involves the use of drilling barges. If, after a well is brought in, the well and all supporting pumping structures are exempt from state taxation, it would appear to follow that the activities required to discover the oil should be exempt.

Furthermore, running throughout the federal wrongful death cases cited in Legal Ruling 366 is a consistent theme that the Jones Act is to be interpreted liberally so as to spread its benefits as widely as possible. While no cases dealing with state taxation under the act have been discovered, the flat prohibition contained in the act does not suggest any liberality toward state taxation was intended.

It is therefore concluded that the act prohibits states from taxing the activities of drilling barges operating on the outer Continental shelf. Apportionment factors associated with such activities will only be reflected in the denominator of the formula.

It will be noted that the opinion expressed herein will not change the actual computation of the measure of the tax from that set forth in Legal Ruling 366. This ruling is promulgated merely to place the analysis on a more sound legal basis.

That portion of Legal Ruling 366 which is inconsistent with the holding herein is hereby revoked.