SHELL OIL CO. v. IOWA DEPT. OF REVENUE

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ORAL ARGUMENT OF KENNETH S. GELLER ON BEHALF OF THE APPELLANT

Chief Justice William H. Rehnquist: We'll hear argument next on Number 87-984, Shell Oil Company versus the Iowa Department of Revenue.

We'll wait just a moment, Mr. Geller.

Very well.

You may proceed whenever you're ready.

Mr. Geller: Thank you, Mr. Chief Justice, and may it please the Court, the issue in this case is whether the State of Iowa may tax the income earned by Shell Oil Company in the extraction of oil and gas from the outer continental shelf.

Simply stated, Iowa requires Shell to take its OCS earnings into account in figuring out its Iowa income tax liability, with the result being that the more money Shell earns on the outer continental shelf, the more Iowa income tax it generally pays.

It's our position that State taxation of this sort is prohibited by the language, the legislative history, and the purposes and policies of the Outer Continental Shelf Lands Act, which demonstrate, we believe, that Congress meant to prohibit the States from taxing any portion of OCS revenue.

Iowa, on the other hand, contends that the Act contains an implied exception for apportioned income taxes.

Let me begin by briefly explaining the background of this dispute.

Shell engages in substantial exploration for oil and gas on the outer continental shelf, pursuant to Federal leases.

Now, it's relatively easy for Shell to figure out its net income from these OCS operations, because the oil and gas has a definite and easily ascertainable fair market value at the wellhead, and Shell also knows what its expenses are in extracting the oil and gas from the shelf.

In fact, Shell has to figure out, make these precise calculations for a number of Federal purposes, such as the windfall profits tax, the oil depletion allowances, and most importantly, in figuring out the amount it owes to the Federal Government as royalties on these Federal leases.

Now, Shell also does business in Iowa, and as a result, it's subject to Iowa's corporate income tax.

Now, Iowa, like virtually every State, determines the Income tax liability for a multi-state business through use of a formula apportionment method.

It starts with the corporation's Federal income tax base, its net income for Federal income tax purposes, and it then subtracts from that Federal income tax amounts that it either can't Constitutionally tax, such as items that may not be part of the unitary business, or items that Congress by statute has prohibited it from taxing, such as, for example, the interest on Federal securities.

Now, what is left then is the Iowa income tax base.

Then multiplies that by a percentage... in most States, that percentage is based on three factors of payroll, property and sales.

As the Court is aware from its decision in Poorman, Iowa uses a one factor sales formula with the numerator being sales in Iowa, and the denominator being sales everywhere.

Then multiplies that Iowa income base by this fraction, and it comes up with the corporation's Iowa taxable income.

Now, when Shell computed its Iowa income for the years in question, it subtracted from its Federal income base the amounts it earned from the extraction of oil and gas from the outer continental shelf, and it did that based on the provisions of the Outer Continental Shelf Lands Act, which provide

"State taxation laws shall not apply to the outer continental shelf. "

And as the Court will know from the table reproduced at footnote seven at page 10 of our brief, when Shell's OCS income was not subjected to the provisions of Iowa's income tax laws, it made a substantial difference in Shell's Iowa income tax liability.

Now, the State challenged the way in which--

Unidentified Justice: Tell me again, Mr. Geller, how that computation was made.

Shell has certain income which, from sales resulting from production in the OCS?

Mr. Geller: --Not from sales, Mr. Chief Justice.

Shell has certain income that it earns on the shelf from the very act of extracting the oil and gas from the ocean floor and bringing it to the surface.

It has a wellhead value.

And Shell also knows--

Unidentified Justice: But I wouldn't think that was income in the ordinary sense.

Mr. Geller: --Well, it's not realized income for purposes of paying an income tax on it at that moment, but it is treated as a sales equivalent or income for a number of Federal purposes, as I said earlier, including the windfall profits tax and depletion allowances, and most importantly, figuring out the royalties it owes to the Federal Government, which is based not on any subsequent sales that may occur, but on the net wellhead value.

Unidentified Justice: On the value--

Mr. Geller: The value of the oil at the shelf.

That's correct.

That Is the earning... that is the amount that Shell claims it earns from its OCS operations.

The wellhead value less whatever expenses were incurred in bringing that oil and gas to the surface.

That is the amount that it claims--

Unidentified Justice: --So Iowa is telling it to figure your Iowa tax by putting Iowa sales as the numerator and all sales as a denominator?

Mr. Geller: --Yes, and multiplying that by an income base that includes the amounts that I just referred to... the amounts that Shell earns from the extraction of oil and gas on the outer continental shelf.

It's crucial that we're talking here about the a income base... what must be included in that base.

Unidentified Justice: Okay, but if preparation of either the numerator or the denominator, do those OCS figures--

Mr. Geller: OCS... well, as I said, Iowa uses a one-factor formula--

Unidentified Justice: --But listen to my question.

Mr. Geller: --Yes, sir.

Unidentified Justice: I'm asking you, in preparing the numerator and the denominator of sales over sales, do the OCS, outer continental shelf, values come into the calculation of either of those two?

Mr. Geller: Yes, they do.

Unidentified Justice: How?

Mr. Geller: They wouldn't come into the numerator, which is Iowa sales.

They come into the denominator.

Any sales that Shell makes on the shelf itself... and it sells a small quantity of oil and gas on the shelf... would be included in its everywhere sales, which would be in the denominator.

Of course, we object to that as well, because we claim that what Congress meant to do in passing the statute is to require the States to simply ignore any OCS values.

Unidentified Justice: But that isn't your primary objection.

Mr. Geller: Our primary objection is the use in the income base of the net wellhead value that Shell earns from the extraction of oil and gas from the outer continental shelf.

That's what we object to.

Unidentified Justice: And the net income base is Shell's net income everywhere, is that right?

Mr. Geller: The income base is Shell's net income everywhere, which we claim should not include its net income on the outer continental shelf.

Unidentified Justice: Does that include net income in the East Indies and places like that?

Mr. Geller: In those states that require worldwide computations, it does, yes.

Unidentified Justice: Even though there's no question, I suppose, that Iowa could not directly tax something that was produced in the East Indies.

Mr. Geller: That's correct.

On the other hand, there's no Federal statute, either, that tells them they can't do that, and we claim that there's a Federal statute here.

I think it's important in light of that statement, Mr. Chief Justice, to begin by emphasizing that this case is quite different from a number of other State income tax cases that the Court has wrestled with in recent years.

This case doesn't involve any Constitutional challenge to Iowa's apportionment method.

Therefore, many of the arguments in Iowa's brief about nexus or extraterritorial taxation or its citations and reliance on cases like Moorman or Exxon v. Hisconsin are, we think, quite irrelevant here.

Iowa may well have a Constitutional power to tax the earnings that Shell makes on the outer continental shelf.

Unidentified Justice: Mr. Geller, let me just get one little detail.

You don't disagree with the proposition that these activities on the outer continental shelf are part of the unitary business?

Mr. Geller: We don't dispute that, Justice Stevens.

What we contend is not that there's any Constitutional restriction on Iowa's power to tax what Shell earns on the outer continental shelf, but that Congress has added an additional restriction by statute, in order to protect and promote operations on an exclusively Federal enclave, are outer continental shelf.

We believe that this conclusion follows from three crucial pieces of evidence.

And the first, of course, is the language of the statute itself.

And As I mentioned a moment ago, Section 1333(a)(2) of Title 43 provides... and I quote...

"State taxation laws shall not apply to the outer continental shelf. "

And this language is reinforced by section 1333(a)(3) of the statute, which states that subsection (a)(2), which I just read to you, shall never be interpreted in such a way as to allow the States to claim any share of the revenues from OCS mineral production.

But that of course is precisely what Iowa is trying to do here by insisting that Shell include its OCS earning in its Iowa income base.

Unidentified Justice: Well, I guess the concern, Mr. Geller, is whether the statutory provisions are really directed toward taxes within the jurisdiction of the State, such as property taxes or excise taxes, severance taxes, and so forth.

Mr. Geller: Right.

That is the dispute between us and Iowa.

Unidentified Justice: Exactly.

And it isn't all that clear to me that Congress had in mind prohibiting any reference in an apportionment formula to OCS wellhead value gas.

Mr. Geller: Well, we think that Congress--

Unidentified Justice: For the objective of determining what income was earned in Iowa.

Mr. Geller: --Well, we think, as I said, that there are three reasons why Congress a did include a comprehensive prohibition on State income tax.

The first, as I was just referring to, is the language of the statute, which is categorical.

It talks about State taxation laws.

It doesn't make any distinctions between jurisdiction based laws and apportioned income taxation.

It speaks generally of State taxation laws.

And I think that the legislative history bears this out, Justice O'Connor.

The legislative history is quite long, and contentious, and we've cited it.

We've discussed it in brief.

Congress gave a lot of thought to what it is doing here.

It seems to us that there are two salient points that bear repeating about the legislative history.

The first is that bill after bill after bill was introduced in Congress, during the course of the debates, to give the States some share of OCS revenues, no matter how accost.

Every one of these attempts was rejected.

Legislative leaders in both houses--

Unidentified Justice: All of the States, or just coastal States?

Mr. Geller: --Well, Justice Kennedy, the focus, curiously, was or the coastal States, because the coastal States had been the prime beneficiaries under the prior system, whereby the States viewed the outer continental shelf as their own land.

Decisions of this Court between 1947 and 1950 had held that the OCS was in fact not State land, but exclusively Federal land.

And Therefore, much of the debates in the legislative history were attempts by the coastal States to reassert the jurisdiction that they had previously exercised.

But every one of those attempts was beaten back.

And of course, if we are right that Congress comprehensively prohibited the States from imposing any income tax, any tax whatsoever, including income tax, then of course it serves to reason that that prohibition would apply to all States, and not just the coastal States.

Unidentified Justice: Well, but you say "the States", and these other States had perhaps a basis or a nexus for a direct tax, and not just including it in an apportionment formula.

Mr. Geller: That's correct.

But it seems to us crucial that at no point in the legislative history... at no point, and Iowa has not been able to cite to any... was there a discussion only of jurisdiction based taxes.

Congress spoke of all State taxation, and in fact the only mention in the legislative history that is at all relevant to the question of apportioned income taxation points our way.

Just as we pointed out in our brief, Senator Long of Louisiana specifically said on a number of occasions that if the statute passed as it was drafted... and it ultimately did pass as it was drafted... that would mean that the States could not impose a tax on corporate profits.

He didn't--

Unidentified Justice: That surely doesn't speak precisely to this question.

Mr. Geller: --Well, I think, Mr. Chief Justice, that it's awfully close to this question.

We're dealing here with a tax on corporate profits.

That's precisely what Iowa suggests is not covered by the statute.

Unidentified Justice: But that's probably why we first turned to the language of the statue itself, and only as a last resort to comments on the Floor, because they are seldom very precise, and certainly this one does not strike me as hitting the nail on the head.

Mr. Geller: Well, it does refer to a tax on corporate profits, which is what we're dealing with here, and which is what Iowa suggests is not covered.

Unidentified Justice: Well, it was also made by an opponent to the legislation, Mr. Geller.

Mr. Geller: It was made by someone who opposed the legislation, that's true.

Unidentified Justice: And we don't often place great reliance on that kind of a remark.

Mr. Geller: Well, we're not asking the Court to place great reliance on it.

But it is the only statement in the legislative history that focuses on the precise issue in this case.

And more important than that, no Member of Congress expressed any disagreement with what Senator Long said.

Unidentified Justice: In the metaphysics of the tax law, this really isn't a tax on OCS profits, is it?

Mr. Geller: Well, in terms of Constitutional objections to apportioned income taxes, this Court has said that what an apportioned income tax attempts to do is to figure out how much money a corporation has made in the State and to that extent of the Constitutional matter, we're not suggesting it is a tax on the OCS.

But there are two things to be said about that, Justice Kennedy.

The first is that the statue doesn't say

"State taxation laws shall not apply on the outer continental shelf. "

it says

"State taxation laws shall not apply to the outer continental shelf. "

It seems to us that what Congress was getting at is that they didn't want the States to tax any activities that occurred on the outer continental shelf, and in any meaningful sense of the term, it seems to us, Congress meant to say that if profits were made on the outer continental... after all, let me answer it this way.

Congress knew that profits were going... at least hoped... profits were going to be made on the outer continental shelf.

That's how it attempted to encourage companies to go out and develop the outer continental shelf.

Now, it's crystal clear from the legislative history... and Iowa doesn't dispute this... that Congress sale, we do not want the States to grab any share of those profits, through a severance tax, through a sales tax, through an excise tax, through a property tax or even through an unapportioned income tax.

So the question really becomes why would Congress have meant to make an exception for apportioned income taxes, if the result of allowing the States to impose apportioned income taxes would be the same as allowing them to impose these other types of taxes, which is to make operations on the shelf less profitable, which they clearly do.

It's undisputed in this case, as the figures I referred to earlier suggest, that the more profit that a company makes on the outer continental shelf, the more State tax it has to pay.

Therefore, operations on the outer continental shelf are less profitable.

If they're less profitable because the States impose a severance tax, or an excise tax, or a sales tax, Congress said they can't do it.

The question remains, given the policies of the Act, which were to encourage development on the shelf, by in fact immunizing the income earned out there, and to maximize Federal revenues, why would Congress have meant to exclude this one type of taxation, apportioned income taxation, from the universe of taxes that they meant to prohibit the States from enforcing as to OCS revenues?

Now, Iowa never explains why.

It never explains why its theory is consistent with the categorical language of the statute, which says State taxation laws shall not apply to the outer continental shelf--

Unidentified Justice: Well, its theory, of course, is that it's only taxing income in the State.

That's its theory.

Mr. Geller: --That is its theory, Justice O'Connor.

And I think it's faulty for the reason that it relies heavily on Constitutional notions.

We're not suggesting that Iowa is taxing income on the shelf for purposes of some claim that they don't have nexus, or its's an extraterritorial type of taxation.

But it seems to us that Iowa's playing word games with the Court by saying it's not taxing income on the shelf.

It is unquestionably requiring all oil companies to include OCS profits in figuring out its State income tax.

When one considers what Congress intended to do in this statute, it's inconceivable--

Unidentified Justice: Well, as a reference point to determine what share belongs to Iowa, I guess.

Mr. Geller: --That's true.

Now, what apportioned income taxation does, in effect, is to treat all of the States as if they were a single taxing entity.

And what apportioned income taxation does is to require all of the income of a multi-State corporation to be amassed in one pie, and what apportionment essentially says is what slice, what, size slice of that pie is each State entitled to.

But the question here is the antecedent one of what is to go into the pie.

And we think what Congress clearly said is that this is an area of exclusive Federal concern.

It's of no concern to the States, the profits that are made out there.

None of that is to be included in the income pie that the States would then--

Unidentified Justice: Mr. Geller, I guess under your theory you're saying it doesn't get into the pie at all, but it would at least be involved in the sense that the sales of these petroleum products would go into computing both... the percentage figure, because those sales, when the stuff is ultimately sold, will be part of sales everywhere, wouldn't they?

Mr. Geller: --No, our position--

Unidentified Justice: I thought your view was the percentage wouldn't change, you just want to take it out of the pie.

Mr. Geller: --No, no, no.

I thought I said in answer to the Chief Justice's question that what we're primarily concerned about is not including that amount in the income base.

Unidentified Justice: I understand, income base.

Mr. Geller: For consistency, Justice Stevens, our position also is that any sales that occur on the shelf also have to be--

Unidentified Justice: Oh, on sales... I'm not talking about the sale on the shelf.

I understand that's a small part of it.

I understand the petroleum extracted on the shelf, and then sent around the country, and ultimately sold in Iowa and every place else in the United States... those sales would still be included in the calculation of the percentage?

Mr. Geller: --They would be included in the denominator.

Unidentified Justice: And you don't say the statutory language forecloses that?

Mr. Geller: Not at all.

And I think one of the ways in which Iowa has attempted to discredit our position is by grossly overstating it, to suggest that we are saying that even those sales must be excluded from the computations.

I think... we've never taken that position.

Unidentified Justice: I didn't take it as grossly overstating it.

I took it as carrying it to its logical conclusion.

If you say that the objective was to prevent the States from cutting in on the exclusive Federal power to derive funds from the shelf, surely they cut in when whatever gas and oil you get from the shelf can be taxed as soon as it's sold on the mainland.

Mr. Geller: I don't think so, Justice Scalia, for the following reason.

We have to look at what Congress meant to do in the statute.

This section 1331(a)(3) is quite clear as to the extent of the immunity that Congress meant to grant here.

And what they said is that the States are not to claim any interest in any revenues from the natural resources from the shelf.

Now, we think that means that when the profit is earned by extracting the oil and gas from the shelf, and income is earned, that is the amount that is excluded from the State tax computations.

Now, Congress did not say... and it wouldn't have been consistent with what it was trying to do here... that this oil and gas would be given an immunity as it went through life, if it was turned into some other product, like petroleum, and it was subject to some transaction in some State, and the transaction tax was generally imposed in that State, it would make no sense, given the purposes here, to carry the immunity that far.

Unidentified Justice: The point is, that you're not drawing the line simply on the basis of what the economic reality is.

Mr. Geller: We are drawing the line on the basis, we think, of what Congress meant to say, which is if you earn income on the outer continental shelf, from the extraction of oil and gas, that income is immunized from State taxation.

Now, any amount earned by the sale by some unrelated third party in Montana or Missouri--

Unidentified Justice: Or by you, in Montana or Missouri.

Mr. Geller: --Or by us.

Unidentified Justice: If you carted it yourself and sold it in Montana, you'd still pay a sales tax?

Mr. Geller: We would still pay... just like anyone else, Justice Scalia would pay a sales tax in that State for selling that product.

Unidentified Justice: And the economic reality of that is that it renders the gas and oil that you take off the shelf somewhat less valuable than it otherwise would be.

Mr. Geller: I would think it would be de minimus given what Congress was trying to... first of all there would be severe bookkeeping problems because it is impossible to trace oil which is fungible.

But what Congress had in mind is that the increment of income earned from the extraction of oil and gas on the shelf... which is easily determinable, and it all accrues on the shelf itself... is what is not to be included in the State income tax base.

All of that income is earned on an exclusively Federal enclave.

It's not a transaction tax such as you're referring to now, which the States generally can tax because it occurs within their jurisdiction and they generally tax transactions of that sort.

We're dealing with something quite different here.

Now, Iowa's position, as I believe Justice O'Connor referred to earlier, is to suggest that the statute only involves jurisdiction-based taxes.

Now, there are a number of problems, we think, with that position.

The first, of course, is that it render the statute largely superfluous and redundant.

After all, there would have been no reason to pass a statute to prevent the States from imposing jurisdiction-based taxes on the OCS.

This Court had held in a series of cases between 1947 and 1950 that the OCS was an area of exclusive Federal jurisdiction.

Therefore, the Due Process clause and the Commerce clause already prevented the States from imposing any jurisdiction-based taxes on the OCS.

So there really wouldn't have been any reason, if that had been Congress' intention, to pass a separate, two separate statutory provisions providing that the States could not impose jurisdiction based taxes on the OCS.

The second point that Iowa makes is, as I said earlier, a bit of a linguistic point.

They suggest that even if Section 1333(a)(2) means what it seems to say, which is that State taxation laws shall not apply to the outer continental shelf, that they are not really "applying" their State taxation laws to the outer continental shelf.

And for this, they rely, as I said earlier, on a series of decisions from this Court involving Constitutional or Due Process objections.

Now it's true that this Court has said in a number of cases that apportioned taxation generally doesn't violate the due process clause, because it's really meant only to measure in-State taxation.

There's no sort of extraterritorial taxation going on.

And we don't challenge Iowa's right to tax OCS revenues under the Constitution.

We think Congress meant something more than that when it passed the statute.

We think that Congress didn't have to be satisfied with the "rough approximations" that occur under the Due Process laws when apportioned State income taxation is attacked as violating rules against extraterritorial taxation.

Congress had something more in mind.

We believe it could require, and in our view it plainly did require, more precision than the Constitution requires.

It required that the States not include any OCS values in figuring out their State income taxes, just as, for example, Congress in passing Section 3124(a) of Title 31 prohibited the States from including any income earned from Federal securities in the income base subject to State taxation.

Unidentified Justice: Mr. Geller, does the Federal Government have oil leases on property that it owns, other than the OCS lands?

Mr. Geller: I don't believe so.

Unidentified Justice: No Government public lands are subject to oil leases?

Mr. Geller: Well, of course the OCS is Government public lands.

Unidentified Justice: I know.

No other Government public lands?

Mr. Geller: I don't know of any others, Mr. Chief Justice.

Now, as I said, there is to be this area of Federally protected income from the States.

Iowa concedes it can't pass a severance tax, or a property tax, or an excise tax, or an unapportioned income tax, but it claims, though, that it can apply an apportioned income tax to OCS income, even though it has the same practical effect at making OCS operations--

Unidentified Justice: Well, come to think of it, what about EIR Hills and Teapot Dome and some of those?

Mr. Geller: --Those are lands within the United States, and they're subject to a whole different series of statues, Mr. Chief Justice, such as the Mineral Leasing Act.

Unidentified Justice: But in any of those, is there a prohibition against... that could be interpreted as prohibiting the use of such... profits from those such as Iowa makes here?

Mr. Geller: No, Congress followed a totally different scheme in those Federal area, Mr. Chief Justice, because those are areas within the States, and in many cases, the States had a legitimate claim to what went on in those areas.

Some of those areas had been ceded to the Federal Government.

Congress... if one reads the legislative history of the OCSLA, it's quite clear that Congress wanted to take a totally different approach with the OCS, because it was an area that had never been part of the States.

It was an exclusively Federal enclave.

And therefore, what Congress wanted to say is that the State... it is irrelevant to State tax laws what happens out here.

Money is going to be made out here, we want to immunize that from State taxation in order to encourage development on the shelf, and in order to maximize Federal revenues.

Now, Iowa never explains how its theory of State taxation laws shall not apply to the outer continental shelf is in any way consistent with those purposes.

Iowa concedes that if money is made on the shelf, that company's State tax income, State income tax liability goes up and therefore makes OCS operations less profitable.

Iowa concedes that it can't make OCS operations less profitable by imposing any other sort of tax out there.

But it never explains why it is consistent with the policies of the OCSLA to make OCS operations less profitable by imposing an apportioned income tax.

It really can't be seriously suggested here that Iowa hasn't required Shell to include its OCS income in figuring out its Iowa income tax liability.

Iowa concedes that it requires Shell to include its OCS profits in its Iowa income base, and the undisputed figures that I referred to earlier show that Shell has to pay more in Iowa income taxes simply because it's making a profit on the shelf.

And we think the conclusion is therefore inescapable that in any meaningful sense of the statutory terms, Iowa has applied its income tax laws to the OCS.

Iowa doesn't dispute that the more income Shell makes on the OCS, it has to include the income in its Iowa calculations for figuring out its Iowa income tax, and as a result it has to pay more, ultimately, in Iowa income tax.

It's inconceivable that would not be within Congress' contemplation when it said that State taxation laws shall not apply to the outer continental shelf.

We therefore believe that the Court should reverse the judgement of the Iowa Supreme Court,--

If there are no further questions, I'd like to reserve the balance of my time.

Chief Justice William H. Rehnquist: Thank you, Mr. Geller.

We'll hear now from you, Mr. Griger.

ORAL ARGUMENT OF HARRY M. GRIGER ON BEHALF OF THE APPELLEE

Mr. Griger: Mr. Chief Justice, and may it please the Court, my argument discusses three points as to why Iowa's apportioned tax is not in conflict with the Cuter Continental Shelf Lands Act.

First, absent extraterritorial taxation that violates the Fourteenth Amendment's Due Process clause, or the Commerce clause, State unitary apportioned taxation is not the exercise of State political jurisdiction outside the taxing State, but only inside.

Second, 43 U.S.C. Section 1331(a) which is found on pages 94(a) to 95(a) of the appendix to the jurisdictional statement precludes State political jurisdiction in the outer continental shelf by a taxing State, but not inside the taxing State.

And third, the 1978 Outer Continental Shelf Amendments are inapplicable to this case.

With respect to my first point, the unitary business formal apportionment method is a method for division of multi-state unitary income within and without the State.

It is designed to tax that income which is reasonably attributable to the taxing State as a result of the taxpayers' activities that occur there.

Unlike separate accounting, it recognizes that there are unquantifiable factors of profitability which arise from the unitary business as a whole, rather than from merely any particular segment, and that these factors of profitability contribute as a whole to the earnings of the entire unitary income.

Its design is to value the income-producing activities in the taxing State, not outside.

My second point is with respect to section 1333, subparagraph (a), which obviously is a key statute in this case.

We contend that the statute precludes State political jurisdiction over the shelf, but not off the shelf.

Section 1333(a), subparagraph (1) provides for exclusive Federal jurisdiction on the outer continental shelf, but such language does not preclude reasonable apportionment income attribution to the taxing State.

The second subsection, which is subsection (a), sub (2), sub (A), provides that applicable and not inconsistent adjacent State law is adopted as surrogate Federal law.

Within the context of that paragraph that says that, the last sentence states that State taxation laws shall not apply to the outer continental shelf.

Now, one who reads that for the first time could understandably get the impression that that simply means that adjacent State tax laws shall not be adopted as surrogate Federal law.

However, one could also read the language to confirm that there is no State political jurisdiction to be exercised in the outer continental shelf.

The language does not preclude a State from exercising its taxing jurisdiction off the shelf, which has occurred in this case.

The legislative history with respect to this taxation language denotes that there was a battle in the Congress between proponents, primarily from Louisiana and from Texas who wanted to extend their territorial jurisdiction to the outer continental shelf to impose primarily their severance taxes there, and opponents of State taxation who resisted such extension as unconstitutional extraterritorial taxation.

Senator Cordon in explaining the conference bill to the Senate, stated that the language [inaudible] State taxation laws do not apply to the outer continental shelf really added nothing to the bill.

It was already covered in other provisions of the statute with respect to absence of State political jurisdiction on the outer continental shelf.

Indeed, this Court in the Gulf Offshore case stated with respect to the third subsection here, section 1333(a)(3), that provides that nothing in the prior subsection, which provides for adoption of adjacent State law as Federal law, can be used by a State to exercise jurisdiction over the outer continental shelf of itself precluded any State taxation laws from being extended to the outer continental shelf.

Therefore, the language

"State taxation laws shall not apply to the outer continental shelf. "

really added nothing to the bill, but according to Senator Cordon, was insisted by the House conferees out of a superabundance of caution.

And my third point is that the 1978 Cuter Continental Shelf Act Amendments are simply inapplicable to the issue in this case.

Unidentified Justice: Excuse me, before you go on to the next point, isn't there a better explanation than it's just a superabundance of caution, to say it twice?

That phrase

"State taxation laws shall not apply to the outer continental shelf. "

comes at the end of a paragraph that specifies at the beginning that the civil and criminal laws of each adjacent State now in effect or hereafter adopted are declared to be the law of the United States for that portion.

So it follows, one could argue, on the basis of that, that all laws are either civil or criminal, and therefore the tax laws apply there.

And it comes at the end of that paragraph, and it says

"State taxation laws shall not apply. "

Mr. Griger: That is certainly one interpretation.

Unidentified Justice: I wouldn't consider that particularly redundant.

I would consider it eliminating what might otherwise be an implication of (2)(a) that State taxation laws of the adjacent States could apply.

Mr. Griger: That's certainly an interpretation.

The language comes from a house amendment to the House bill by Representative Keating.

And he wanted to confirm that the States will not extend their territorial jurisdiction through taxation to the outer continental shelf, and therefore he wanted that language in the Act.

And they chose to place it in that particular paragraph.

Unidentified Justice: Suppose the State didn't use an apportionment formula, but they just arrived at the income earned in the State by just counting up the actual sales of oil and gas in Iowa, and figuring out what the income was from those sales.

And obviously, they would include in that calculation oil and gas that originated on the outer continental shelf that was sold in, say, Iowa.

Would that be legal?

Where they expressly include OCS gas in figuring their, directly in figuring their income?

Mr. Griger: I'm not sure I understand the question.

Do you mean if we had a separate accounting computation of income in Iowa without regard to apportionment, attributing income?

Unidentified Justice: Exactly.

Mr. Griger: No, because we would be taxing too much.

We would probably be arrogating income from outside the State without apportionment.

Unidentified Justice: Well, that's one reason why it wouldn't be good, but how about the statute?

Would it violate the statute to do it that way?

Mr. Griger: We would be extraterritorially applying our tax laws--

Unidentified Justice: You're just taxing sales made in Iowa.

Mr. Griger: --Sorry, Your Honor.

If we just would tax sales made in... I misunderstood your original question.

If we just imposed a tax on sales made in Iowa, there is no problem, in my opinion, with violating the Cuter Continental Shelf Act.

Unidentified Justice: Even though everybody agrees that a large portion of the sales made in Iowa involved sales of outer continental shelf oil or [inaudible]?

Mr. Griger: No, I don't see the problem.

We could impose a property tax, for example, on the storage of outer continental shelf oil or gas stored in the State.

We could impose a sales tax or some sort of occupation tax on that particular oil and gas sold.

The key is don't discriminate against it.

As long as we have a non-discriminatory tax, our [inaudible] is not on the outer continental shelf, it's in the State of Iowa.

Unidentified Justice: If that's the case, you would think that a state voir would be right in this case.

Mr. Griger: I agree, your Honor.

As a matter of fact, Mr. Geller has conceded, in page 6 of his reply brief, that Iowa could impose such a property tax in Iowa, impose that on outer continental shelf oil and gas.

The concepts are no different, because the problem is, you have a unitary business.

And because it's a unitary business, formula apportionment is generally an acceptable way of attributing the income within the State, recognizing that activities from the entire business contribute to the earning of income.

But what we are trying to do is simply attribute income in reasonable proportions to Shell's activities in Iowa, and as Mr. Geller has stated, they don't contend that we've done otherwise.

My third point is with respect to the 1978 OCS amendments.

Those amendments were designed to procure a fair return to the Federal Government while at the same time be fair to oil producers in increasing funds for exploration.

Now, the problem that these amendments were dealing with was the cash bonus, fixed royalty method of leasing in the outer continental shelf by the Federal Government with huge front-end payments.

These payments were so large that they literally kept down competition in the shelf for lease bidding.

Only a few of the major oil companies could afford the bids, and indeed, the legislative history shows at the Senate hearings they complained... even some of the majors complained, such as Humble, Standard Oil... complained that the amounts that they had to pay in terms of the front-end costs were very high.

It also led to low bids.

There was an example in the legislative history where one company bid $144,000 for a tract that had a potential value of $20 million,--

Finally, it kept small producers off the shelf entirely, because they couldn't afford the huge, front-end bids.

The Congressional response to that was to amend section 1337 to provide for alternative bidding, which is discussed by this Court in the watt case.

Now note that State taxes were never mentioned.

They're not mentioned in the statute, the 1978 amendments, they're not mentioned in the legislative history, and OCS producers at this time had been paying apportioned State taxes.

In fact, Shell had, as denoted on page 47 of the Joint Appendix.

Therefore, in conclusion, Shell's challenge to the makeup of the unitary net income base subject to apportionment as in conflict with the Cuter Continental Shelf Lands Act should be rejected, and the decision of the Iowa Supreme Court should be affirmed.

Chief Justice William H. Rehnquist: Thank you, Mr. Griger.

We'll hear now from you, Mr. Wallace.

ORAL ARGUMENT BY LAWRENCE G. WALLACE AMICUS CURIAE IN SUPPORT OF APPELLEE

Mr. Wallace: Thank you, Mr. Chief Justice, and may it please the Court, our position in this case is uncomplicated.

In our view, the fundamental and dispositive flaw in Petitioner's claim is that it is based and was based in the State courts solely on a Federal statute that does not address, and was not intended to address, the subject matter of Petitioner's claim.

Certainly none of the statutory language on which Petitioner relies in terms speaks to the question of apportionment methods in the State taxation of the in-state income of a unitary business.

We may assume, for purposes of this case, that the language that Congress enacted would suffice, and this is questionable, but we may assume it would suffice, to have some effect on that subject.

If the legislative history clearly showed that that was what Congress intended... but the conspicuous thins about the legislative history, for our purposes, is that no one discussed or even adverted to the question of apportionment methods in determining the amount of a unitary business' income that is properly attributable to its in-state activities for State income taxation.

Unidentified Justice: Well, Mr. Wallace, I guess if the language is clear on its face, we don't get to the legislative history.

Mr. Wallace: If the language were clear on its face in support of Petitioner's claim, that is correct.

But the language does not, in our view, refer in any way in terms to the question of apportioning the income of the unitary business, for purposes of determining the amount attributable to its in-state activities.

And that subject, having been omitted from the legislative history, it is a subject that the Court is familiar with.

Unidentified Justice: Well, but it used broad language,

"State taxation laws shall not apply. "

Mr. Wallace: Yes, but this Court's decisions dealing with the subject of unitary taxation are all premised on the notion that the taxes are not being applied extraterritorially, to something outside the States's borders.

It is just a method of more accurately determining how much of a unitary business' income is properly attributable to its in-state activities, because of what the Court has called the theoretical weaknesses of separate geographical accounting in trying to apportion the income of a unitary business, where it would be subject to imprecisions and manipulation... these are words that the Court has used... were it not considered as a unit and apportioned according to the common apportioned formula methods.

Now, that is a subject that has occupied tens of pages in the United States Courts.

It's a subject of some complexity, and no one discussed it in the course of the legislative history of this statute.

Instead, the entire controversy in the evolution and enactment of the provisions of the Outer Continental Shelf Lands Act, that are at Issue here, concern the question of the proper relation between Federal law and the law of the immediately adjacent State in territorial governance of the outer continental shelf, a question to which Congress turned in the wake of this Court's decisions, holding that that was Federal, rather than State, territory.

And with respect to the particular subject of income taxation, the controversy before Congress never extended beyond the question whether the adjacent State should be allowed to tax income from activities on the outer continental shelf as if those activities had occurred within the State itself.

That is not what Iowa has done, and is not the question here.

And, I specifically include the one snippet of the legislative history that Shell particularly relies on... Senator Long's statement on the Floor... and I'm perfectly willing to look at it as quoted in the Appellant's blue brief, on the merits, page 31, at the bottom of the page of text.

Senator Long... this is the fourth line from the bottom of that page... Senator Long recognized that OCS lessees would be

"subject neither to the State severance tax, property tax, nor the tax on corporate profits. "

For all that appears, all he was referring to were three categories of tax that proponents of alternative bills wanted the adjacent State to be able to apply directly to the outer continental shelf, as if that were part of their territory, as many States had treated it prior to this Court's decisions holding it to be Federal territory.

That was what the controversy was about... whether they should be allowed to exercise taxing jurisdiction over this territory by grant of that authority by Congress, whether the effect on the State power to tax that followed from this Court's decisions would be overruled by legislation.

That was the controversy.

It had nothing to do with the issue.

Unidentified Justice: Mr. Wallace?

Mr. Wallace, it is true, is it not, that the Iowa tax, being enforced or imposed in this case, is a tax on Shell's corporate profits?

Mr. Wallace: That is correct.

But in context, there's nothing to indicate that Senator Long was talking about anything other than a tax being imposed by the adjacent State, either a severance tax, a property tax, or an income tax, on the activities on the shelf, as if those were still to be considered part of the State's territory, subject to the State's jurisdiction.

So, our conclusion is that the Iowa Supreme Court correctly held that the Federal statute does not address the apportionment issue that was before that court, and that that issue therefore continues to be governed only by this Court's decisions under the Due Process and Commerce clauses, and by State law.

And I might say, about State law, that many of the States, including Iowa and Florida, whose case is being held for this one, in applying their apportionment formulas start, in basing the total income subject to the formula, with Federal taxable income.

And that, we know from the Internal Revenue Service, includes income derived from all portions of United States territory, including Federal enclaves within the States.

If oil is produced on an Indian reservation or a Federal petroleum reserve, all of that would normally be included in the apportionment formula, and income derived from operations on the outer continental shelf would ordinarily be included.

So, this statute, in our view, does not address that question, and since no Constitutional claim has been raised, the judgement of the Supreme Court of Iowa should be affirmed.

Chief Justice William H. Rehnquist: Thank you, Mr. Wallace.

Mr. Geller, you have two minutes remaining.

REBUTTAL ARGUMENT BY KENNETH S. GELLER

Mr. Geller: Just a few things, Mr. Chief Justice.

First, I'd like to address the statement that Justice Scalia made earlier about the possible interpretation of the phrase

"State taxation laws shall not apply to the outer continental shelf. "

Justice Scalia suggested that maybe that was simply meant to exclude State tax laws from the State laws that were being adopted as Federal law, as I understand it.

But I think that that makes absolutely no sense, when you look at the legislative debates.

The whole purpose of the debates was over whether the States would be able to share in any OCS revenues.

That's crystal clear, that this was intended to be a restriction on the States.

But if State tax laws had been adopted as Federal law, under the first part of Section 1333(a)(2), then the revenues from those State taxes would have gone to the Federal Government, not to the States, and those State taxes would have been administered by the Federal Government, not by the States.

So therefore, I think that reading of the State tax prohibition would make it a restriction on the powers of the Federal Government, not on the powers of the States, which makes very little sense.

Congress must have had something more in mind than not adopting State tax laws as Federal law, I believe, when it passed the State tax prohibition in section 1333(a)(2).

Now, I didn't hear anything in Iowa's statements here today, or either from the Solicitor General, explaining why it would make any sense, given the policies and purposes of the Act, to allow the States to diminish OCS profits through this one form of State taxation.

They have some arguments about there being nothing on the face of the statute about apportionment methods.

Of course there's nothing on the face of the statute that talks about property taxes or severance taxes either.

As Justice O'Connor said, Congress spoke quite categorically.

It said State taxation laws as a group.

Unidentified Justice: Do you think a gross receipts tax in Iowa on all sales, including sales of petroleum and including petroleum from the OCS, would be valid under the--

Mr. Geller: Yes.

We have said... I think I said earlier in response to Justice Scalia's question, transaction-based taxes of this sort, that are imposed well after any profits are earned on the OCS, are not within the intent of Congress in passing this immunity.

We don't suggest the statute goes that far.

Thank you.

Chief Justice William H. Rehnquist: Thank you, Mr. Geller.

The case is submitted.

Print this transcript Transcript: 

Argument of Speaker

Mr. Speaker: The opinion of the Court in No. 87-984, Shell Oil Company versus Iowa Department of Revenue will be announced by Justice Marshall.

Argument of Justice Marshall

Mr. Marshall: This is an appeal from the Supreme Court of Iowa.

In an opinion filed with the Clerk today, we hold that the Outer Continental Shelf Lands Act does not preclude Iowa or any other states from including Outer Continental Shelf derived income in the unitary tax rate of an otherwise constitutionally permissible apportionment formula.

The Supreme Court of Iowa is hereby affirmed.