Could California tax a unitary business's floating drilling-barge operations on the federal outer Continental Shelf, and where did the related apportionment factors go?
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This page answers the general question as of 1976. Ask about yours and see what current California tax law says, with citations.
Plain-English summary
California Legal Ruling 396 concluded that the Outer Continental Shelf Lands Act prohibited California from taxing floating drilling-barge operations conducted on the outer Continental Shelf.
The apportionment factors associated with those offshore activities were placed only in the denominator of the apportionment formula.
The ruling reversed part of FTB's legal analysis in Legal Ruling 366 but said the actual computation of the tax measure remained the same. It revoked only the portion of Legal Ruling 366 inconsistent with the new holding.
Why FTB changed its analysis
Legal Ruling 366 had treated floating drilling barges as vessels outside the statutory phrase "artificial islands and fixed structures." That view relied on federal injury and wrongful-death cases applying the Jones Act.
Legal Ruling 396 reconsidered the issue for state income-tax purposes. FTB focused on the Outer Continental Shelf Lands Act's extension of federal law and jurisdiction to offshore resource activity and its statement that state taxation laws did not apply to the outer Continental Shelf.
FTB reasoned that exploration for offshore resources was expressly covered and ordinarily required drilling barges. If completed wells and supporting structures were exempt, the agency concluded that the drilling activity used to discover the oil also should be exempt.
Apportionment treatment
The ruling did not remove the offshore-operation factors from the formula entirely. It said factors associated with the exempt drilling-barge activity would appear only in the denominator.
That treatment preserved the computation used in Legal Ruling 366 even though the legal basis changed from the earlier vessel analysis to the federal state-tax prohibition.
Effect on the earlier ruling
FTB stated that Legal Ruling 396 was issued to put the result on a sounder legal foundation.
It revoked the portion of Legal Ruling 366 inconsistent with the conclusion that outer-Continental-Shelf drilling-barge operations were exempt from state taxation. It did not say the prior numerical computation changed.
What this means for you
Offshore energy companies
Under the historical ruling, location and federal offshore jurisdiction determined whether drilling-barge operations could enter the California tax base.
Multistate unitary businesses
Exempt activity could still affect the denominator of the apportionment formula. The ruling distinguished exemption from complete factor exclusion.
Accountants and tax professionals
Confirm the exact offshore location, activity, federal jurisdiction, current preemption rule, and current California factor treatment. Do not assume the 1976 denominator-only method remains unchanged.
Common questions
Q: Did FTB treat floating drilling barges as taxable vessels?
A: No for this state-income-tax issue. The ruling concluded their outer-Continental-Shelf operations were covered by the federal tax prohibition.
Q: Were the offshore factors removed from the formula?
A: No. They were included only in the denominator.
Q: Did the ruling change the actual tax computation from Legal Ruling 366?
A: No. FTB said it changed the legal analysis, not the computation.
Q: What part of Legal Ruling 366 was revoked?
A: Only the portion inconsistent with the new holding that drilling-barge operations on the outer Continental Shelf were exempt from state taxation.
Q: Does this establish current offshore tax treatment?
A: No. It is a 1976 interpretation requiring review against current federal and California law.
Citations and references
- Outer Continental Shelf Lands Act, 43 U.S.C. §§ 1331 et seq.
- 43 U.S.C. § 1333
- Former Jones Act citation, 46 U.S.C. § 688
- Legal Ruling 366 (modified in part)
The official HTML prints the case reporter as 266 Fed.2d 769, which did not parse in the citation check, and the index subject refers to Legal Memorandum 604 while the ruling body says it modifies Legal Ruling 366. The body is authoritative for this page, and the original source is preserved verbatim below.
Source
- Landing page: California FTB Legal Rulings
- Official HTML: Legal Ruling 396
Original ruling text
Home
Legal ruling 396
STATE OF CALIFORNIA
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.
Last updated: 09/24/2025
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