Harris County, represented by firm attorney Benny Agosto, Jr. received an important win from a Houston appellate court in a property tax case involving a Houston oil refinery. In a 2-1 decision handed down last Thursday, the First Court of Appeals in Harris County v. Harris County Appraisal District reversed the trial court’s ruling and rendered judgment that inventory held in a refinery operated by Pasadena Refining System, Inc. was not exempt from local property taxes under the federal Foreign Trade Zones Act. The exemption was claimed on crude oil, refined products, and other inventory valued at over $100 million during the relevant tax years, representing millions in tax revenue for Harris County and the other taxing jurisdictions.
Pasadena Refining System, Inc., or PRSI, is a subsidiary of Brazilian state-owned oil giant Petrobras. PRSI was formed through a merger as part Petrobras’s purchase of an oil refinery in Pasadena, Texas from Belgian energy group Astra Transcor, which itself purchased the refinery from longtime owner Crown Central Petroleum. The refinery is among the oldest on the Houston Shipping Channel. Allegations of corruption surrounding Petrobras’s purchase of the refinery ultimately led to the impeachment and removal of Brazil’s president, Dilma Rousseff, in 2016.
At the center of the case is Foreign Trade Subzone 84N, which was created around the then-Crown Central refinery in the mid-1990s. Foreign Trade Zones and Subzones are created under the federal Foreign Trade Zones Act of 1934, and goods in such zones are treated as outside the customs jurisdiction of the United States for some purposes, subject to Customs and Border Patrol and Foreign Trade Zones Board regulations. Under an early-1980s amendment, goods held in a Foreign Trade Zone for some purposes are exempt from state and local ad valorem taxes.
Customs and Foreign Trade Zones Board regulations require that a zone or subzone be activated in order for the operator to enjoy the benefits of the zone, including the ad valorem tax exemption. After Petrobras’s purchase of the refinery and the merger that created PRSI, Customs issued a letter ruling in 2009 holding that PRSI was a new operator of Subzone 84N and was required obtain approval of a new activation of the Subzone under applicable regulations, and that PRSI was therefore not an authorized operator of the Subzone. PRSI contested the ruling, but Customs issued another letter ruling in 2013 affirming its earlier ruling.
Despite this, PRSI Trading, LLC, PRSI’s sister company and the owner of the inventory at the refinery, continued to claim and receive property tax exemptions under the Foreign Trade Zones Act through 2013. Harris County, represented by Mr. Agosto, challenged the exemptions before the Harris County Appraisal District’s Appraisal Review Board, and then appealed to a district court in Harris County. After the district court affirmed the Board’s ruling, Harris County appealed to the First Court of Appeals.
In a majority decision written by Justice Russell Lloyd, the First Court of Appeals held that because the Subzone lacked an authorized operator and had not been activated, PRSI Trading’s inventory could not be properly admitted to the Subzone under federal regulations. The Court held that it was required to give effect to Customs’ letter rulings under the doctrine of collateral estoppel. Because PRSI Trading’s inventory could not be properly admitted to the zone, PRSI Trading could not establish that it was entitled to the tax exemption.