Sep 19, 2016
From KPMG TaxWatch
The Texas Comptroller recently issued a private letter ruling addressing how receipts from sales of “liquefied natural gas” (LNG) should be sourced under Texas’ rules for sourcing sales of tangible personal property. The taxpayer at issue liquefied the natural gas at its Texas facility, then loaded the gas onto vessels for export. The purchasers of the LNG did not own the vessels, but chartered the vessels under so-called time charter agreements. Under these agreements, the vessel’s owner furnished a crew and operated the vessel, but the charterer (here the taxpayer’s customer) designated the ports of call and the cargo to be carried. The taxpayer requested guidance on whether its customers took delivery of the LNG when it was loaded onto a chartered vessel docked in a Texas port.
Under Texas law, receipts from sales of tangible personal property are apportioned to Texas if the purchaser takes delivery of the property in Texas–even if the property is subsequently transported outside of the state. A Texas regulation further provides that tangible personal property loaded onto a vessel or tanker that the purchaser of the property leases and controls, or owns, is sourced to Texas if the vessel is docked in Texas. Thus, the issue was whether the taxpayer’s customers were in control of the vessels chartered under the so-called time charter agreements. The taxpayer suggested that the appropriate standard to apply was “operational control,” which narrowly considers which party is operating the vessel and is responsible for ensuring that it is operated safely and in compliance with Maritime law. In the instant case, operational control would remain with the vessel’s owners and the taxpayer’s customers would not be deemed to be in control. The Comptroller, relying on a federal case addressing whether a time-charter agreement should be treated as a lease or service agreement under the Internal Revenue Code, rejected this approach. The charter agreements in the federal case were very similar to the ones entered into by the taxpayer’s customers and indicated that the charterer maintained control over every aspect of the use of the vessel. The Comptroller concluded that the control over the use of the vessel was more important than the operational control exercised by the crew. Thus, when the LNG was loaded onto a vessel in a Texas port and the vessel was chartered by the LNG purchaser under a time-charter-agreement with industry-standard terms, the LNG was considered delivered in Texas and the receipts were included in the Texas sales factor numerator. Please contact Doug Maziur at 713-319- 3866 with questions on this private letter ruling.
Please note that since the date this TWIST was published, the ruling has been removed from the state’s website and the Comptroller’s office has indicated it was prematurely published.
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The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.