Texas High Court to Hear Challenge of Property Tax Assessments on FTZ Merchandise

The Texas Supreme Court will take up a case involving the assessment of property taxes on merchandise stored in a foreign-trade zone that CBP had temporarily approved an oil refiner to operate, it said on Aug. 30. PRSI Trading says Harris County, location of Houston and also Foreign-Trade Zone 84, improperly found its subzone was not activated and is set to improperly assess $9 million in property taxes, despite dozens of temporary monthly approvals from CBP.

According to court documents, PRSI initially began to operate the refinery at subzone 84-N in 2005, but was merged into its Connecticut-based parent a year later. Faced with a lack of clarity over whether the new entity, PRSI (CT), was authorized to operate the zone, it requested a ruling from CBP. The agency ruled in 2009 that PRSI (CT) was a new operator that needed CBP’s re-approval to operate. PRSI (CT) sought reconsideration of the ruling, but CBP reached the same decision in 2013.

In the meantime, PRSI (CT) continued to import crude oil into subzone 84-N, with CBP each month sending a letter giving the company temporary approval to operate. During the ruling process, CBP never sought to suspend or deactivate subzone 84-N, and never said it was deactivated. Rather, the agency allowed PRSI to continue to import into the subzone, PRSI (CT) said in its petition for the Texas high court’s review. Only in 2013, after CBP issued its final ruling and the Port of Houston requested deactivation, did the agency deactivate the zone.

Under CBP’s FTZ regulations, imported merchandise held in an FTZ, or domestic merchandise held in an FTZ for exportation, “shall be exempt from state and local ad valorem taxation.” That property tax exemption applies when FTZs are activated. Yet after CBP issued its final ruling on PRSI (CT)’s approval to operate the zone, Harris County assessed two years of back property taxes for the period 2011-13. A lower court ruled against the assessment, but a Texas court of appeals overturned the lower court and found in favor of Harris County.

PRSI (CT) says the temporary monthly approvals from CBP meant the zone was activated, and its goods should have qualified for the property tax exemption. “Customs told PRSI (CT) fifty-three times in writing that it could operate the zone, which means Customs treated the zone as activated. Over a seven-year period, Customs never refused to admit [PRSI (CT)'s] inventory into 84-N, which means Customs treated it as activated. Customs did not approve deactivation of 84-N until August 2013 and never said it was deactivated before that date, which means Customs treated 84-N as activated until that date,” it said.

In its reply brief, Harris County says it correctly applied the ruling letters CBP issued in 2009 and 2013 finding the merged PRSI (CT) was not an approved operator. “The court of appeals did not disregard any rulings or actions by any federal agency. On the contrary, it cited, quoted, and applied two letter rulings issued by CBP, both of which held that Pasadena Refining CT was a 'new operator,' that it had no approval to operate the Subzone, and that it was required to obtain a new 'activation,'” the county said in its reply brief.

And the temporary extension letters did not mean the zone was activated, Harris County said. “The letters say nothing about whether the zone was 'activated' or whether [PRSI (CT)] was entitled to a tax exemption.”

(PRSI Trading, LLC v. Harris County, Texas Supreme Court 18-0664)