Texas Supreme Court to Hear Tax Free Zone Case

The Texas Supreme Court agreed to hear a challenge to a 2017 lower court ruling that caused a crude oil importer to lose its local property tax exemption. A lower Texas appeals court ruled 2-1 in favor of Harris County and against PRSI Trading LLC. Harris county argued that the corporate restructuring of a subzone operator disqualified PRSI Trading from the subzone’s tax exemptions.

PRSI Trading argues that when Pasadena Refining System Inc. – (Connecticut) began operating their petrochemical facility after a merger, it was automatically entitled to the same foreign trade subzone status held as its predecessor. Due to the ruling in favor of Houston County, PRSI Trading lost its local property tax exemptions between 2011 and 2013.

Regulated by US Customs and Border Protection (CBP), Foreign-Trade Zones (FTZ) are the US equivalent of international free-trade zones. Certain merchandise stored in FTZ are exempt from state and local ad valorem taxes because the foreign-trade zone is considered to be outside the United States. However, entities must apply for approval from the CBP and local authorities. Upon approval, the subzone is activated, and the operator qualifies for special tax benefits.

PRSI Trading argues that because the merger was between the subzone’s former operator and its parent, the subzone remained activated after the reorganization. In addition, the CBP sent PRSI (CT) extension letters authorizing it to operate the subzone. Hence, PRSI (CT) continued operating the subzone under the reasonable belief that it had temporary authorization from the CBP. Since the subzone was activated, PRSI Trading was entitled to the property tax exemptions.

Harris County argues that CBP no longer considered the subzone as activated because the original operator no longer existed. After the restructuring, the new entity did not apply for new activation approval as required. The county also contends that PRSI Trading mischaracterized the CBP’s ruling letters as advice letters.

The Texas Supreme Court scheduled oral arguments for Dec. 5, 2019 for the initial hearing.