IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
SUPERIOR ENERGY SERVICES, LLC, No. 88267-8-I
Respondent, DIVISION ONE
v. UNPUBLISHED OPINION
STATE OF WASHINGTON, DEPARTMENT OF REVENUE,
Appellant.
BIRK, J. — Superior Energy Services LLC seeks review of a Board of Tax
Appeals (Board) decision that it owed use tax or deferred sales tax, penalties, and
interest for goods and services it used in constructing an oil containment system.
Superior contracted with Shell Offshore Inc. to design, manufacture, and operate
an Arctic Containment System (containment system), and to modify and operate a
surface support vessel for Shell’s Arctic drilling program. Superior argues its use
of goods and services are tax exempt for either of two reasons: (1) the use was
pursuant to a lease for a new article of tangible personal property, or (2) the use
was to modify the vessel which was a watercraft primarily used for transport of
property or people in interstate commerce. Because Superior provided operators
for the containment system, and because the vessel was not used primarily to
transport property or people in interstate commerce, Superior does not qualify for No. 88267-8-I/2
either use tax exemption. We affirm the Board’s decision and reverse the superior
court’s decision.
I
In 2010, while the Deepwater Horizon oil spill was ongoing, Shell was
exploring options to drill for oil in the Arctic Ocean in the Beaufort and Chukchi
seas. As a precondition to drilling in the Arctic, federal regulators required that
Shell have a containment system in place for an oil well blowout.1 In December
2011, Shell contracted with Superior, an oil and gas service business, to create
the containment system. The containment system would include a floating barge,
high pressured hoses, and a containment dome, and would serve as a “last line of
defense” to a “serious loss of well control incident.”
Under the contract, Superior would “manage, design, fabricate, procure,
assemble, test, demonstrate, maintain, and operate an arctic subsea spill
containment system” that would “[meet] the design and performance requirements
specified.” Superior’s scope of work included among other things “[r]ecruiting and
training operations staff,” “[m]aintaining the system ready for response in the
Beaufort or Chukchi Sea during the drilling season,” and “[o]perating the system
should it be required in an emergency.” Superior’s scope further included, “[i]n the
event of a subsea well incident,” that it “call up” its personnel, “move to the wellsite,
and deploy equipment under the direction of” Shell. As part of the “[o]perational
[r]eadiness” requirements, the contract contemplated that operations staff would
1 Unchallenged findings of fact made by the Board are accepted as true on
appeal. Stuewe v. Dep’t of Revenue, 98 Wn. App. 947, 950, 991 P.2d 634 (2000) (citing Tapper v. Emp’t Sec. Dep’t, 122 Wn.2d 397, 407, 858 P.2d 494 (1993)).
2 No. 88267-8-I/3
be “involved during the design, procurement, and construction and commissioning”
of the system.
Superior and Shell agreed that Superior would lease the flat decked ice-
class barge Arctic Challenger (the vessel) to serve as the base for the containment
system. Superior entered into a lease under which it had “full custody” and
“complete control in every respect” over the vessel, including sole responsibility for
navigation, operation, supply, refuel, and repair. Superior took possession of the
vessel in early 2012, moved it from Oregon to Bellingham, Washington, in April
2012, and then, along with its subcontractors, began work on the containment
system. Shell spent over $89 million to modify and outfit the vessel.
The containment system was designed to capture oil and gas from a well
blowout by placing a dome over the sea floor and then using hoses to transfer the
oil and gas to the surface. Superior conducted three deployment tests of the
containment system in 2012-13. The first test was unsuccessful, but the
subsequent tests were successful. Shell accepted the containment system in April
2013, which began a five year lease between Superior and Shell. Shell paid over
$86 million for construction and outfitting of the containment system.
Shell did not drill in 2013 or 2014. In 2013-14, Shell paid Superior over $64
million in “non-drilling rate” fees. As part of its preparation, Superior had the vessel
inspected and certified by the United States Coast Guard. The Coast Guard
labeled the vessel as an “Industrial Vessel.” Shell decided to drill in the Arctic in
2015. Superior prepared the containment system and vessel for the drilling
season.
3 No. 88267-8-I/4
A Superior contractor towed the vessel from Bellingham to Dutch Harbor,
Alaska, and then to Kotzebue, Alaska. Under Shell’s drilling permit, the
containment system needed to be on standby near its drilling activities. While it
was moored at Kotzebue, no one lived on the vessel, but Superior employees and
contractors visited it daily to ensure that the containment system was functioning
properly. Superior also maintained a crew of employees and contractors who were
ready to fly to Alaska to operate the containment system in the event of an oil well
blowout. In 2015, no such blowout occurred.
Shell paid Superior more than $32 million in standby and maintenance fees
during the 2015 drilling season. After the 2015 drilling season concluded, the
vessel and containment system were towed to Vancouver, British Columbia,
Canada. After the vessel arrived in Vancouver, Shell announced that it was
abandoning its Arctic drilling program. Shell terminated its contract with Superior
and paid a demobilization fee of $2,875,000.00 and a contract termination fee of
almost $25 million. Rather than restore the vessel to its original state under the
terms of its lease, Superior bought the vessel from its lessor for $5,500,000.00 and
then sold it to an unrelated third party for $1,250,000.00.
In 2016, the Department audited Superior for the period of January 1, 2012,
through December 31, 2015. The Department assessed Superior over $15 million
in unpaid use tax or deferred sales tax and over $6 million in penalties and interest,
totaling $21,690,525.00. Superior protested the assessment and sought its
reversal within the Department, but the Department upheld its assessment, adding
another $503,808.85 in extension interest.
4 No. 88267-8-I/5
Superior petitioned for and was denied reconsideration by the Department.
Superior appealed the Department’s decision to the Board, arguing that it was
exempt from the taxes because its contract with Shell was a tax exempt lease and
separately because the vessel was a tax exempt watercraft primarily used for
transport of property in interstate commerce. The Board affirmed the Department’s
assessment. Superior appealed to the superior court, which reversed the Board’s
decision, finding both of Superior’s arguments for tax exemption persuasive. The
Department timely appealed the superior court’s order.
II
We review the Board’s decisions under the Administrative Procedure Act
(APA). RCW 34.05.510, RCW 82.03.180; Envolve Pharmacy Sols., Inc. v. Dep’t
of Revenue, 25 Wn. App. 2d 699, 709, 524 P.3d 1066 (2023), aff’d, 4 Wn.3d 142,
560 P.3d 839 (2024). We sit in the same position as the superior court, in direct
review of the Board’s decision. Id. The APA provides several bases to reverse
the Board, including erroneous interpretation or application of the law, the order
not being supported by substantial evidence, or the order being arbitrary and
capricious. RCW 34.05.570(3). “We review issues of law de novo under the APA
error of law standard, which allows us to substitute our view of the law for that of
the Board.” Envolve, 25 Wn. App at 710. The party challenging the Board’s
decision, here Superior, bears the burden of demonstrating the invalidity of the
Board’s decision. RCW 34.05.570(1)(a).
“Exemptions to a tax law must be narrowly construed. Taxation is the rule
and exemption is the exception.” Budget Rent-A-Car of Wash.-Or., Inc. v. Dep’t of
5 No. 88267-8-I/6
Revenue, 81 Wn.2d 171, 174, 500 P.2d 764 (1972) (citations omitted). Taxpayers
bear the burden of proving they are factually exempt from a tax. Lamtec Corp. v.
Dep’t of Revenue, 170 Wn.2d 838, 843, 246 P.3d 788 (2011). “At trial, the burden
shall rest upon the taxpayer to prove that the tax as paid by the taxpayer is
incorrect.” RCW 82.32.180.
III
Superior argues that its use of goods and services to produce the
containment system and modify the vessel is not subject to Washington’s use tax
because its contract with Shell is exempt as a lease of a new article of tangible
personal property. We disagree. The definition of “lease,” for purposes of the use
tax exemption, excludes agreements where the contractor provides tangible
personal property with an operator who is “necessary for the tangible personal
property to perform as designed.” RCW 82.04.040(3)(b)(iii). Because Superior
provided extensive hiring, training, and operational expertise for the containment
system and vessel, its services to Shell are not a “lease” exempt from the use tax.
A
Washington imposes a “tax or excise for the privilege of using within this
state as a consumer” any article of tangible personal property. RCW
82.12.020(1)(a). Consumer means “any person who purchases, acquires, holds,
or uses any article of tangible personal property irrespective of the nature of the
person’s business and including, among others, without limiting the scope hereof,
persons who install, repair, clean, alter, improve, construct, or decorate real or
personal property.” RCW 82.04.190(1). But one is exempt and not considered a
6 No. 88267-8-I/7
“consumer” when “[c]onsuming such property in producing for sale as a new article
of tangible personal property or a new substance, of which such property becomes
an ingredient.” RCW 82.04.190(1)(c). Under the statute, a “lease” is a “sale.”
RCW 82.04.040(1). “ ‘Lease or rental’ means any transfer of possession or control
of tangible personal property for a fixed or indeterminate term for consideration.”
RCW 82.04.040(3)(a). Superior argues it is not subject to the use tax because it
was producing for lease a new article of tangible personal property—the
containment system and the vessel.
However, RCW 82.04.040(3)(b) establishes certain exceptions for when
something will not be considered a “lease.” Here, the relevant exception is,
[p]roviding tangible personal property along with an operator for a fixed or indeterminate period of time. A condition of this exclusion is that the operator is necessary for tangible personal property to perform as designed. For the purpose of this subsection (3)(b)(iii), an operator must do more than maintain, inspect, or set up the tangible personal property.
RCW 82.04.040(3)(b)(iii). This exception is consistent with other provisions of
chapter 82.04 RCW, as the statute elsewhere provides one definition for “retail
sale” or “sale at retail,” as
the charge made for providing tangible personal property along with an operator for a fixed or indeterminate period of time. A consideration of this is that the operator is necessary for the tangible personal property to perform as designed. For the purpose of this subsection (9), an operator must do more than maintain, inspect, or set up the tangible personal property.
RCW 82.04.050(9).
The Department has adopted an interpretive rule, WAC 458-20-211 (Rule
211) to “explain[] how persons are taxable who rent or lease tangible personal
7 No. 88267-8-I/8
property or rent equipment with an operator.”2 WAC 458-20-211(1). Rule 211
defines a “true lease” or “operating lease” as a lease of property for consideration
“with the property under the dominion and control of the lessee for the term of the
lease with the intent that the property will revert back to the lessor at the conclusion
of the lease.” WAC 458-20-211(2)(f). Rule 211 sets out a “true object test” to
analyze a transaction “involving the rental of equipment with an operator, to
determine if the lessee is simply purchasing the use of the equipment or
purchasing the knowledge, skills, and expertise of the operator beyond those
needed to operate the equipment.” WAC 458-20-211(2)(e)(i).
Rule 211’s examples 5 and 6 provide guidance on applying the true object
test. WAC 458-20-211 (2)(e)(i). In example 5, “ZYX Construction Co. contracts
with WVU Rental Co. for the rental of scaffolding. WVU’s technicians set up, move,
and dismantle the equipment. After assembly, ZYX assumes dominion and control
over the use of the scaffolding until it is dismantled by WVU upon conclusion of the
construction project.” WAC 458-20-211(8). In this example, the business activity
is classified as a rental of tangible personal property without an operator. Id. In
example 6,
ABC Crane Co. is hired by DEF Builders Co. to supply a crane and operator to lift air conditioning equipment from the ground and hold
2Citing Association of Washington Business v. Department of Revenue, Superior argues that Rule 211 is merely persuasive and not binding. 155 Wn.2d 430, 447, 120 P.3d 46 (2005) (“[Interpretive rules] serve merely as advance notice of the agency’s position should a dispute arise and the matter result in litigation. The public cannot be penalized or sanctioned for breaking them. They are not binding on the courts and are afforded no deference other than the power of persuasion.”). We ultimately resolve the question based on RCW 82.04.040(3)(b)(ii), not the Department’s interpretive rule.
8 No. 88267-8-I/9
it in place on the roof of a six-story building while DEF employees bolt the unit down. ABC’s operator will retain control over the crane. ABC has no responsibility to attach wiring, plumbing, or otherwise make the unit operational.
Id. In this example, ABC’s business activity is classified as a rental of equipment
with an operator. Id. These two examples provide bookends for when a rental or
lease is with or without an operator.
B
The Board found that the contract was structured as a lease, a finding not
disputed by the parties. The parties disagree as to whether Shell exercised
sufficient dominion and control over the containment system and the vessel for the
contract to be a lease of tangible personal property. Because the true object of
the contract was for Superior to provide Shell with the containment system and
vessel, along with accompanying operators necessary to ensure they performed
as designed, the contract is not considered a lease for the purposes of the use tax.
See RCW 82.04.040(3)(b)(iii). Superior owes use tax as a consumer.
The opening of section IV of the contract, “scope of work,” states that
“[Superior’s] scope of work is to manage, design, fabricate, procure, assemble,
test, demonstrate, maintain and operate an arctic subsea spill containment
system.” (Emphasis added.) Superior’s obligations included,
• Recruiting and training operations staff • Commissioning and testing the system • Demonstrating the system • Maintaining the system ready for response in the Beaufort or Chukchi Sea during the drilling season. • Operating the system should it be required in an emergency
9 No. 88267-8-I/10
• Participating in COMPANY readiness activities, including Incident Management Drills and stakeholder engagements • De-commissioning, maintaining, and preserving the system in storage during the off-season.
(Emphasis added.)
Under “operations scope,” Superior was required to
• Prepare operating manuals • Prepare maintenance manuals • Prepare commissioning plans • Prepare subsea deployment plans • Develop a training simulator and training program for deployment and operation of the various systems • Arrange for personnel to receive other required training and certifications • Recruit and train operating staff each operating season • Commission all systems prior to each operating season • Perform acceptance tests and deployments for regulators and stakeholders in Alaska • Train operators using the simulator, on-board equipment and other training materials .... • De-commission and preserve equipment to protect it from corrosion and deterioration in the off season • In the event of a subsea well incident, call up [Superior personnel], move to the wellsite, and deploy equipment under the direction of [Shell].
(Emphasis added.) Under the contract, Superior was obligated to ensure
competency in its training systems, supply personnel, and “demonstrate that the
requisite knowledge and training to manage [the containment system] onboard
control systems [had] been achieved.” In defining the terms used in the contract,
“WORK” means that Superior was obligated to provide “operation, maintenance
and all other necessary services, personnel and labor not specifically listed” in
accordance with its obligations under the contract.
10 No. 88267-8-I/11
Under the contract, Superior had to “provide sufficient personnel at all times
to ensure performance and completion” of the work, and all personnel employed
“shall, for the work, which they are required to perform, be competent, properly
qualified, skilled and experienced in accordance with good industry practice.” The
Board found that while the vessel was moored near Kotzebue, no one lived on the
vessel, but Superior employees and contractors “did visit the vessel on a daily
basis to ensure that the [containment system] equipment was functioning
properly.” In the event of an oil well blowout, Superior maintained a response
team, composed of “employees and/or contractors,” ready to be “flown in” and
deployed to operate the containment system.
For Superior to be exempt from the use tax, the contract must have been a
“lease” as defined by RCW 82.04.040(3). But the contract is excluded from the
definition of a lease if Superior provided the containment system “with an operator
for a fixed or indeterminate period of time,” and “the operator [was] necessary for
the [containment system] to perform as designed.” RCW 82.04.040(3)(b)(iii). For
this to apply, the operator “must do more than maintain, inspect, or set up the
[containment system].” RCW 82.04.040(3)(b)(iii). To determine if the contract was
for use of tangible personal property with an operator, the Department advises
application of the “true object test” to determine if Shell was “simply purchasing the
use of the [containment system] or purchasing the knowledge, skills, and expertise
of the operator beyond those needed to operate the equipment.” WAC 458-20-
211(2)(e)(i).
11 No. 88267-8-I/12
The contract includes numerous provisions requiring Superior to recruit and
train qualified personnel. It required Superior to develop a training program and
training simulator for the “operation of various systems.” The contract contains
provisions requiring Superior to operate the containment system. During the 2015
drilling season, Superior personnel and contractors visited the vessel daily to
ensure the containment system’s readiness. Superior maintained a response
team offsite that was ready to fly into Alaska and deploy the containment system
in the event of an oil well blowout. These responsibilities go beyond maintaining,
inspecting, or setting up the system.
Superior argues that the services it provided are analogous to Rule 211’s
example 5, the scaffolding example described above, an example of rental or lease
of tangible personal property without an operator. WAC 458-20-211(8). But
Superior’s obligations are more akin to example 6, a rental or lease with an
operator, where a company contracts for use of a crane and an operator for the
crane. WAC 458-20-211(8). In the event of an oil well blowout, Superior would
have moved the containment system into place while providing the necessary
expertise for its operation. Considering the expertise and services that Superior
contracted to provide Shell, the true object of the contract was not just for Superior
to provide the containment system to Shell, it was for Superior to provide the
containment system with an operator.
Though there was no oil well blowout in the 2015 drilling season, and the
containment system was not deployed outside of testing, Shell contracted with
Superior for its expertise to operate the containment system if such a blowout
12 No. 88267-8-I/13
occurred. Superior designed and built the containment system, and its operators
were “necessary for the [containment system] to perform as designed.” RCW
82.04.040(3)(b)(iii). Therefore, the contract is excluded from the definition of a
“lease” for purposes of the use tax and Superior is subject to the use tax under
RCW 82.12.020(1)(a).
IV
Superior argues in the alternative that its services to Shell are exempt from
the use tax under RCW 82.12.0254(1)(b) because the vessel was “a tax-exempt
watercraft used primarily in interstate and foreign transportation of property for
hire.” The Department counters that Superior does not qualify for the exemption
because the vessel is not a “watercraft,” and even if it is a “watercraft,” it was only
used to provide services to Shell, not transport property, and that the only property
transported were components of the containment system. We do not decide
whether the vessel is a “watercraft” because regardless, it was not used primarily
to transport property in interstate commerce.
There is a use tax exemption for any “watercraft used primarily in
conducting interstate or foreign commerce by transporting property or persons for
hire.” RCW 82.12.0254(1)(b) (emphasis added). The exemption also applies to
“[tangible] personal property that becomes a component part of any such . . .
watercraft in the course of repairing, cleaning, altering, or improving the same,”
and “[l]abor and services rendered in respect to such repairing, cleaning, altering,
or improving.” RCW 82.12.0254(1)(c)-(d). In the common carrier context, WAC
458-20-175 defines “component part” as tangible personal property “which is
13 No. 88267-8-I/14
attached to and a part of carrier property. It also includes spare parts which are
designed for ultimate attachment to carrier property. The said term does not
include furnishings of any kind which are not attached to the carrier property nor
does it include consumable supplies.”
Superior claims it is exempt from the use tax because the vessel carried the
containment system and property owned by Shell in interstate and foreign
commerce, and the vessel was “modified specifically to transport the [c]ontainment
[s]ystem, along with other equipment for Shell for hire in interstate and foreign
commerce.”
Superior moved the vessel to Bellingham in April 2012. Superior made
extensive modifications to the vessel and constructed the containment system.
The vessel housed the containment system in two modules, a subsea module and
a process module carried on the deck. The vessel carried some components
owned by Shell, including a choke manifold, hoses, umbilical, and a chemical
injection system. The major components of the containment system “were welded
to the deck” of the vessel and connected to the containment system’s “electrical,
plumbing, and control systems.” Except for one trip to Vancouver, Canada, for
modifications in 2015, the vessel remained docked in Washington until June 2015,
and while docked, Superior only carried out maintenance activities. While in
transit, the vessel carried no crew. While the vessel was docked in Kotzebue
during the 2015 drilling season, no one lived aboard.
When the vessel was deployed to Alaska for the 2015 drilling season, Shell
paid Superior a “Pre-Season Transit Fee” of $3,090,500.00 and a “Post-Season
14 No. 88267-8-I/15
Transit Fee” of $3,752,750.00 at the conclusion of the season. In contrast, Shell
paid Superior over $89 million to modify the vessel, and over $86 million to produce
the containment system. Shell paid Superior non-drilling rates, to maintain the
containment system and vessel, in 2013, totaling $28,674,000.00, and in 2014,
totaling $35,842,500.00. After the 2015 drilling season, when Shell terminated the
contract, Shell paid Superior a demobilization fee of $2,875,000.00 and contract
termination fee of $24,931,000.00.
We are not persuaded by Superior’s argument that it is exempt from the use
tax under RCW 82.12.0254(1)(b). The vessel’s primary purpose was not to
“transport property for hire.” Superior received less than $7 million for its transit
fees related to the 2015 drilling season, while it received over $175 million for
modification and production of the containment system and vessel, and $60 million
in fees for maintaining the two in 2013 and 2014. The contract described
Superior’s scope of work as, “manage, design, fabricate, procure, assemble, test,
demonstrate, maintain, and operate an arctic subsea spill containment system”
that “meets the design and performance requirements specified.” The vessel’s
primary use was to carry the containment system to a drilling site to be available
in case of an oil well blowout, deploy the containment system, and act as a support
vessel. This is different from transporting property or persons in interstate
commerce for the sake of transporting them from one place to another.
In the absence of evidence that the vessel took on transport of property or
persons other than its own operational equipment it cannot be described as being
15 No. 88267-8-I/16
“used primarily” for transport. See Budget Rent-A-Car, 81 Wn.2d at 174
(“Exemptions to a tax law must be narrowly construed.”).
We affirm the Board’s decision and reverse the superior court’s decision.
WE CONCUR: