Inventory and Pricing: Adjustments for Personal Property Taxes at the Calendar Year-End


Logic assumes that if oil inventories in the U.S. are low it would affect oil prices because of basic supply and demand principles. Yet, a recent academic paper from researchers at the University of Wisconsin, Michigan State University, and Indiana University found that this is not always the case. The reason? Market participants appear to understand the business decision to lower crude oil inventory and adjust prices accordingly.

Non-income taxes on oil and gas companies represent a significant portion of their overall tax expense, and firms often face many types of these taxes at once. In addition, these taxes at the state and local level are situational and location-specific. The type of non-income tax most relevant to our recent research paper is the personal property tax (PPT). State and local jurisdictions that choose to use a PPT on the value of crude oil inventory typically assess it at the calendar year-end (December 31).

Consequently, companies that operate refineries, tank farms, and pipelines in states that administer this tax must strike a balance between reducing inventory levels at year’s end and ensuring the company can maintain an efficient refining operation. Using crude oil inventory data from the U.S. Energy Information Administration (EIA), our research paper (hereafter referred to as ALPS)1 documents how companies subject to crude oil PPT reduce inventory levels prior to the year-end assessment. The paper also shows that the crude oil market recognizes the declines in inventory at year-end for what they are—PPT minimization strategies—and adjust prices accordingly.

Many companies in the oil and gas industry reduce crude oil inventories prior to the year-end PPT assessment. While the news media2 has speculated on the reasons for this, our study is the first to rigorously investigate the phenomenon and trace the decrease in crude oil inventories at year-end to PPTs. In order for a local jurisdiction (such as a county or parish) to assess a PPT on inventory, the state must legislatively authorize the move. As ALPS discusses in detail, 14 states currently allow or previously have allowed inventories to be subject to PPT. Within those states, there have been 60 refineries subject to PPT on their crude oil inventories.

PPT assessment typically allows inventory to be valued under the firm’s accounting method. Almost all petroleum refineries use the last-in first-out (LIFO) method of accounting for inventories, which allows a firm to value its year-end inventories at beginning-of-the-year prices if inventories are managed downward at year-end. Given the rising prices of crude oil, the incentive for companies to draw down crude oil inventories prior to the assessment date is a tactic to reduce the PPT tax burden even further.

Although the news media has documented this behavior using total U.S. crude oil inventories, a lack of data on the inventories of specific firms has prevented a full statistical analysis to rule out potential alternative explanations. Using crude oil inventory data from the EIA, along with hand-collected PPT rates for each jurisdiction in the U.S., we compared month-to-month changes in crude oil inventories between refineries that are subject to PPT and refineries that are not.

The results indicate that month-to-month changes in crude oil are similar across the various jurisdictions—with the exception of December and January. Refineries subject to PPT reduce their inventories by approximately seven percent in December, while refineries in non-PPT jurisdictions don’t show any significant changes in December levels. Based on average crude oil inventories, the typical firm in a PPT jurisdiction reduced its inventory by about 900,000 barrels, which translates into an average tax savings of nearly $100,000 per refinery3. In addition, January inventories in the PPT jurisdictions increased at a higher rate than inventories in non-PPT jurisdictions.

The paper also discusses three strategies companies can use to manage crude oil inventories prior to the assessment date: 1) reduce incoming crude oil; 2) shift crude oil inventories from taxable to non-taxable locations; and 3) use up stored supplies of crude oil right before the end of each calendar year. Due to data limitations, we were unable to investigate the extent to which a firms delay purchases of crude oil, including the parking of crude oil tankers offshore, although the news media speculates it could be a component of how refineries draw down year-end inventories. However, the data on refinery utilization suggests that firms in taxable locations increase their production in December more so than firms in non-taxable locations, which means year-end reductions can be partially attributed to firms using stored supplies close to the PPT assessment.

Classic economic theory predicts that prices will increase when supply decreases, and concerns exist that PPT minimization strategies could impact crude oil prices. Recent articles in the news media have observed anecdotally that industry experts do understand year-end declines in inventory are temporary and not considered a meaningful decline in supply4. ALPS is the first study to systematically analyze the pricing effect by examining the relationship between changes in crude oil prices and inventory. We found that the crude oil market does not adjust crude oil prices upward in December to reflect the decline in inventories likely caused by PPT minimization efforts, which suggests industry experts understand the cause of the year-end draw downs.

Companies in the oil and gas industry continuously seek to balance different non-income taxes across several tax jurisdictions. The management of crude oil inventories prior to the year-end assessment is one way to reduce PPT tax burdens. However, companies should continue to assess the benefits of inventory reductions along with possible increase in supply chain costs.


1 “Do Property Taxes Affect Real Operating Decisions and Market Prices for Crude Oil?” by Kristian Allee, Dan Lynch, Kathy Petroni, and Joseph Schroeder. Forthcoming at Contemporary Accounting Research.
2 Strumph – http://online.wsj.com/news/articles/SB10001424052748703531504575625013694074190
3 Calculation based on $80 per barrel of crude oil.
4 Garrett, J. – http://www.heatingoil.com/blog/oil-refiners-bookkeeping-trick-artificially-deflates-year-end-inventory-numbers1123/