Complete Auto - Eventsential

UPDATE ON OIL & GAS TAX
LITIGATION
Tax Section
Moderator:
Dustin Whittenberg
Law Office of Dustin Whittenberg
San Antonio
Panelists:
Wade Phillips
Shell Oil
Houston
Bill Sullivan
Norton Rose Fulbright
San Antonio
Friday, June 19, 2015
2:30 p.m. – 3:30 p.m.
Dustin Whittenburg
Law Office of Dustin Whittenburg
Dustin Whittenburg is a graduate of the Southern Methodist University Dedman School of Law (JD,
cum laude, '03) and New York University School of Law (LL.M.-Taxation, '06). Mr. Whittenburg was
awarded the Dean's Scholarship and appointed an articles editor of the SMU Law Review Association.
After graduating from law school Mr. Whittenburg worked as a litigator at a Dallas, Texas based law
firm for two years. He then attended New York University School of Law. After graduation he worked
at Cox Smith Matthews, Incorporated where his practice focused on complex tax planning, federal and
state tax controversies, counseling non-profit entities, and matters related to executive compensation. He
has represented taxpayers during administrative appeals before the Internal Revenue Service and Texas
Comptroller as well as in the United States Tax Court and Federal District Courts. Mr. Whittenburg is
admitted to practice before the United States Tax Court, the Federal District Court of the Western
District of Texas and the Federal District Court of the Northern District of Texas.
Prior to attending law school Mr. Whittenburg received a BBA in accounting and finance as well as a
MS in accounting from Texas Tech University. He is a graduate of Randall High School in Amarillo,
Texas. He is the son of Burk and Carol Whittenburg. His wife, Brooke Whittenburg, is a San Antonio
native and daughter of Wayne and Cynthia Harwell.
Education
•
New York University School of Law, LL.M., Taxation, 2006
•
Southern Methodist University Dedman School of Law, J.D., cum laude, 2003
•
Texas Tech University, M.S., Accounting, 2000
•
Texas Tech University, B.B.A., Accounting and Finance, cum laude, 2000
Court Admissions
•
United States Tax Court
•
United States District Court for the Western District of Texas
•
United States District Court for the Northern District of Texas
•
Texas
Wade Phillips
Shell Oil Company
Wade Phillips serves as the Tax Counsel for State Tax Disputes for Shell Oil Company in
Houston. He litigates state and local, direct and indirect tax matters throughout the United States
concerning Shell’s upstream, downstream and trading operations. Wade has over 15 years of
State and Local Tax litigation and policy development experience, having served the first part of
his career in senior level tax counsel roles at the Texas Comptroller and Texas Attorney General.
Wade has a broad range of tax controversy and policy development experience in Texas taxes
including sales and use, oil and gas severance, insurance gross premiums, tobacco, mixed
beverage, and fuels. While working for the State of Texas, Wade litigated taxation issues
concerning the oil and gas, manufacturing, retail, and insurance industries. Two notable Texas
indirect tax cases that Wade litigated were the successful defense of the Texas Comptroller in the
application of sales tax on software in Verizon Business Network Services, Inc. v. Combs, and the
down-hole oil and gas equipment litigation in Southwest Royalties, Inc. v. Combs. Since joining
Shell, Wade has spoken at several continuing education engagements regarding various aspects
of state and local tax affecting the oil and gas industry.
William T. “Bill” Sullivan
Norton Rose Fulbright
Bill Sullivan joined the San Antonio office of Norton Rose Fulbright in 2005. As counsel, his
current practice focuses primarily on representation of property owners in disputes involving ad
valorem taxation at both the administrative and judicial levels.
A significant amount of Bill's practice involves the negotiation and litigation of property tax values
on behalf of property owners throughout the State of Texas including, among others, petrochemical
facilities, telephone and electric utilities, cogeneration facilities, wind farms, solar projects,
manufacturing plants, railroads, pipelines, rail cars, office buildings and private estates.
Education
1987 - J.D., St. Mary's University School of Law
• 1981 - B.B.A., St. Mary's University
•
Court Admissions
Bill was admitted to practice law in Texas in 1987. He is also admitted to practice law in the
following courts:
• U.S. District Court, Western District of Texas (1988)
• U.S. District Court, Southern District of Texas (1990)
• U.S. District Court, Northern District of Texas (1990)
• U.S. Court of Appeals, Fifth Circuit
• U.S. Supreme Court (1991)
Recognition
• Texas Top Rated Lawyer - LexisNexis Martindale-Hubbell (2012 - 2014)
Update on Oil & Gas Tax Litigation
State Bar of Texas Annual Meeting
Tax Section
June 18-19, 2015 - San Antonio, Texas
Presenters:
Wade Phillips
William T. Sullivan
Senior Tax Counsel
Shell Oil Company
Houston, TX
T: 713-241-2523
wade.phillips@shell.com
Counsel
Norton Rose Fulbright US LLP
San Antonio, TX
T: 210-270-7139
bill.sullivan@nortonrosefulbright.com
Dustin Whittenburg, Moderator
Partner
Law Office of Dustin Whittenburg
San Antonio, TX
T: 210-826-1900
dustin@WhittenburgTax.com
2
Agenda
• Texas Manufacturing Exemption
• Taxation of Oil & Gas in Transit – Interstate
Commerce Exemption
• Texas Property Tax Case Law Review
• Questions
3
4
Texas Manufacturing Exemption
Texas Manufacturing Exemption
• Overview of Oil & Gas Industry
• Texas Tax Code Section 151.318
• Southwest Royalties v. Combs
• Taxability of Compressors
• Burden of Proof
5
Overview of Oil & Gas Industry
6
Overview of Oil & Gas Industry
7
Overview of Oil & Gas Industry
8
Texas Tax Code Section 151.318
•
Tax Code § 151.318(a)(2) provides an exemption for “tangible
personal property directly used or consumed in or during the actual
manufacturing, processing, or fabrication of tangible personal property
for ultimate sale if the use or consumption of the property is necessary
or essential to the manufacturing, processing, or fabrication operation
and directly makes or causes a chemical or physical change to:
(A) the product being manufactured, processed, or fabricated for
ultimate sale; or
(B) any intermediate or preliminary product that will become an
ingredient or component part of the product being manufactured,
processed, or fabricated for ultimate sale.”
•
9
Tax Code § Sec. 151.3111 provides and exemption for “a service that
is performed on tangible personal property that, if sold, leased, or
rented, at the time of the performance of the service, would be
exempted under this chapter because of the nature of the property, its
use, or a combination of its nature and use.”
Texas Tax Code Section 151.318
•
Tax Code § 151.318(a)(4) provides an exemption, in relevant part, for
compressors “that are used to power, supply, support, or control
equipment that qualifies for exemption under Subdivision (2) . . . .”
•
Tax Code Section 151.318(c)(3) specifically excludes from the
exemptions in subsection (a) (i.e., makes taxable) “equipment or
supplies used in . . . transportation activities.”
•
Tax Code § 151.318(r) states that “a taxpayer claiming an exemption
under this section has the burden of proof that the exemption is
applicable and that no exclusion under Subsection (c) applies.”
10
Southwest Royalties, Inc. v. Combs, No. 03-12-00511-CV,
2013 WL 4058950 (Tex. App – Austin Aug. 13, 2014, pet.
filed.)
• Does downhole equipment qualify for the manufacturing
exemption?
• Comptroller contended that the extraction of oil and gas from
the subsurface did not constitute manufacturing.
• Surface equipment and some downhole chemicals at the well
site qualified for the manufacturing exemption.
• Prior rulings by former Comptrollers determined that other
mineral extraction activities, such as a gravel mining,
constituted manufacturing.
• However, former Comptrollers had also consistently determined
that the extraction of oil and gas did not constitute
manufacturing.
11
Southwest Royalties, Inc. v. Combs
• Court determined that the Comptroller’s policy excluding oil and
gas extraction activities was not contrary to the Tax Code, and
upheld the District Court’s denial of Southwest Royalties’ claim
for refund.
• Southwest Royalties filed an appeal to the Texas Supreme
Court on Dec. 11, 2014.
• Amicus Curiae briefs submitted by Texas Association of
Business, Texas Aggregates and Concrete Association, and
Texas Mining and Reclamation Association.
• Court has requested the State to respond to Southwest
Royalties’ Petition for Review.
12
Taxability of Compressors
Increased Scrutiny on Compressors as Excluded Transportation
Equipment under the Manufacturing Exemption.
• Auditors assessing tax on parts/services for compressors
previously determined to qualify for the manufacturing
exemption in prior audits.
• Connection to Southwest Royalties?
• A view of extraction as simply transportation of oil and gas to
the surface, whether by natural reservoir pressure or
compressor.
13
Taxability of Compressors
• Exclusion of Compressors as Transportation Equipment
• Lack of “clear and convincing proof” that compressors at a
natural gas plant support qualified equipment under
151.318(a)(4) and were not used for transportation.
Comptroller’s Decision 104,635 (2012).
• Comptroller sought input from industry in 2014.
‒ View that compressors used for any type of transportation
are taxable and there is no basis for divergent use
analysis.
• Anticipate a policy statement in 2015.
• Recent private letter ruling concerning compressors at an
LNG plant.
14
Taxability of Compressors
• Private Letter Ruling 142340831 (Dec. 19, 2014) [STAR
Accession No. 20141299L]
• Does manufacturing occur at an LNG Plant? Yes.
‒ Specifically, compressing gas to a pressure required to
convert the gas into a liquid within the Facility constitutes
“actual manufacturing” under Section 151.318(a)(2) and is
considered processing performed by a manufacturer as
defined in Rule 3.300(a)(10). Further, the production of
liquefied natural gas under Rule 3.300(a)(9)(B) begins
after natural gas enters the Facility.
‒ The purpose of COMPANY A liquefying natural gas is so it
can ultimately be sold as LNG and then transported
overseas. Although the conversion to LNG is done for
transportation purposes, we conclude that the conversion
of pipeline quality natural gas into LNG at the Facility is a
manufacturing process.
15
Burden of Proof
•
Statutory exemptions are strictly construed because they undermine
both uniformity and equality of taxation by imposing a heavier burden
on some taxpayers instead of imposing the burden equally on all
taxpayers. Laredo Coca-Cola Bottling Co. v. Combs, 317 S.W.3d 735,
739 (Tex. App.—Austin 2010, pet. denied).
•
Comptroller’s Rule 1.40(2)(A) requires a taxpayer to prove that a
transaction is exempt from taxation by “clear and convincing
evidence.”
•
Tax Code § 151.318(r) states that “a taxpayer claiming an exemption
under this section has the burden of proof that the exemption is
applicable and that no exclusion under Subsection (c) applies.”
•
“Texas does not recognize a self-contained, unified manufacturing
process in large integrated plants as being all-inclusive for tax
purposes.” See Private Letter Ruling 142340831 (Jan. 27, 2015)
[STAR Accession No. 201501032L]. Consequently, “each piece of
equipment … must stand on its own and meet the qualifications for
exemption under Section 151.318.” Id.
16
Burden of Proof
Recent example of the Comptroller’s analysis of evidence provided in
support of a claim under the Manufacturing Exemption.
Hearing No. 103,035 (2014)
•
Supermarket chain provided invoices and testimony of production
manager for taxpayer’s dairy production facility regarding nature and
use of purchases at issue at an oral hearing.
•
•
17
Regarding a closed-loop, milk pasteurization system: “testimony
corroborates and augments the invoice project descriptions and
the ALJ finds, based on the totality of the evidence presented, that
Petitioner’s evidence is clear and convincing, and demonstrates
that those transactions are exempt.”
Regarding fuel mixing equipment to create and dispense “midgrade fuel” for sale: “the evidence does not support the factual
assertions Petitioner’s contention makes.”
BURDEN OF PROOF
Recent example of the Comptroller’s analysis of evidence provided in
support of a claim under the Manufacturing Exemption.
Hearing No. 105,855 (2014)
•
18
Large supplier of products and services to the global semiconductor
industry, who manufactures, markets and services integrated circuit
fabrication equipment. Invoices, service contracts, and additional,
extensive factual documentation submitted into evidence on written
submission.
• Regarding items explained as inventory or component parts of items
manufactured by the taxpayer for sale, or component parts of
taxpayer’s production equipment; e.g. “clean room robot wrists and
motor mounts,” “short flex controller,” “encoders on customer robots,”
“module receivers, enclosures, and mounting frames for an 18-slot
PXI chassis.”
• Each claim denied; written submission explanations dismissed as
“bare assertions,” descriptions on invoices not “clear and convincing.”
19
Taxation of Oil & Gas in
Transit
Interstate Commerce Exemption – Significant for
Taxpayers in the Oil and Gas Industry
•
One of the few exemptions potentially applicable to ad valorem taxes
on oil and natural gas.
•
Three general exemptions from Texas ad valorem taxes are available
for tangible personal property: (i) the Freeport exemption; (ii) the
goods-in-transit exemption; and (iii) the interstate commerce
exemption.
•
Only the interstate commerce exemption is generally available to
businesses in the oil and gas industry for relief from Texas property
taxation.
20
U.S. Pipeline Storage System Overview
•
Approximately 217,000 miles of interstate pipeline in the U.S.
•
160 Underground storage fields [in 156 counties] in 24 states
•
Billions of barrels are produced in the U.S.
•
Trillions of cubic feet of natural gas are produced in the U.S.
21
Overview: State Ad Valorem Taxes on Oil and Gas
•
Ad Valorem taxes are applied to personal property that has acquired a
situs in a state. Once oil and gas comes out of the ground they are
considered personal property. While oil and gas products wholly
located within a state are taxable for property tax purposes, the more
difficult question comes when these same products are moving in the
stream of interstate commerce.
•
For state or local governments’ ad valorem taxes on oil and gas
already put into the stream of interstate commerce to be upheld under
the dormant Commerce Clause, the taxes must meet all four factors
enunciated by the United States Supreme Court in Complete Auto
Transit, Inc. v. Brady, 430 U.S. 274 (1977).
•
In order for the tax to not violate the Due Process clause of the United
States Constitution, the property being taxed must acquire situs. See
Shaffer v. Carter, 252 U.S. 37, 52 (1920) (Supreme Court explained
that a state's taxing power extends to the "persons, property and
business" within its jurisdiction.). Generally, it is easier for property to
acquire situs than meeting the four-part test under the Commerce
Clause.
22
Relevant Constitutional Provision – Commerce Clause
United States Constitution, Article 1, Section 8, Clause 3 – (the
“Interstate Commerce Clause”) provides:
•
Congress shall have the power…to regulate commerce with foreign
Nations, and among the several States, and with Indian Tribes.
•
U.S. Supreme Court has said this provision “gives exclusive power
to the Congress to regulate interstate commerce, and its failure to
act on the subject in the area of taxation nevertheless requires that
interstate commerce shall be free from any direct restrictions or
impositions by the States.”
•
U.S. Supreme Court’s primary concern is that taxation places
unnecessary burdens on property moving between the states.
However, the Supreme Court has also held that interstate commerce
is not constitutionally immune from state or local taxation.
23
Relevant Texas Tax Statutes
Texas Tax Code § 11.12. Federal Exemptions.
Property exempt from ad valorem taxation by federal law is exempt from
taxation.
Texas Tax Code § 11.01. Real and Tangible Personal Property.
(a) All real and tangible personal property that this state has jurisdiction to
tax is taxable unless exempt by law.
(b) This state has jurisdiction to tax real property if located in this state.
(c) This state has jurisdiction to tax tangible personal property if the
property is:
(1) located in this state for longer than a temporary period;
…
Texas Tax Code § 21.02. Tangible Personal Property Generally.
(a) Except as provided by Subsections (b) and (e) and by Sections 21.021,
21.04, and 21.05, tangible personal property is taxable by a taxing unit
if:
(1) it is located in the unit on January 1 for more than a temporary
period;
…
24
State v. Crown Central Petroleum Corp., 242 S.W.2d 457
(Tex. Civ. App. - San Antonio 1951, writ ref’d)
•
Crown Central owned a refinery in Harris County. Crown produced or
purchased crude oil that originated in Nueces County with the
intention to ship it to Harris County. When the crude oil left the oil well
it was scheduled for export to Harris County. Crown stored the crude
oil in storage tanks within Nueces County to accumulate sufficient
volumes for shipment.
•
The court of appeals held that the crude oil had taxable situs of a
permanent nature in Nueces County when it originated there, and
that taxable situs would continue at least until the crude oil was
delivered to a common carrier for shipment out of the county.
•
Because Crown failed to show that anything had happened prior to
January 1st of each tax year that would have the effect of removing
the crude oil from the general mass of taxable property in Nueces
County, the crude oil was taxable in Nueces County.
25
State v. Crown Cent. Petroleum Corp.
•
“That actual physical permanent situs continues at least until it is
delivered to a common carrier for transportation on a final and
continuous journey out of the county. The mere intention of [Crown]
to have it loaded on tankers or barges and transported to Harris
County is not sufficient to change the actual and permanent
situs…”
•
“‘What we have already said, however, in relation to the products of a
state intended for exportation to another state will indicate the view
which seems to us the sound one on that subject, namely, that such
goods do not cease to be a part of the general mass of property
in the state, subject, as such, to its jurisdiction, and to taxation in the
usual way, until they have been shipped, or entered with a
common carrier for transportation, to another state or have been
started upon such transportation in a continuous route or journey, We
think that this must be the true rule on the subject.’” (quoting Coe v.
Town of Errol, 116 U.S. 517, 527 (1886)).
26
Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977)
•
In the Brady case, the Supreme Court stated that a tax had to pass
the following four tests to be valid under the U.S. Constitution:
1. The activity being taxed has to have a substantial nexus (i.e.
connection) with the taxing state.
2. The tax has to be fairly apportioned.
3. The tax must be uniformly applied and not implemented in a
manner so as to discriminate against interstate commerce.
4. The tax has to be fairly related to the services provided by the
state to the taxpayer.
•
If the tax fails to pass all four elements of the Brady test, it is
unconstitutional.
•
On the other hand, simply establishing that property is moving in the
stream of interstate commerce without failing any of the Brady tests is
insufficient by itself to exempt the property from taxation.
27
Exxon Corp. v. San Patricio County Appraisal District, 822
S.W.2d 269 (Tex. App.—Corpus Christi 1991, writ denied).
•
The issue in this case was the proper tax situs for crude oil located in a
particular county.
•
The appraisal district taxed oil owned by Exxon and located in working oil
tanks in San Patricio County as of January 1, 1988. Exxon had oil in the
tanks every day of every year.
•
At all times during 1987 and 1988, Exxon maintained at least 400,000 barrels
of oil in San Patricio County, and any particular barrel of oil stayed in that
county for an average of 17 days.
•
Source and destination of oil was Texas.
•
Exxon argued that each barrel of oil appraised remained only temporarily
in, and was merely being transported through, San Patricio County, and
therefore could not have attained situs there for tax purposes.
•
The Court held that a determinable amount of oil was located within San
Patricio County for longer than a temporary period and was thus
taxable.
28
Exxon Corp. v. San Patricio County Appraisal District
•
“The fact that each individual barrel does not remain in the County for
more than seventeen days, but rather flows sporadically through the
working tanks, is inconsequential. We do not view this mass of oil as
a continual flow of singular barrels which independently do not remain
in the County long enough to establish a tax situs there. Rather,
because Exxon held a quantity of over 400,000 barrels of oil in San
Patricio County in seventeen tanks at all times, a massive quantity
was located in the County throughout 1987 and 1988 for more than a
temporary period.”
•
“The owner of property which is located in the taxing unit with such
permanence as to be considered part of the general mass of
property located therein must pay the taxes on its portion of that
property.”
29
Diamond Shamrock Ref. and Mktg. Co. v. Nueces County
Appraisal Dist., 876 S.W.2d 298 (Tex. 1994), cert. denied
513 U.S. 995 (1994)
•
•
•
•
•
30
The issue in this case was whether oil which is imported from abroad
directly into Texas, which is its final destination, may be taxed while in
transit under the Import-Export Clause and the Commerce Clause.
The subject oil was shipped from foreign sources through the Gulf of
Mexico, off-loaded at a storage facility in Nueces County, held there in
tanks, and transmitted by pipeline to Diamond Shamrock’s refinery in
Live Oak County, Texas.
Some of Diamond Shamrock’s crude oil was always present in
Nueces County between 1987 and 1990, although the particular oil in
the tanks on January 1st of each year was actually present for a
maximum period of 12 to 25.3 days.
The parties stipulated that the oil was “in transit” while in Nueces
County.
The Court held that the oil was taxable in Nueces County and that the
taxation did not violate the Commerce Clause or the Import-Export
Clause, because the facts satisfied the first and fourth nexus prongs
of Complete Auto.
Diamond Shamrock Ref. and Mktg. Co. v. Nueces Cnty.
Appraisal Dist.
•
“[T]he only question presented is whether oil that enters Texas from a
foreign country and reaches its ultimate destination here may, under
the United States Constitution, be taxed in a particular Texas county,
despite the fact that it is still ‘in transit’ while there. Id. At 299
(emphasis added).
•
“Obviously, where the four prongs of Complete Auto are not met,
goods are not taxable under the Commerce Clause whether or not
they are “in transit.” And, the circumstances which make the goods
“in transit” may inform a court’s decision that the first and fourth nexus
requirements of Complete Auto are not met. For instance, if oil in
tanks on trucks merely passes through Nueces County without
stopping, it would be “in transit” in a way that would cause it to have
little or no nexus with the county.”
31
Diamond Shamrock Ref. and Mktg. Co. v. Nueces Cnty.
Appraisal Dist.
•
“Our holding today is limited to foreign goods ‘in transit’ through only
one state, which remain in that state. Even as to goods in
interstate commerce, however, the question of whether Diamond
Shamrock’s ‘in transit’ argument has any remaining validity under the
modern commerce clause analysis is questionable, at least as to
goods which have entered the state of their final destination.”
•
“Oil passing through a county without stopping, in pipelines or on
trucks, would thus not be located in that county ‘for more than a
temporary period so as to allow taxation under the Code.
32
Marathon Ashland Petroleum L.L.C. v. Galveston Cent.
Appraisal Dist., 236 S.W.3d 335 (Tex. App. – Houston [1st Dist.]
2007, no pet.
•
The issue in this case was whether Marathon’s petroleum products awaiting
transportation to out-of-state customers violates the Commerce Clause.
•
Marathon owned an oil and gas refinery in Texas City, and it produced
petroleum products. Upon completion of the refining process, Marathon
segregated petroleum products destined exclusively for out-of-state
customers from its processing units into refinery tanks it designated to hold
solely those products it intended to later ship out-of-state. The refined
products remained in the tanks for three to eight days before leaving the
refinery.
•
“Goods that have not yet entered the stream of interstate commerce…[u]nder
these circumstances, the [Complete Auto] test does not apply.”
•
“We hold that the petroleum products in Marathon’s tanks awaiting
transportation to out-of-state customers have not entered the stream of
interstate commerce because they have not commenced their movement
out of Texas. Marathon’s products have not been shipped, entered with a
common carrier for transportation to another state, or started upon
such transportation in a continuous route or journey.”
33
Peoples Gas, Light, and Coke Co. v. Harrison Central Appraisal
District, 270 S.W.3d 208 (Tex. App.—Texarkana 2008, pet.
denied) cert. denied, 139 S.Ct. 2097 (2011).
•
The issue in this case was whether a portion of working gas on an
interstate pipeline by a Chicago based supplier was subject to
taxation.
•
The gas in question was owned by Peoples Gas and stored in a large,
depleted natural gas field used as a natural gas storage facility, which
was part of the interstate pipeline system operated by the Pipeline.
The Pipeline, not a party to this matter, operated the interstate
pipeline system pursuant to regulations promulgated by the Federal
Energy Regulatory Commission.
•
Beginning in 1999, the appraisal district listed and allocated to
Peoples a portion of the “working” natural gas balance, which is the
volume of gas above the “cushion gas” which provides necessary
pressure and balance for the pipeline, that was transported and
delivered to pipeline customers.
34
The Peoples Gas, Light, and Coke Co. v. Harrison Central
Appraisal District
•
The Court of Appeals held that the Commerce Clause shields the
“working gas” from taxation because it was in interstate commerce.
The Court concluded that the storage of the gas did not remove the
“working gas” from interstate commerce and that the appraisal
district’s tax failed to satisfy the first prong of Complete Auto and,
therefore, violated the Commerce Clause.
•
“We conclude that, despite the fact that Peoples owns some of the
natural gas on the system and thus under Harrison County, the
storage of natural gas at the North Lansing field is an insufficient
nexus when we consider the particular, unique circumstances at hand
and the complex relationships among the parties involved. We find
insufficient nexus between Texas and the entity, property, or
transaction to be taxed. That said, the District’s tax fails to satisfy the
first prong of the Complete Auto test, and, therefore, violates the
Commerce Clause.”
35
Midland Central Appraisal District v. BP America
Production Co., 282 S.W.3d 215 (Tex. App.—Eastland
2009, pet. Denied) cert. denied, 139 S.Ct. 2097 (2011).
•
The issue in this case was whether an ad valorem tax may be imposed on
crude oil located in Midland County in a tank farm that is an integral part of an
interstate, common carrier pipeline system.
•
The court of appeals held that the oil was in the stream of interstate
commerce. The oil had been injected into a common carrier pipeline system
and remained in that interstate system at the time of the tax assessment. Any
delay at the tank farm was not attributable to the oil companies; rather, it
was incidental to the transportation of the oil by the common carrier and
was necessary for the safe and efficient operation of the pipeline system. The
oil was merely transported through the county, and it was only temporarily
located there.
•
The court of appeals held that the tax on the oil in interstate transit violated
the first prong of Complete Auto because it lacked a substantial nexus with
Texas.
36
Midland Central Appraisal District v. BP America
Production Co.
•
“In determining whether the oil at issue in this case was taxable, we
address whether the oil was in the stream of interstate commerce,
whether the trial court erred in failing to consider the oil as a constant
presence in the tanks rather than individual barrels in transit, and
whether the oil had situs in Midland County.”
•
“To comply with the first prong of the Complete Auto test, the ad
valorem tax on the oil in the tank farm must have applied to an activity
with a substantial nexus with Texas. . . . [T]he ‘activity’ being
taxed had no such nexus. The activity essentially being taxed in this
case was the ownership of oil that was present but in transit on
January 1 in a tank farm that constituted an integral part of an
interstate, common carrier pipeline system.”
37
ETC Mkt’g, Ltd. v. Harris Cty. Appraisal Dist., Texas Court of
Appeals, First District, No. 01-12-00264-CV, 2014 WL 4928712
(Tex. App. 2014).
•
The issue in this case was whether a marketer of natural gas destined
for sale to interstate purchasers and held by an interstate pipeline
carrier was subject to ad valorem tax.
•
Pipeline affiliate would store the gas to “time the market”
•
Distinguishes Midland Central Appraisal District v. BP America
Production Co.
•
Nexus requirement of Complete Auto met because the company was
physically present in the state and the activity taxed (ownership and
storage of natural gas) occurred in the county
•
Rejected the concept that interstate commerce can prohibit taxation of
property stored in state
38
•
“Even assuming the gas is in interstate commerce, it was nevertheless appropriate
for the ad valorem tax to be imposed when the owner stored the gas in Texas for [a]
business purpose.”
•
Court does not discuss the “continuity of transit” /“goods in transit” doctrine
ETC Mkt’g, Ltd. v. Harris Cty. Appraisal Dist. (rehearing)
(Jan. 13, 2015).
•
•
•
Court of Appeals reaffirmed its October decision
For purposes of analysis, court assumed gas was in interstate
commerce
Court provided additional Complete Auto Analysis:
1. Nexus-Met because taxpayer had employees, offices in Texas. Pipeline where gas
stored entirely located in Texas.
2. Fairly apportioned‒ Internal consistency-Consistent, no multiple taxation would result from identical
tax in another state.
‒ External consistency-Consistent because gas stored beyond temporary period
and taxpayer acknowledged ownership of gas in Texas pipeline in the Bammel
reservoir.
3. Does not discriminate against interstate commerce-No difference in rates between
intrastate and interstate gas and only quantity stored in Harris county was assessed
tax.
4. Is fairly related to the services provided by the state-Test met because taxpayer
enjoys benefit of public services, police and fire protection. Court also quoted the
U.S. Supreme Court in Jefferson Lines: “ . . . along with the usually forgotten
advantages conferred by the State’s maintenance of a civilized society.”
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OTHER STATE SUPREME COURT OPINIONS ON
INTERSTATE COMMERCE EXEMPTIONS CONFLICT WITH
THE HOLDINGS OF TEXAS COURTS – WILL THE U. S.
SUPREME COURT RESOLVE THE ISSUE?
40
Oklahoma - In re Assessment of Personal Property Taxes
Against Missouri Gas Energy, 234 P.3d 938 (Okla. 2009), cert.
denied, 130 S.Ct. 1685 (2010).
•
Owner of gas was a business based in Kansas City, Missouri.
•
Some of the gas was produced in Oklahoma.
•
Gas was in the Oklahoma facility as part of its transportation in
interstate commerce.
•
Carrier maintained cushion gas in pipeline that was taxable.
•
Gas destined for Missouri.
•
Court held that
41
•
the gas had acquired situs under the Due Process Clause; and
•
the gas had acquired situs under the Commerce Clause because (1) it was stored
in Oklahoma on a consistent or constant basis; (2) it was fairly apportioned; (3) did
not discriminate against interstate commerce; and (4) was sufficiently connected to
services provided by government because the property received the benefit of “the
advantages of civilized society.” Quoting Oliver Wendell Holmes, Jr. in Compania
General de Tabacos de Filipinas v. Collector of Internal Revenue, 275 U.S. 87
(1927).(“Taxes are what we pay for civilized society …”).
Kansas - In re Appeals of Various Applicants From a Decision of
Division of Property Valuation of State of Kansas for Tax Year 2009
Pursuant to K.S.A. 74-2438, 313 P.3d 789 (Kan. 2013), cert denied, Mo.
Gas Energy v. Kansas Div. of Prop. Valuation, 135 S.Ct. 51, 190 L.Ed.
2d 29 (2014).
•
Owners of gas were out of state purchasers.
•
Gas was sourced from outside Kansas and destined for locations
outside of Kansas.
•
Court held that
•
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•
gas was stored in Kansas and thus acquired situs in Kansas did not violate the Due
Process Clause; and
•
although gas was not sourced in Kansas, there was sufficient nexus to satisfy the
Complete Auto Transit, Inc. v. Brady 1st factor because the gas was stored in
Kansas on the assessment date.
Court quoted with approval the Oklahoma Supreme Court that the tax
was “for the support of government-provided services and the receipt
of ‘the advantages of a civilized society’” and thus satisfied the fourth
factor under Complete Auto Transit, Inc. v. Brady.
Lessons Learned from TX, OK, KS
•
In the oil & gas property tax context, it is the 1st and the 4th factors of
the four-part Complete Auto Transit, Inc. v. Brady test that pose the
most significant hurdles.
•
With respect to the 1st factor, whether there is a sufficient nexus to
the activity of the taxpayer. The dispositive question appears to be
whether the gas or oil in the pipeline or in the underground storage or
field is characterized as being “stored” or whether it is “in transit.”
•
With respect to the 4th factor, whether the tax is fairly related to the
services provided by the state to the taxpayer. The dispositive
question appears to be whether courts view the tax as supporting
“civilized society” or “specific state and/or local government services.”
If the former, the tax is upheld, if the latter, the services are deemed
insufficient.
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44
Texas Property Tax Case Law
Review
DOES MOTOR OIL QUALIFY FOR FREEPORT EXEMPTION?
Ashland, Inc. v. Harris County Appraisal District, 437 S.W.3d 50
(Tex. App. – Houston [14th Dist.] 2014, pet. filed)
•
Taxpayer sought a Freeport Exemption for motor oil, grease and gear oil
that it was exporting from the state. HCAD denied the exemption
contending that motor oil is base oil, which is also a lubricant, and is thus
“an immediate derivative of the refining of oil” and does not qualify for
Freeport exemption.
•
Taxpayer responded that its products were secondary derivatives, not
immediate derivatives, because they took base oil, and using a
manufacturing process that was unlike refining, added other materials
through trade secret and patented processes.
•
The court of appeals agreed with the taxpayer finding that these products
were new products and that in determining whether something is an
immediate derivative, consideration must be given to “time, location and
degree of separation from the refining process.”
•
The Texas Supreme Court has requested briefing.
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BOUNDARY DISPUTES IN 2015?
San Patricio County v. Nueces County & Nueces County Appraisal
Dist., No. 13-14-00293-CV, 13th Court of Appeals – Corpus Christi
(Oral Argument held in May)
•
On-going dispute between San Patricio County and Nueces County
since 1972 over boundary lines along the Nueces River, about half of
Nueces Bay, and a portion of both Corpus Christi and Red Fish bays.
Dagger and Ransom islands in Red Fish Bay and Dagger Point also
are on the list of properties claimed both counties claim.
•
2003 decision by District Judge in Refugio County fixed the boundary
line between the two counties purportedly awarding San Patricio the
dry land and assets touching the shoreline such as piers, but not the
submerged land.
•
Parties continue to dispute ruling and case has gone to the Court of
Appeals, Texas Supreme Court, and back to the appellate courts.
•
Oil and chemical companies are being subjected to double taxation.
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Disputed Area
47
Disputed Area
48
TEXAS COMMISSION ON ENVIRONMENTAL QUALITY
•
Increased litigation resulting
exemptions.
•
TCEQ decisions appear to be impacted by concerns over potential
loss of revenue to taxing jurisdictions from the granting of an
exemption as opposed to concerns about protecting the environment.
•
Companies are having to seek legislative solutions to obtain pollution
control relief because of the difficulties being encountered in the
TCEQ administrative process.
•
What should the role of the TCEQ be with respect to pollution control
exemptions?
49
from denial
of pollution
control
50
Questions?