Opinion issued January 13, 2015
In The
Court of Appeals For The
First District of Texas ——————————— NO. 01-12-00264-CV ——————————— ETC MARKETING, LTD., Appellant V. HARRIS COUNTY APPRAISAL DISTRICT, Appellee
On Appeal from the 127th District Court Harris County, Texas Trial Court Case No. 2010-71360
DISSENTING OPINION ON REHEARING
This case addresses a county appraisal district’s right to impose ad valorem
taxes on “working” gas in interstate commerce that is temporarily stored in a
storage facility in the county. The majority opinion extends the county’s ad valorem taxing power to this gas in contravention of both United States Supreme
Court and Texas authority. Therefore, I respectfully dissent.
Appellant ETC Marketing, Ltd. (“ETC”), a marketer of natural gas,
protested the appraisal and ad valorem taxation by appellee Harris County
Appraisal District (“HCAD”) of the portion of the working gas temporarily stored
in Houston Pipeline Company, LP’s Bammel facility in Harris County, Texas, and
awaiting resale in the interstate market that was allotted to ETC. The majority
affirms the trial court’s order denying ETC’s motion for summary judgment and
granting HCAD’s competing motion, thus upholding the tax. Because I believe the
tax places an unconstitutional burden on interstate commerce, I would reverse and
render judgment declaring that the ad valorem tax imposed on ETC’s portion of the
working gas stored in the Harris County facility by HCAD is unconstitutional. I
withdraw the prior dissenting opinion dated October 2, 2014, and issue this
dissenting opinion in its stead.
Background
The facts material to the analysis are restated below for ease of reference.
As the majority acknowledges, ETC buys, markets, and resells natural gas
that it acquires from multiple sellers, principally from the “Katy Hub,” a central
delivery and distribution point for natural gas into and out of the state of Texas.
All of the gas ETC buys for resale is “working gas,” or gas that is intended for
2 ultimate delivery through the pipeline system to other buyers and end users. The
gas ETC buys is entrusted to its affiliate, Houston Pipeline Company, LP (“HPL”),
either for immediate transportation to a buyer or user through HPL’s pipeline or for
storage at HPL’s Bammel facility, located in Harris County, for later transportation
into the interstate pipeline system. There ETC either sells the gas or causes it to be
further transported by the pipelines to ETC’s requested redelivery points in Texas
and out of state. Both ETC and HPL conduct business and maintain offices in
multiple locations throughout Texas. Both entities have offices and employees in
Houston and Dallas. HPL operates solely in Texas, but its pipelines connect with
interstate pipelines.
HPL transports gas into the interstate pipelines both for ETC and for others
as permitted by Federal Energy Regulatory Commission (“FERC”) regulations.
Gas owned by ETC and by the other marketers is physically commingled in the
pipeline system for withdrawal for later delivery to purchasers or users as working
gas. Thus, within the Bammel reservoir, any gas destined for sale in Texas is
physically commingled with gas destined for sale in interstate commerce. HPL
directs the physical movement of the gas; and, once ETC entrusts the gas it buys to
HPL, ETC has no control over the storage or movement of the gas.
HPL’s Bammel facility is not the only natural gas storage facility between
the place where ETC purchases the gas and the burner tips where it is ultimately
3 consumed. HPL’s pipeline system connects with multiple downstream pipelines
and systems that, in turn, utilize other storage facilities in other states to facilitate
the movement of the gas in the same way it utilizes the Bammel facility. Storage
facilities such as the Bammel reservoir are located throughout the entire
nationwide natural gas distribution system and are necessary for the efficient
movement of the gas, facilitating regulation of pipeline capacities so that sufficient
gas supplies can be provided to downstream users during peak demand periods.
FERC recognizes such storage as a component of the transportation of natural gas.
The gas moves constantly throughout the pipeline system, and sellers, such
as ETC, who have delivered gas into the system at one point, have the right to sell
a corresponding volume of gas at another point in the system, subject only to
FERC regulations governing the gas and HPL’s handling of it. Distinct volumes of
gas are segregated by paper allocation, which is used for verifying compliance with
contracts and pipeline requirements, reporting to the Texas Railroad Commission,
and payment of tariffs. ETC then sells the gas at “paper points” at various places
along the interstate pipeline systems with which HPL may connect. The point of
sale does not necessarily correspond to a physical location associated with any
particular seller’s natural gas.
4 Analysis
As the majority states, to prevail on appeal, ETC must demonstrate both that
the natural gas taxed by HCAD was in interstate commerce and, if so, that the gas
was not subject to ad valorem taxation by HCAD under the Complete Auto test.1
The majority declines to determine whether the gas was in interstate commerce on
the ground that the gas is subject to ad valorem taxation by HCAD regardless of
whether it was in interstate commerce. Slip Op. at 7. I would hold that the storage
of gas in the Bammel facility is an integral part of the interstate delivery of gas
regulated by FERC and that the ad valorem tax fails the Complete Auto test that
justifies the taxation of tangible property in interstate commerce. I would reverse
and render judgment declaring the tax unconstitutional.
A. Law Governing the Taxation of Tangible Personal Property
The Texas Constitution provides that “[a]ll . . . tangible personal property in
this State, unless exempt as required or permitted by this Constitution . . . shall be
taxed in proportion to its value, which shall be ascertained as may be provided by
law.” TEX. CONST. art. VIII, § 1. Under the Texas Tax Code, unless exempt by
law, tangible personal property is taxable if it is located in the taxing unit “for
longer than a temporary period.” TEX. TAX CODE ANN. § 11.01 (West 2008); see
also id. § 21.02(a)(1) (West Supp. 2014) (“[T]angible personal property is taxable
1 Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 97 S. Ct. 1076 (1977).
5 by a taxing unit if it is located in the unit on January 1 for more than a temporary
period.”). But “[p]roperty exempt from ad valorem taxation by federal law is
exempt from taxation.” TEX. TAX CODE ANN. § 11.12 (West 2008).
The Interstate Commerce Clause of the United States Constitution grants
Congress the power to regulate interstate commerce. See U.S. CONST. art. I, § 8,
cl. 3. The United States Supreme Court has long interpreted the Commerce Clause
to include a “dormant” Commerce Clause, which prohibits a state from imposing
discriminatory burdens on interstate commerce. Am. Trucking Ass’ns, Inc. v. Mich.
Pub. Serv. Comm’n, 545 U.S. 429, 433, 125 S. Ct. 2419, 2422–23 (2005); see In re
Nestle USA, Inc., 387 S.W.3d 610, 624–25 (Tex. 2012) (orig. proceeding). “[A]
tax imposed on local activity related to interstate commerce is valid if, and only if,
the local activity is not such an integral part of the interstate process, the flow of
commerce, that it cannot realistically be separated from it.” Mich.-Wis. Pipe Line
Co. v. Calvert, 347 U.S. 157, 166, 74 S. Ct. 396, 401 (1954) (holding
unconstitutional Texas occupation tax on taking gas from outlet of independent
gasoline plant in state, after production, gathering, and processing, for immediate
interstate transmission). “‘The very purpose of the Commerce Clause was to
create an area of free trade among the several States. That clause vested the power
of taxing a transaction forming an unbroken process of interstate commerce in the
6 Congress, not in the States.’” Id. at 170, 74 S. Ct. at 403 (quoting McLeod v. J.E.
Dilworth Co., 322 U.S. 327, 330–31, 64 S. Ct. 1023, 1026 (1944)).
The burden is on the taxpayer to prove that a tax is invalid under the
Dormant Commerce Clause by showing that the tax fails at least one prong of the
Complete Auto test. See Barclays Bank PLC v. Franchise Tax Bd. of Cal., 512
U.S. 298, 310–11, 114 S. Ct. 2268, 2276 (1994); Midland Cent. Appraisal Dist. v.
BP Am. Prod. Co., 282 S.W.3d 215, 223 (Tex. App.—Eastland 2009, pet. denied).
Under the Complete Auto standard, a state tax on interstate commerce ordinarily
“will not survive Commerce Clause scrutiny if the taxpayer demonstrates that the
tax (1) applies to an activity lacking a substantial nexus to the taxing State; (2) is
not fairly apportioned; (3) discriminates against interstate commerce; or (4) is not
fairly related to the services provided by the State.” Barclays Bank, 512 U.S. at
310–11, 114 S. Ct. at 2276 (emphasis in original) (citing Complete Auto Transit,
Inc. v. Brady, 430 U.S. 274, 279, 97 S. Ct. 1076, 1079 (1977)). A state tax must,
therefore, fail only one prong of the Complete Auto test to be unconstitutional.
B. Application of the Interstate Commerce Clause to the Storage of Natural Gas
The majority finds it unnecessary to determine whether ETC’s gas is in
interstate commerce, reasoning that, even if it is, the tax is constitutional. Thus, for
purposes of its argument, it simply assumes that the gas is in interstate commerce,
7 and it addresses the facts of the case solely in the context of determining whether
the Complete Auto test is satisfied. See Slip Op. at 11–22.
The majority first recites the facts it finds material to its determination as to
whether the gas has a “substantial nexus” with Texas, the taxing state, and
therefore satisfies the first factor used under the Complete Auto test. Slip Op. at
11–16. It observes that ETC has offices and employees in Harris County and
elsewhere in Texas; that the gas at issue was purchased by ETC at the Katy Hub in
Harris County; that HPL, which has offices and employees in Texas and whose
entire system, including the Bammel facility, is located within Texas, transported
the gas; and that ETC’s natural gas is stored for up to several months in the
Bammel facility “pursuant to a storage agreement with [HPL].” Slip Op. at 11–12.
The majority opines that “[t]hese factors establish that ETC Marketing ha[s]
a substantial physical presence in Harris County” and that these facts distinguish
this case from a case that ETC relies upon, Peoples Gas, Light, & Coke Co. v.
Harrison Cent. Appraisal Dist., 270 S.W.3d 208 (Tex. App.—Texarkana 2008,
pet. denied). Slip Op. at 12. The majority reasons that, “unlike this case, Peoples
Gas had no physical facilities, employees, representatives, or customers in Texas,”
whereas “ETC Marketing had a physical presence in Harris County including
employees, offices, and—most significantly—natural gas that it had specifically
contracted to store with [HPL].” Slip Op. at 12. It points out, “Unlike the pipeline
8 at issue in Peoples Gas, [HPL’s] facilities are located entirely within Texas,
including the Bammel reservoir in Harris County.” Slip Op. at 12–13. The
majority also points out that Peoples’ “only connection to Texas was through the
‘structure and location’ of the separately owned pipeline, which made the decision
about where to store the gas and paid its own ad valorem taxes on the facility and
equipment used for storage of natural gas in Texas.” Slip Op. at 12.
Unlike the majority, I would first determine whether the portion of the
working gas owned by ETC that is temporarily stored in the Bammel facility is
indeed in interstate commerce under the facts of the case; and, if it is, I would
apply the Complete Auto test to determine the constitutionality of the ad valorem
tax imposed by HCAD on that gas. Therefore, rather than beginning with the first
Complete Auto factor, I would perform the same analysis as the Peoples court—
first determining whether the working gas owned by ETC is property in interstate
commerce and, if so, determining whether it is nevertheless subject to the ad
valorem tax imposed by HCAD. When the analysis is performed this way, it is
clear to me that the distinctions the majority draws between this case on the one
hand—in which a county appraisal district imposed an ad valorem tax on the
amount of working gas owned by the taxpayer that was in temporary storage in a
Texas county in a gas storage facility connected to the interstate pipeline system—
and the Peoples case on the other hand—in which a different Texas county
9 appraisal district did the same thing—are immaterial to the analysis of the
constitutionality or unconstitutionality of the tax. Finding no material distinction
between this case and the Peoples case, I would reach the same result as the
Texarkana Court of Appeals in Peoples. I would hold that the gas is in interstate
commerce and that the HCAD tax is unconstitutional.
ETC is a marketing company that buys gas committed to the interstate
natural gas pipeline system, some of which is stored by HPL, the pipeline owner, at
the Bammel facility in Harris County until a specified quantity is resold and
delivered by ETC to a customer at a paper point along the interstate pipeline
system, subject to regulations promulgated by FERC. Peoples was similarly “a
distribution company that purchase[d] natural gas from suppliers and deliver[ed] it
to users in Chicago, Illinois” through an interstate pipeline system operated by
Natural Gas Pipeline Company of America (“the Pipeline”). Peoples, 270 S.W.3d
at 211. Like ETC, Peoples bought and sold natural gas in the interstate pipeline
system owned and operated by the Pipeline. Id. Some of the gas distributed by
Peoples was stored at the North Lansing facility, a natural gas storage facility in a
large depleted natural gas field in Harrison County, Texas, similar to the Bammel
facility located in Harris County. Id. The Pipeline, however, had many associated
storage facilities for gas in the pipeline, which were owned and operated “in the
aggregate.” Id. In Peoples, Harrison County attempted to place an ad valorem tax
10 on a portion of the working gas in the Harrison County storage facility that it had
allocated to Peoples based on the Pipeline’s records of Peoples’ working natural
gas balance at the facility at the end of the year. See id. at 211–12. Here, HCAD
has done the same thing with respect to a Harris County storage facility.
In short, Harrison County attempted to do exactly what Harris County has
done in this case under the same material circumstances, the only differences being
that ETC has offices in Texas, whereas Peoples did not, and that HPL, which
operates the Bammel facility and stores gas there, including gas allocated to ETC,
operates an intrastate Texas pipeline system connected to the interstate pipeline
system, whereas the Pipeline into which Peoples delivered its gas stored at the
North Lansing facility was itself an interstate pipeline system. The Texarkana
Court of Appeals, however, struck down the ad valorem tax, unlike the majority in
this case. The majority here upholds the tax on the ground that ETC has a physical
presence in Texas, whereas Peoples did not, and ETC’s gas stored at the Bammel
facility moves into the pipeline system of HPL, a Texas pipeline, to the points of
sale and consumption along the interstate pipeline system to which HPL connects,
whereas Peoples’ gas moved directly into an interstate pipeline operated by the
Pipeline. Slip Op. at 12–13. These distinctions are, in my view, distinctions
without a difference in any way material to this case.
11 The Peoples court’s reasoning is instructive. The court first pointed out that
the natural gas transportation and storage industry was restructured by FERC in
1992, creating “a system of commercial rights for the pipeline customer that was
separate from the physical operation of the pipeline system” in which gas is bought
and sold at “paper points,” or imaginary points along the pipeline “that do not
necessarily reflect the physical location of the gas purchased.” Peoples, 270
S.W.3d at 213. In this nationwide gas transportation system—the same as that in
this case—the system operator, here HPL, retains complete control of the physical
operation of the pipeline and decides when and where the natural gas is stored, and
there is no physical connection between a pipeline customer’s storage account
balance and physical volumes at any particular storage facility. See id.
The Peoples court reasoned that although the Pipeline had full custody,
control, and possession of the gas in the pipeline system it had no ownership rights
over it. Id. at 213–14. Rather, for ad valorem tax purposes, Peoples was the owner
of its allotted portion of the natural gas stored at the Pipeline’s North Lansing
facility in Harrison County. Id. at 214. However, the court held that the
Commerce Clause shielded Peoples from the county appraisal district’s ad valorem
tax assessment because the gas was in interstate commerce and the tax did not pass
the Complete Auto test that would nevertheless allow it to be assessed. See id. at
215–19.
12 Stating that “[t]he crucial question in determining whether the state may
exert its taxing power is whether there is ‘continuity of transit,’” the Peoples court
looked first to see whether there was such continuity. Id. at 215–16 (quoting
Indep. Warehouses v. Scheele, 331 U.S. 70, 73, 67 S. Ct. 1062, 1064–65 (1947)
(stating, “If the interstate movement has begun, it may be regarded as continuing,
so as to maintain the immunity of the property from state taxation, despite
temporary interruptions due to the necessities of the journey or for the purpose of
safety and convenience in the course of the movement. . . . Formalities, such as the
forms of billing, and mere changes in the method of transportation, do not affect
the continuity of the transit”)). The Peoples court opined that because “Peoples
has no control over where [its] natural gas is stored and how much is stored at any
given location, we cannot say that Peoples made the decision to store gas at North
Lansing in order to serve its business purpose.” Id. at 216. Consequently, it
concluded that “the stoppage of natural gas in North Lansing does not serve the
business purpose of Peoples.” Id. at 217. Rather, it served the business purpose of
the Pipeline. See id. The court determined that the storage of natural gas at the
North Lansing facility did not take the gas out of interstate commerce, which “it
entered by injection into an interstate pipeline,” because “[t]o conclude otherwise
would be to segregate, from the pipeline itself, a function deemed ‘necessary and
13 integral’ to the pipeline,” namely the function of storing working gas in the system
for delivery to points of resale and consumption in interstate commerce. Id.
Here, by contrast, the majority declines to determine whether the working
gas stored at the Bammel facility was in interstate commerce, but states that it
assumes it was. Slip Op. at 10–11. However, it implicitly, and contradictorily,
concludes that the portion of the working gas allotted to ETC was not in interstate
commerce, stating, “There was no evidence that the gas was already bound for
another state when it was committed to [HPL],” and, “[T]here was evidence that
ETC Marketing contracted to store the gas in [HPL’s] facilities, located entirely
within Texas, for its own business purposes . . . .” Slip Op. at 13. This is the
opposite of the Peoples court’s conclusions that the working gas in the pipeline
was in interstate commerce from the moment it was injected into the pipeline
system and that the storage was an integral part of the Pipeline’s business purpose
of interstate gas transportation and could not realistically be separated from it. See
Peoples, 270 S.W.3d at 217. I agree with the reasoning of the Peoples court,
which is supported by Supreme Court case law. See Mich.-Wis. Pipe Line Co., 347
U.S. at 166, 74 S. Ct at 401 (stating that tax of local activity related to interstate
commerce is valid only if it is not such an integral part of interstate process of flow
of commerce that it cannot realistically be separated from it).
14 In reaching the opposite conclusion from the Peoples court, the majority
places great emphasis on ETC’s business purpose in storing the gas at the Bammel
facility so it could “tim[e] the market and sell[] the gas at higher prices out of state
during cold months” and the lack of evidence of specific sales of the stored gas
into the interstate market. Slip Op. at 13. I agree with the majority that ETC has
as a business purpose the storage of a portion of its gas in interstate commerce until
the price rises with demand and that it contracted with HPL (as Peoples contracted
with the Pipeline) to use a portion of the Bammel facility to store some of its gas
for this purpose. However, it does not follow that this business purpose took the
gas out of interstate commerce or justified burdening the portion of ETC’s gas
allocated to the Bammel facility with a local ad valorem tax in Harris County.
Storage of a portion of the gas until needed served the business purposes of both
ETC and HPL, but storage of a portion of ETC’s gas at the Bammel facility was
only incidental to the overriding purpose served by the agreement between ETC
and HPL: the efficient transportation and sale of natural gas throughout the
interstate pipeline system in order to meet the need for gas as and wherever the
need might arise, a function “necessary and integral” to the operation of the FERC-
regulated nationwide gas distribution system. See Peoples, 270 S.W.3d at 217.
I would hold that the working gas owned by ETC on which HCAD imposed
the contested ad valorem tax was in interstate commerce when it was temporarily
15 stored in the Bammel facility, and I would then apply the Complete Auto test to
determine whether the ad valorem tax imposed by HCAD on that gas placed an
unconstitutional burden on interstate commerce.
C. The Complete Auto Test for Constitutional Taxation of Property in Interstate Commerce
1. Substantial nexus to the taxing state
I agree with the majority that the validity of the tax imposed by HCAD on
the portion of ETC’s gas stored at the Bammel facility must be determined under
the Complete Auto test. See 430 U.S. at 279, 97 S. Ct. at 1079. The first prong of
that test, upon which the majority concentrates, considers whether the tax applies
to an activity that has a substantial nexus with the taxing state. See id.; Slip Op. at
11–16. Again, the majority distinguishes Peoples, which I find to be both
materially indistinguishable and instructive.
The Texarkana Court of Appeals observed that Peoples maintained no office
in Texas and had no employees, representatives, or physical facilities in Texas and
that there was no evidence that any of the gas it purchased was delivered in Texas,
although the record suggested that much of the stored gas was produced in Texas.
Peoples, 270 S.W.3d at 218–19. The court found this to be an “insufficient nexus
between Texas and the entity, property, or transaction to be taxed” to justify the tax
under the Complete Auto test. Id. at 219. Therefore, it held that the tax violated
the Commerce Clause. See id.
16 The majority in this case, viewing those facts as determinative of the
“substantial nexus” factor, concludes that ETC’s own physical presence in Harris
County and its contract with HPL for temporary working gas storage at the
Bammel facility distinguish this case from Peoples and also from Midland Central
Appraisal District v. BP America Production Co. Slip Op. at 12–14. I have
already opined that I find this case indistinguishable from Peoples. I draw the
same conclusion with respect to BP America.
In BP America, the Eastland Court of Appeals, similarly to the Texarkana
Court of Appeals in Peoples, held that an ad valorem tax was improperly assessed
by a Texas county on oil in interstate commerce passing through an interstate
pipeline but temporarily held in a tank farm located in Texas. See 282 S.W.3d at
219, 223–24. The majority in this case, however, distinguishes oil in interstate
commerce that is temporarily stored in Texas from working gas that is similarly
temporarily stored. It opines, “Unlike ETC Marketing’s natural gas deliberately
stored at Bammel to facilitate timing the natural gas market, the oil at issue in the
Midland case was not held in the tank farm for storage purposes or for any
business purpose of the owner other than its transmission through the pipeline.”
Slip Op. at 14 (citing BP Am. Prod. Co., 282 S.W.3d at 221–23). The problem
with this argument is that every seller of oil or gas in an interstate pipeline system
that is destined for resale on an interstate market necessarily has the business
17 purpose of making money on the resale. Further, this fact is immaterial to the
overriding purpose of holding either oil or gas in a temporary storage facility to
further its efficient transportation and sale throughout the interstate pipeline
system.
I find the Peoples and BP America decisions to be not only indistinguishable
from this case on the law and material facts but also persuasive authority in
deciding the constitutionality of the tax imposed in this case.
In assessing the validity of the tax on the oil stored in Midland County under
the first prong of the Complete Auto test, the Eastland Court of Appeals opined in
BP America:
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. Although the oil itself had a substantial nexus with this state as much of it was produced in this state and some of it was destined for an in-state refinery, the “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.
282 S.W.3d at 224. Likewise, the activity that is being taxed in this case is the
ownership of natural gas that was present but in transit in a natural gas storage
facility that constituted an integral part of an interstate, common carrier pipeline
system into which the gas was transmitted for resale and consumption in
accordance with market forces, pipeline handling, and FERC regulations.
18 Unlike the majority, I would hold that the ad valorem tax imposed by Harris
County on the gas owned by ETC and stored in the Bammel facility does not
satisfy the substantial nexus test, the first prong of the Complete Auto test for
constitutionality under the Commerce Clause, and is therefore unconstitutional.
This conclusion becomes even more compelling when the other prongs of that test
are considered.
2. Discrimination against interstate commerce
The Complete Auto test also asks whether the tax discriminates against
interstate commerce. See 430 U.S. at 279, 97 S. Ct. at 1079. A tax is
nondiscriminatory under Complete Auto when it “places no greater burden upon
interstate commerce than the state places upon competing intrastate commerce of
like character.” Id. at 282, 97 S. Ct. at 1081. The United States Supreme Court
elaborated upon this test in American Trucking Associations. See 545 U.S. at 433–
38, 125 S. Ct. at 2423–26 (upholding flat tax imposed on truckers exclusively for
intrastate activities). The Court observed that it had found unconstitutional state
regulations and taxes that (1) “unjustifiably discriminate on their face against out-
of-state entities”; (2) “impose burdens on interstate trade that are ‘clearly excessive
in relation to the putative local benefits’”; (3) “facially discriminate against
interstate business and offer commercial advantage to local enterprises”;
(4) “improperly apportion state assessments on transactions with out-of-state
19 components”; and (5) “have the ‘inevitable effect [of] threaten[ing] the free
movement of commerce by placing a financial barrier around the State.’” Id. at
433, 125 S. Ct. at 2423 (quoting Pike v. Bruce Church, Inc., 397 U.S. 137, 142, 90
S. Ct. 844, 847 (1970) and Am. Trucking Ass’ns, Inc. v. Scheiner, 483 U.S. 266,
284, 107 S. Ct. 2829, 2840 (1987)).
The majority concludes that “the ad valorem taxes here were
nondiscriminatory.” Slip Op. at 19.
I would hold that the tax imposed by HCAD on ETC’s gas stored in the
Bammel facility in Harris County is discriminatory against interstate commerce on
two of the grounds recognized by the United States Supreme Court in American
Trucking Associations. First, it imposes a burden on working gas in interstate trade
that is “clearly excessive in relation to the putative local benefits” in that the local
benefits of storage in the Bammel facility are not necessary to the efficient
distribution of the gas, which could be stored by HPL and others elsewhere but is
stored in Harris County at HPL’s discretion. And the local benefits of fire and
police protection afforded to the Bammel facility by its location in Harris County
primarily benefit HPL and are taxed to it, as argued below with respect to the
fourth prong of the Complete Auto test. Thus, the benefits to ETC of temporarily
storing a portion of its working gas at the Bammel facility are clearly outweighed
by the burden of paying an ad valorem tax for use of that facility.
20 Second, the tax has “the ‘inevitable effect [of] threaten[ing] the free
movement of commerce by placing a financial barrier around the [s]tate’” by
imposing a tax on gas temporarily stored in Harris County that is not levied by
taxing authorities in other taxing jurisdictions through which the gas passes and in
which it is temporarily stored. See Am. Trucking Ass’ns, 545 U.S. at 433, 125 S.
Ct. at 2423. In this case, the tax the majority upholds is particularly discriminatory
in that it places a financial barrier around Harris County in the form of an ad
valorem tax that two other Texas courts of appeals have invalidated as
unconstitutional on facts materially indistinguishable from those in this case.
I would hold that the ad valorem tax imposed by HCAD on ETC’s gas
stored in the Bammel facility is discriminatory against interstate trade and is
therefore unconstitutional under the third prong of Complete Auto.
3. Fair relation to state-provided services
The final prong of the Complete Auto test is whether the tax is fairly related
to the services provided by the state. See 430 U.S. at 279, 97 S. Ct. at 1079. The
“fair relation prong of Complete Auto requires no detailed accounting of the
services provided to the taxpayer on account of the activity being taxed, nor,
indeed, is a State limited to offsetting the public costs created by the taxed
activity.” Okla. Tax Comm’n v. Jefferson Lines, Inc., 514 U.S. 175, 199, 115 S. Ct.
1331, 1345 (1995). Rather, “police and fire protection, along with the usual and
21 usually forgotten advantages conferred by the State’s maintenance of a civilized
society, are justifications enough for the imposition of a tax.” Id. at 200, 115 S. Ct.
at 1346.
Taking at face value the statement of the law by the Supreme Court in
Oklahoma Tax Commission, the majority reasons that “[ETC] owns the gas while it
is stored at Bammel, and it enjoys the benefit of public services which facilitate gas
storage, which in turn allows it to accomplish its business objective of buying
natural gas and holding it for sale at some later point in time.” Slip Op. at 21.
Therefore, it concludes that “the tax in this case is fairly related to the services
provided by the state.” Slip Op. at 21 (citing Complete Auto, 430 U.S. at 279, 97
S. Ct. at 1079).
Again, I disagree with the majority’s reasoning and, instead, find the
reasoning and the conclusion of the Peoples court on this fourth prong of the
Complete Auto test to be persuasive. In that case, the Texarkana Court of Appeals,
having found the ad valorem tax imposed by Harrison County on Peoples’ gas
stored in the North Lansing facility to be unconstitutional under the “substantial
nexus” test of the first prong of the Complete Auto test, turned directly to the fourth
prong. It reasoned:
Under the Commerce Clause, the measure of the tax must be reasonably related to the extent of the taxpayer’s presence or activities within the taxing state and to the taxpayer’s consequent enjoyment of the opportunities which the state has afforded. Even though fire and
22 police services may not be invoked, protection conferred by these “along with the usual and usually forgotten advantages conferred by the state’s maintenance of a civilized society are justification enough for the imposition of a tax.” The District presented substantial evidence of services provided within the county. While we do not doubt the value of those services, we note, again, that services such as law enforcement and the fire department would serve the North Lansing facility itself, and the facility undoubtedly belongs to Pipeline, which does pay ad valorem taxes on both the “cushion” gas it maintains in the facility and the physical plant of the facility itself.
Peoples, 270 S.W.3d at 219 (internal citations omitted). The court held that the tax
imposed by Harrison County on Peoples’ gas in storage at the North Lansing
facility failed the fourth prong of the Complete Auto test as well as the first. Id.
Here, as in Peoples, the record shows that HPL pays millions of dollars in
property taxes on the Bammel facility and on its cushion gas maintained at the
facility, just as the Pipeline in Peoples paid ad valorem taxes on its cushion gas and
the physical plant of the Harrison County facility. 2 I, therefore, agree with the
Peoples court’s reasoning with regard to the fourth prong of the Complete Auto
test. I would conclude, like that court, that while law enforcement, fire, and other
public services provided by Harris County to the Bammel facility are valuable
services, those services serve the facility itself, on which HPL pays substantial
taxes, in addition to paying taxes on the cushion gas it maintains permanently at
the facility. These taxes are not properly levied against the activity of temporarily
2 “Cushion gas” is gas that remains in the storage facility and is used to maintain adequate pressure to keep the working gas at issue in this case moving through the pipeline system.
23 storing gas owned by marketers during its transmission through the interstate
pipeline system or the use of the facility for that purpose.
I would conclude that the ad valorem tax imposed on ETC’s gas at the
Bammel facility fails the fourth prong of the Complete Auto test, in addition to the
first and third prongs.
Because I would conclude that the portion of the working gas stored at the
Bammel facility that is allotted to ETC is in interstate commerce and that the ad
valorem tax imposed on that gas by HCAD impermissibly burdens interstate
commerce, as shown by the tax’s failure to satisfy three of the Complete Auto test
factors, I would hold that the tax violates the Commerce Clause of the United
States Constitution.
24 Conclusion
I would reverse the judgment of the trial court and render judgment
declaring that the ad valorem tax imposed by HCAD on working gas allotted to
ETC that is temporarily stored in the Bammel facility in Harris County is
unconstitutional.
Evelyn V. Keyes Justice
Panel consists of Justices Keyes, Higley, and Massengale.
Justice Keyes, dissenting.