ETC Marketing, Ltd. v. Harris County Appraisal District

Opinion

ACCEPTED 01-12-00264-CV FIRST COURT OF APPEALS HOUSTON, TEXAS 7/1/2015 11:06:57 AM CHRISTOPHER PRINE CLERK

NO. 01-12-00264-CV

FILED IN 1st COURT OF APPEALS IN THE COURT OF APPEALS HOUSTON, TEXAS 7/1/2015 11:06:57 AM FOR THE FIRST DISTRICT OF TEXASCHRISTOPHER A. PRINE Clerk AT HOUSTON

ETC MARKETING, LTD.,

Appellant, v. HARRIS COUNTY APPRAISAL DISTRICT,

Appellee.

APPELLANT’S REPLY IN SUPPORT OF MOTION FOR EN BANC RECONSIDERATION

Lynne Liberato Robert J. Myers State Bar No. 00000075 State Bar No. 14765380 William Feldman John J. Shaw State Bar No. 24081715 State Bar No. 24079312 HAYNES AND BOONE, LLP MYERS ✯ LAW 1221 McKinney Street, Suite 2100 2525 Ridgmar Blvd., Ste. 150 Houston, Texas 77010-2007 Fort Worth, Texas 76116 Telephone: (713) 547-2000 Telephone: (817) 731-2500 Telecopier: (713) 547-2600 Telecopier: (817) 731-2501 Lynne.Liberato@haynesboone.com RMyers@myerslawtexas.com William.Feldman@haynesboone.com JShaw@myerslawtexas.com

Attorneys for Appellant, ETC Marketing, Ltd. TABLE OF CONTENTS

TABLE OF CONTENTS ........................................................................................... i TABLE OF AUTHORITIES .................................................................................... ii

ARGUMENT IN REPLY ..........................................................................................1

CONCLUSION ..........................................................................................................6

CERTIFICATE OF COMPLIANCE .........................................................................8

CERTIFICATE OF SERVICE ..................................................................................9

-i- TABLE OF AUTHORITIES

Cases Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977) ...........................................................................................3, 4

Greene v. Farmers Ins. Exch., 446 S.W.3d 761 (Tex. 2014) ..............................................................................4, 6

Marathon Ashland Petroleum L.L.C. v. Galveston County Appraisal Dist., 236 S.W.3d 335 (Tex. App.—Houston [1st Dist.] 2007, no pet.) .....................2, 3

Maryland v. Louisiana, 451 U.S. 725 (1981) ...............................................................................................2

Midland Cent. Appraisal Dist. v. BP Am. Prod. Co., 282 S.W.3d 215 (Tex. App.—Eastland 2009, pet. denied), cert. denied 131 S. Ct. 2097 (2011) ...................................................................4, 5 Peoples Gas, Light & Coke Co. v. Harrison Cent. Appraisal Dist., 270 S.W.3d 208 (Tex. App.—Texarkana 2008, pet. denied), cert denied 131 S. Ct. 2097 (2011) ....................................................................3, 4 Schneidewind v. ANR Pipeline Co., 485 U.S. 293 (1988) ...............................................................................................2

Statutes and Rules 18 C.F.R. § 284.1(a)...................................................................................................2

- ii - TO THE HONORABLE COURT OF APPEALS, EN BANC:

ETC Marketing, Ltd. respectfully files this reply in support of its motion for

reconsideration en banc.

ARGUMENT IN REPLY

HCAD’s response highlights the extraordinary circumstances that warrant

this Court’s en banc review. Contrary to HCAD’s assertions, this case does indeed

represent the first time that any Texas appellate court has found constitutional a tax

on goods in the stream of interstate commerce. And, while HCAD summarily

dismisses ETC’s substantial concerns, it ultimately does not dispute that the

panel’s decision will create a county-by-county patchwork of different rules

governing the imposition of ad valorem taxes on interstate commerce, or that the

decision will have substantial consequences for companies and consumers across

Texas.

Interstate Commerce: HCAD dedicates the first several pages of its

argument to the issue of whether the natural gas here was in interstate commerce.

(Opp. Br. at 3-6.) Nevertheless, the majority assumed, and the dissent concluded,

that the gas was in interstate commerce. (Majority at 8, 12; Dissent at 5, 14-16.) As

the dissent explained, “working gas in the pipeline [is] in interstate commerce from

the moment it [is] injected into the pipeline system.” (Dissent at 14.) HCAD, however, argues that goods are not in interstate commerce unless

movement “from another state has actually begun and is going on,” and that ETC

provided no evidence that its gas was “actually moving to another state.” (Opp. Br.

at 3-4.) HCAD’s argument ignores controlling law and draws an artificial

distinction between gas in one part of the pipeline system and gas elsewhere in that

same system. As the dissent recognized, storage and transportation cannot

“realistically be separated.” (Dissent at 5, 14.) The Supreme Court has agreed. See

Schneidewind v. ANR Pipeline Co., 485 U.S. 293, 308 (1988) (gas storage facilities

are regulated by FERC “since those facilities are a critical part of the transportation

of natural gas and sale for resale in interstate commerce.”); Maryland v. Louisiana,

451 U.S. 725, 754-55 (1981) (“[T]he flow of gas from the wellhead to the

consumer, even though ‘interrupted’ by certain events, is . . . a continual flow of

gas in interstate commerce.”). Federal regulations likewise recognize that

“transportation” of natural gas “includes storage.” 18 C.F.R. § 284.1(a). The gas

temporarily located at the Bammel facility is in the stream of interstate commerce.

No justice on the panel concluded otherwise.

For that reason, HCAD’s extensive reliance on this Court’s decision in

Marathon Ashland Petroleum L.L.C. v. Galveston County Appraisal District, 236

S.W.3d 335 (Tex. App.—Houston [1st Dist.] 2007, no pet.) is misplaced. (See,

e.g., Opp. Br. at 2-3, 5, 6, 9, 11.) In that case, the court held that petroleum

-2- products held in Marathon’s refinery tanks before shipment to consumers could be

taxed by local authorities because those products had “not yet entered the stream

of interstate commerce” and were instead “part of the general mass of property in a

state” that was “subject to state taxation in the usual way.” Marathon Ashland, 236

S.W.3d at 338 (emphasis added); see also id. at 336, 343. Because Marathon’s

petroleum products were not yet in interstate commerce, the court concluded that

the Complete Auto test did not apply. Id. Here, in contrast, the natural gas is in the

stream of interstate commerce even while it is at the Bammel facility. HCAD’s ad

valorem tax may therefore be upheld only if it satisfies all four prongs of the

Complete Auto test.1

Complete Auto Test: Because the natural gas is in interstate commerce, the

only remaining issue is whether ETC’s temporary storage of natural gas in

interstate commerce can be subject to local taxation under the Complete Auto test.

Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977). The ad valorem tax at

issue fails to satisfy even one of the Complete Auto prongs. (Mtn. for

Reconsideration En Banc at 8-17; Br. of Amicus Curiae Valero Marketing &

1 Marathon is also distinguishable because in that case Marathon Ashland Petroleum exercised “complete control” over the physical movement of the petroleum products in its refinery. 236 S.W.3d at 341. ETC, in contrast, does not control the movement and storage of the natural gas temporarily located at the Bammel facility. See Mtn. for Reconsideration En Banc at 2; see also Peoples Gas, Light & Coke Co. v. Harrison Cent. Appraisal Dist., 270 S.W.3d 208, 215 (Tex. App.—Texarkana 2008, pet. denied), cert denied 131 S. Ct. 2097 (“Unlike the taxpayer in Marathon Ashland Petroleum, L.L.C., Peoples does not maintain any control over the physical movement of the gas.”).

-3- Supply Co. at 10-12; see also Dissent at 16-24.) The tax must satisfy all four

prongs of Complete Auto to be constitutional. Complete Auto, 430 U.S. at 279.

Existing Texas Authority: Under existing Texas authority, the natural gas

at issue here would not be subject to local ad valorem taxes. Peoples Gas, Light &

Coke Co. v. Harrison Cent. Appraisal Dist., 270 S.W.3d 208 (Tex. App.—

Texarkana 2008, pet. denied), cert. denied 131 S. Ct. 2097 (2011); Midland Cent.

Appraisal Dist. v. BP Am. Prod. Co., 282 S.W.3d 215, 224 (Tex. App.—Eastland

2009, pet. denied), cert. denied 131 S. Ct. 2097 (2011). Those decisions are

materially indistinguishable from this case. (See Dissent at 10-19, 22-24; Mtn. for

Reconsideration En Banc at 9-14.)

Policy Considerations: HCAD also argues that this Court should not

consider the broad repercussions of the majority’s decision because those

arguments are “alarmist” and “unsupported,” even though those same concerns

were voiced by both the dissent and by amicus curiae Valero. (Opp. Br. at 1 n.10.)

They further suggest that this Court should ignore those concerns because they

were not raised to the trial court. (Id.) But “parties are free to construct new

arguments in support of issues properly before the Court.” Greene v. Farmers Ins.

Exch., 446 S.W.3d 761, 764 n.4 (Tex. 2014). The issue here—whether local

taxation of natural gas in interstate commerce violates the commerce clause of the

U.S. Constitution—was squarely before the trial court and the court of appeals.

-4- In any event, the broad repercussions of the majority’s decision cannot

simply be dismissed as “alarmist” or hypothetical. The panel’s ruling has

significant negative consequences that make immediate correction essential. As the

dissent cautions, the majority’s decision will erect a “financial barrier” around

Harris County and the other counties within this Court’s jurisdiction, see Dissent at

21, as companies seek to store their goods elsewhere. Amicus Curiae Valero

Marketing & Supply Co. warns that “the panel’s decision . . . will subject

companies to a complex patchwork regime” of tax regulations and is “bad for

Texas businesses, taxpayers, and consumers.” Amicus Curiae Valero Marketing &

Supply Co. at 13-14. The majority’s decision also raises the prospect of multiple

taxation. As the Eastland Court of Appeals recognized when striking down a

similar ad valorem tax, “if the tax in this case is upheld, then ad valorem taxes

could potentially be levied by any taxing authority on oil in transit but located, at

the time of assessment, in the portion of an interstate pipeline system within the

boundaries of that taxing authority.” Midland Cent. Appraisal Dist., 282 S.W.3d at

224; see also Mtn. for Reconsideration En Banc at 5-8. Notably, HCAD’s brief

does not even address any of the significant statewide implications of the panel’s

decision.

State Law Grounds: Finally, HCAD rejects the independent state-law

grounds for invalidating the ad valorem tax, arguing that ETC waived the issue by

-5- not raising it in its motion for summary judgment. (Opp. Br. at 18-20.) But the

issue was in fact raised below. See Appellant Br. at 49; Plf. Orig. Pet. at 3-8; Plf.

Mtn. for Summary Judgment at 1, 5-6; Plf. Resp. to Def. Mtn. for Summary

Judgment at 5-6; Greene, 446 S.W.3d at 764 n.4. Even HCAD concedes that “[t]he

first page of ETC’s motion for summary judgment did state the taxing units lacked

jurisdiction to tax the gas.” (Opp. Br. at 19.) The Majority addressed the merits of

ETC’s statutory argument, recognizing that ETC’s “motion for summary judgment

also included an argument that HCAD lacked jurisdiction to tax the property.” (Op.

at 2 n.1.)

CONCLUSION

ETC respectfully requests that the Court grant its motion for en banc

reconsideration and grant the relief as specified in its motion.

Respectfully submitted,

HAYNES AND BOONE, LLP

/s/ Lynne Liberato Lynne Liberato State Bar No. 00000075 William Feldman State Bar No. 24081715 1221 McKinney Street, Suite 2100 Houston, Texas 77010-2007 Telephone: (713) 547-2000 Telecopier: (713) 547-2600 Lynne.Liberato@haynesboone.com William.Feldman@haynesboone.com

-6- Robert J. Myers State Bar No. 14765380 John J. Shaw State Bar No. 24079312 MYERS ✯ LAW 2525 Ridgmar Blvd., Ste. 150 Fort Worth, Texas 76116 Telephone: (817) 731-2500 Telecopier: (817) 731-2501 RMyers@myerslawtexas.com JShaw@myerslawtexas.com

COUNSEL FOR APPELLANT, ETC MARKETING, LTD.

-7- CERTIFICATE OF COMPLIANCE TEX. R. APP. P. 9.4(i)(3)

I hereby certify that this Reply in Support of Motion for En Banc Reconsideration contains a total of 1,380 words, excluding the parts of the brief exempted under TEX. R. APP. P. 9.4(i)(1), as verified by Microsoft Word 2010. This Motion is therefore in compliance with TEX. R. APP. P. 9.4(i)(2).

Dated: July 1, 2015.

/s/ Lynne Liberato Lynne Liberato Counsel for Appellant, ETC Marketing, Ltd.

-8- CERTIFICATE OF SERVICE

In accordance with the Texas Rules of Appellate Procedure, I hereby certify that a true and correct copy of Appellant’s Reply in Support of Motion for En Banc Reconsideration was served on the following counsel of record on July 1, 2015:

Counsel for Appellee Harris County Appraisal District:

Mario L. Dell’Osso Via E-Service Eric C. Farrar OLSON & OLSON, LLP Wortham Tower, Ste. 600 2727 Allen Parkway Houston, Texas 77019-2133

/s/ Lynne Liberato Lynne Liberato

-9-