In The
Court of Appeals
Sixth Appellate District of Texas at Texarkana
______________________________
No. 06-07-00103-CV
______________________________
THE PEOPLES GAS, LIGHT, AND COKE COMPANY, Appellant
V.
HARRISON CENTRAL APPRAISAL DISTRICT, Appellee
On Appeal from the 71st Judicial District Court
Harrison County, Texas
Trial Court No. 05-0381
Before Morriss, C.J., Carter and Moseley, JJ.
Opinion by Chief Justice Morriss
OPINION
The large amount of natural gas ordinarily stored under Harrison County has great value. The
Harrison Central Appraisal District (the District) has acted to assess a large ad valorem tax bill
against a portion of that gas—gas allocable to the account of Peoples Gas, Light, and Coke Company
(Peoples). From a judgment favoring the District, Peoples appeals.
The gas in question is stored in a large, depleted natural gas field now used as a natural gas
storage facility—the North Lansing facility—part of the interstate pipeline system operated by
Natural Gas Pipeline Company of America (Pipeline). Peoples is a distribution company that
purchases natural gas from suppliers and delivers it to users in Chicago, Illinois. Pipeline, not a party
to this matter, operates the interstate pipeline system pursuant to regulations promulgated by the
Federal Energy Regulatory Commission (the Commission). Peoples buys natural gas already on the
interstate pipeline system owned and operated by Pipeline. Pipeline representatives testifying at trial
emphasize that there are many storage facilities associated with its pipeline and that the pipeline is
operated "in the aggregate." In other words, Pipeline's storing and transporting gas does not use any
particular storage field exclusively.
Pipeline pays ad valorem taxes on what is called "cushion gas" in North Lansing, the
significant volume of natural gas that remains in the storage facility and provides the necessary
pressure and balance to facilitate the safe, efficient operation of the pipeline. Beginning in 1999, the
District allocated to Peoples a portion of the "working" natural gas balance—the volume of gas
2
(above the "cushion") that is transported and delivered to pipeline customers—and assessed taxes
on the value of that portion of the natural gas stored at North Lansing. Peoples successfully
challenged the assessment and, on advice of its appraisal consultant firm, the District removed
Peoples from the tax rolls. The same thing happened in 2000.
For tax years 2003–2005, the District again attempted to assess taxes against Peoples on a
portion of the gas stored at North Lansing. This time, on advice from a new consultant firm, the
District refused to remove Peoples from the tax rolls. Instead, the District assessed Peoples' portion
of the gas at North Lansing, for those years, at values exceeding nine million, forty million, and
forty-three million dollars, respectively. Those tax years and tax levies are at issue in this case.
The gas volume figures allocable to Peoples are based on Pipeline's records.1 Pipeline
compares the total contractual balance for all the NSS2 shippers that have contracts on Pipeline's
Gulf Coast Leg to the "working" natural gas balance at North Lansing at the end of the year. This
yields a percentage that is multiplied by each shipper's NSS contractual balance on the Gulf Coast
Leg of the pipeline at the end of the year to arrive at the allocation it attributes to a customer.
1
Pipeline's representative explained that its allocation methods were not for the purpose of
determining ownership. It merely did what it was asked to do for the courts to decide the issue of
ownership.
2
Pursuant to Commission tariffs, Pipeline offers several types of contracts to shippers on its
pipeline system. Most common are the "NSS" and "DSS" contracts. NSS storage requires a
customer such as Peoples to request or nominate a withdrawal to get delivery on a date certain. DSS
storage service, on the other hand, allows for no-notice delivery.
3
The trial court ruled that the District has the authority to assess the ad valorem taxes for the
years in question on the gas it allocated to Peoples. We review de novo the trial court's conclusions
of law determining each question of law independently. Quick v. City of Austin, 7 S.W.3d 109, 116
(Tex. 1999). We review the trial court's findings of fact for legal and factual sufficiency, as we do
with jury findings. See Ashcraft v. Lookadoo, 952 S.W.2d 907, 910 (Tex. App.—Dallas 1997, pet.
denied).
Our analysis leads us, through the following logical steps, to conclude that taxing this gas
infringes the Commerce Clause:
(1) Peoples owns this gas for ad valorem tax purposes.
(2) The Commerce Clause shields this gas from ad valorem taxation.
(A) This gas is in interstate commerce.
(B) This storage does not remove this gas from interstate commerce.
(C) The District cannot tax this gas.
For these reasons, we reverse the judgment of the trial court and render judgment that assessing these
ad valorem property taxes for these years was improper.
(1) Peoples Owns this Gas for Ad Valorem Tax Purposes
The District and Peoples agree that, under the Commission's regulations, Pipeline does not
own the gas in its pipeline system. Peoples contends that it does not own, for ad valorem tax
purposes, any amount of the massive volume of natural gas lying beneath Harrison County; the
District responds that someone must own the gas, and, since Pipeline certainly does not, Peoples
must be the taxable owner of the portion of the gas allocable to its account.
4
"Property taxes are the personal obligation of the person who owns or acquires the property
on January 1 of the year for which the tax is imposed." TEX . TAX CODE ANN . § 32.07(a) (Vernon
2008). The Texas Tax Code does not define "own" or "owner" for purposes of assessing ad valorem
taxes. Texas courts have generally defined taxable "owner" as the individual or entity holding legal
title to the property or holding an equitable right to obtain legal title. See Childress County v. State,
127 Tex. 343, 92 S.W.2d 1011, 1015 (1936); Travis Cent. Appraisal Dist. v. Signature Flight
Support Corp., 140 S.W.3d 833, 840 (Tex. App.—Austin 2004, no pet.); Comerica Acceptance
Corp. v. Dallas Cent. Appraisal Dist., 52 S.W.3d 495, 497 (Tex. App.—Dallas 2001, pet. denied).
If an individual or entity does not hold perfect legal title, however, that individual or entity may still
be considered the taxable owner of property "if he is the record owner, or is vested with the apparent
legal title, or is in possession thereof, coupled with such claims and evidences of ownership as will
justify the assumption that he is the owner thereof." Childress County, 92 S.W.2d at 1015; Signature
Flight Support Corp., 140 S.W.3d at 840. The term "owner" has no fixed legal meaning:
The meaning of the term owner is not the same under all circumstances. It is not a
technical term or word at all, but one of wide application in various connections. In
all instances its meaning must be ascertained from the context and subject matter.
Realty Trust Co. v. Craddock, 131 Tex. 88, 112 S.W.2d 440, 443 (1938); see Signature Flight
Support Corp., 140 S.W.3d at 839. That said, we examine the "context and subject matter" here to
determine whether Peoples owns the gas in question.
5
We begin with a short explanation of the highly regulated natural gas transportation and
storage system and the dealings between Pipeline and its customers, including Peoples. The
Commission restructured the natural gas transport and storage industry in 1992. This restructuring
created a system of commercial rights for the pipeline customer that was separate from the physical
operation of the pipeline system. Buyers and sellers conduct transactions at commercial
points—"paper points" or imaginary points—along the pipeline at which a purchase may be
completed, points that do not necessarily reflect the physical location of the gas purchased. Pursuant
to this restructuring and to facilitate purchase transactions, Pipeline established geographical zones,
such as the South Texas zone, the "TEX-OK" zone, and the Iowa-Illinois zone, which help identify
the distance the gas is transported from the point at which it was injected into the pipeline system.
Applying the Comerica/Travis County test, we conclude Peoples is the owner for ad valorem
taxation purposes. As the parties agree, Pipeline has complete control of the physical operation of
the pipeline system. Pipeline decides where and when the natural gas is stored. There is no physical
connection between a Pipeline customer's storage account balance and physical volumes at any
particular storage facility. The District acknowledges that Pipeline's accounting methods are
completely divorced from the physical reality of the natural gas location. Pipeline's customers
purchase volumes of natural gas at what the parties refer to as a "paper" pooling point after which
time, Peoples emphasizes, the purchaser retains no control to direct the physical movement of the
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natural gas purchased. Peoples also emphasizes that Pipeline's storage fields are operated on an
aggregated basis. That is, none of its services are specifically linked to any particular storage field.
Relevant documents show that Peoples purchased natural gas and paid for its transportation
to the Iowa-Illinois zone. Of course, the fungible and ethereal nature of natural gas makes it
impossible to ascertain the physical location of a given allocated portion of natural gas at any
moment. Peoples contends that this documentary evidence in the form of Commission-approved
agreements between Peoples and Pipeline suggests that Peoples' allocation of natural gas is
"contractually" located in the Iowa-Illinois zone. Obviously, Pipeline cannot identify particular
volumes of gas as belonging to a particular customer when physically transporting or storing natural
gas.
Consistent with Commission regulations, Pipeline is in full custody, control, and possession
of the natural gas within the pipeline system. Only Pipeline can direct the physical movement of the
gas once it is placed in the pipeline; and, even after a purchase of gas at a paper pooling point, the
purchaser obtains no control over the physical movement of the volume of natural gas purchased.
Peoples has no legal right to the natural gas located at North Lansing; it cannot specifically request
gas from that facility and could not merely back a truck up to the facility and remove any amount of
natural gas. Nor is there any indication that it could do any such thing in Illinois. Peoples
emphasizes that it owns merely contractual rights to physically receive natural gas in Chicago and
that its purchases from Pipeline call for contractual storage in the Iowa-Illinois zone.
7
Nonetheless, by regulation, ownership rights could not be transferred to Pipeline. That said,
according to the District, legal title must lie with Peoples. No doubt gas is stored beneath Harrison
County; there must be an owner of that gas for tax purposes. Considering the nature of the product
at issue here, the nature of the pipeline in which customers' fungible goods must be commingled, and
the highly regulated industry in which Pipeline and Peoples conduct their business and which
prohibits Pipeline from having ownership rights in the gas but requires that it maintain physical
control of the natural gas, we conclude the trial court correctly decided that, for tax purposes, Peoples
owns an allocation of the natural gas stored in Harrison County.3
3
Last year, the Kansas Supreme Court decided a case similar to the instant case. See In the
Matter of the Appeal of the Director of Prop. Valuation, 284 Kan. 592, 161 P.3d 755 (2007). In that
case, several non-Kansas entities (municipal utilities, natural gas marketing company, and public
utilities) had contracted for gas storage or deferred delivery with an interstate pipeline that
maintained storage facilities in Kansas. Id. The parties stipulated that none of the entities had
facilities within Kansas or sold, traded, or delivered natural gas anywhere in Kansas. Id. at 594. In
Kansas, a public utility's property is not exempt from ad valorem taxes. The taxing entity argued that
non-Kansas companies were public utilities within the following definition: "that own, control, and
hold for resale stored natural gas in an underground formation in this state." Id. at 597. Based on
the legal and contractual relationship between the pipeline and its customers established by
Commission-approved tariffs, the Kansas Supreme Court concluded the entities were not public
utilities because they did not "control" and "hold for resale" the stored natural gas. Id. at 606. With
that, the non-Kansas companies' allocations were exempt from ad valorem taxes. It did, however,
touch on the ownership aspect of the "public utility" definition:
There is no serious dispute that the Taxpayers own (or at least hold contractual rights
to) storage balances of natural gas contained in underground formations in the state.
Nevertheless, whether the Taxpayers actually control and hold the natural gas is
doubtful. It is undisputed that tariffs issued by the . . . Commission . . . establish that
control and possession of natural gas delivered to interstate pipelines for
transportation and storage is vested in the pipelines until the gas is redelivered to
their customers. It is also undisputed that the interstate pipelines cannot track and
8
(2) The Commerce Clause Shields this Gas from Ad Valorem Taxation
Peoples argues that, even if it could be said that it is the taxable owner in this matter, the
Commerce Clause shields it from the District's assessment since the natural gas is in interstate
commerce and since the tax cannot pass the test that would permit the District to assess such a tax
on this property. We agree.
The Commerce Clause grants Congress the power to regulate interstate commerce. U.S.
CONST . art. I, § 8, cl. 3. Congress protects interstate business activity by restricting state regulation
of interstate commerce.4 See Marathon Ashland Petroleum, L.L.C. v. Galveston Cent. Appraisal
Dist., 236 S.W.3d 335, 337–38 (Tex. App.—Houston [1st Dist.] 2007, no pet.).
(a) This Gas Is in Interstate Commerce
Traditionally, the United States Supreme Court has identified three ways in which goods can
enter the stream of interstate commerce: (1) the goods have been shipped, (2) the goods have been
placed with a common carrier, or (3) the goods have started a continuous route or journey into
account for discrete packages or molecules of natural gas delivered for storage. As
the Supreme Court said in Central Illinois, under federal regulations the pipeline
customers have "little or no control over where the severed natural gas is stored or
for how long."
Id. at 603. Our conclusion on the ownership issue is consistent with the Kansas Supreme Court's
conclusion.
4
Congress has granted the Commission exclusive jurisdiction to regulate the natural gas
industry through the Natural Gas Act (NGA). Schneidewind v. ANR Pipeline Co., 485 U.S. 293
(1988).
9
interstate commerce. See Coe v. Errol, 116 U.S. 517, 527 (1886); Marathon Ashland Petroleum,
L.L.C., 236 S.W.3d at 338. The goods become a part of interstate commerce when their movement
demonstrates that the goods have started and are bound for another state. See Hughes Bros. Timber
Co. v. Minnesota, 272 U.S. 469, 476 (1926). Goods are not a part of interstate commerce when the
record shows only preparation or intent to send those goods out of state. See id.; Marathon Ashland
Petroleum, L.L.C., 236 S.W.3d at 340–41.
Here, it is apparent that the natural gas has been placed with a common carrier, Pipeline.
Unlike the taxpayer in Marathon Ashland Petroleum, L.L.C., Peoples does not maintain any control
over the physical movement of the gas. Moreover, that common carrier is an interstate pipeline
specifically governed by the Commission. There is little dispute that the natural gas in the pipeline
is in interstate commerce. A critical question is whether the gas in North Lansing storage is similarly
in interstate commerce.
(b) This Storage Does Not Remove this Gas from Interstate Commerce
The District takes the position that, although an extremely small portion of the natural gas
(that portion actually moving in the pipeline) is actually in interstate commerce, the rest of the
natural gas is stored and therefore subject to local taxation wherever it is located. More specifically,
the District argues that the fact that the portion of natural gas allocated to Peoples here is not actually
moving in the pipeline and is, rather, stored beneath Harrison County takes the gas outside interstate
10
commerce, leaving it subject to taxation as a part of the mass of property within the State of Texas.
See Coe, 116 U.S at 527; Marathon Ashland Petroleum, L.L.C., 236 S.W.3d at 338.
We conclude this contention fails in the face of two areas of the law: authorities determining
the effect of transportation stoppage on whether a product is in interstate commerce and authorities
more specifically addressing storage of natural gas.
First, we look to the line of cases examining generally the circumstances surrounding the
stoppage of products that have been injected into the stream of interstate commerce and determining
whether a stoppage in a jurisdiction would subject the goods to local taxation. See Indep.
Warehouses, Inc. v. Scheele, 331 U.S. 70, 73 (1947); see also Virginia Indonesia Co. v. Harris
County Appraisal Dist., 910 S.W.2d 905, 912–13 (Tex. 1995).5 When there is a break in the
interstate transit, the property may come to rest within a state and become subject to the power of
the state to impose a nondiscriminatory property tax. Indep. Warehouses, Inc., 331 at 72–73. The
crucial question in determining whether the state may exert its taxing power is whether there is
"continuity of transit." Id. at 73 (citing Carson Petroleum Co. v. Vial, 279 U.S. 95, 101 (1929)). The
United States Supreme Court explained the concept:
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
5
In Virginia Indonesia Company, the Texas Supreme Court determined whether the Import-
Export Clause would permit imposition of an ad valorem tax. Similar considerations are involved
when determining the "continuity of transit" for purposes of the Commerce Clause. See 910 S.W.2d
at 912.
11
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 question is always one of substance, and in each case it is
necessary to consider the particular occasion or purpose of the interruption during
which the tax is sought to be levied. . . .
Id. (quoting Minnesota v. Blasius, 290 U.S. 1, 9–10 (1933)). We must look at the facts of each case
and will consider the owner's intention, the owner's ability to change destination, the agency or
method of transportation, the actual continuity of the journey, and the purpose of the interruption.
See Champlain Realty Co. v. Town of Battleboro, 260 U.S. 366, 377 (1922).
The character of the shipment in such a case depends on the circumstances, including what
the owner has done to prepare for the journey and to carry it out. Virginia Indonesia Co., 910
S.W.2d at 912–13. For instance, when the stoppage of property in interstate commerce is necessary
for the safety and convenience of the goods, we do not consider the continuity of transit broken.
Indep. Warehouses, Inc., 331 U.S. at 73. On the other hand, if the stoppage is attributable to the
business purpose of the owner, then we deem the continuity of transit terminated and the goods are
subject to tax in the jurisdiction of the stoppage. Virginia Indonesia Co., 910 S.W.2d at 912. Put
another way,
[w]here property has come to rest within a State, being held there at the pleasure of
the owner, for disposal or use, so that he may dispose of it either within the State, or
for shipment elsewhere, as his interest dictates, it is deemed to be a part of the
general mass of property within the State and is thus subject to its taxing power.
Indep. Warehouses, Inc., 331 U.S. at 73.
12
In the instant case, the record shows and the law requires that Peoples has no control over
the physical operations of the pipeline. Control lies solely with Pipeline. Since Peoples has no
control over where that 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. Simply put, it made no decision at all regarding the physical location of the stored natural
gas.
The District contends Peoples benefits from the storage at North Lansing since it can buy gas
at a cheaper rate in the summer months and store it for later use in the winter months when the
demand in the Chicago area increases dramatically. It may well be the case that the advent of a
pipeline system that will allow for storage of a significant amount of natural gas is beneficial to local
distributing companies generally. Indeed, such a system would seem to be beneficial to all. Such
a benefit, however, does not alter the fact that Peoples, while benefitting from a storage system
generally, makes no decision to store the natural gas at North Lansing specifically. The record shows
that the contracts between Peoples and Pipeline do not specify that the gas would be located in
Texas. In fact, those agreements provide for "contractual" storage in Iowa and Illinois. The truth
is, Pipeline operates its system without regard to the physical reality of identifying a specific storage
facility at which any customer's volume of natural gas will be physically stored. Rather, Pipeline
operates the pipeline on an "aggregate" basis in which all the storage facilities serve the pipeline as
needed to operate efficiently and effectively. With these facts in mind, we conclude that the
13
stoppage of natural gas in North Lansing does not serve the business purpose of Peoples. To the
contrary, Peoples has no control over where the natural gas is stored, and we cannot say that the
stoppage in Harrison County serves a business purpose as contemplated by the cases dealing with
the continuity of transit of goods in interstate commerce.
Second, we examine law specifically concerning the storage of natural gas. Commission
regulations provide some guidance as to whether storage would take the natural gas out of the stream
of interstate commerce: "Transportation includes storage, exchange, backhaul, displacement, or
other methods of transportation." 18 C.F.R. § 284.1(a). By regulation, then, at least some storage
is considered a part of the transportation process. Therefore, storage can be a part of interstate
transportation. Storage in North Lansing, then, as a matter of regulatory definition, would not
necessarily take the natural gas out of the stream of interstate commerce.
Indeed, the United States Supreme Court has spoken on this issue:
Petitioners argued below that Storage was not a natural gas company within the
meaning of the NGA, contending that the storage of gas constitutes neither the
transportation nor the sale of gas in interstate commerce. Both courts below rejected
this argument . . . reasoning that "transportation" includes storage. "Underground gas
storage facilities are a necessary and integral part of the operation of piping gas from
the area of production to the area of consumption."
Schneidewind, 485 U.S. at 295 n.1 (quoting Columbia Gas Transmission Corp. v. Exclusive Gas
Storage Easement, 776 F.2d 125, 129 (6th Cir. 1985)); see also Michigan-Wisconsin Pipe Line Co.
v. Calvert, 347 U.S. 157, 166–68 (1954) (evaluating Texas tax on "gathering" gas in context of
interstate pipeline, characterizing situation and "so closely related to interstate transportation as to
14
be practically a part of it," and concluding that the tax in that situation violated Commerce Clause).
This storage of this natural gas in North Lansing does not take the gas out of interstate commerce.
To conclude otherwise would be to segregate, from the pipeline itself, a function deemed "necessary
and integral" to the pipeline. We will not do so and, instead, conclude that this storage does not take
this natural gas out of the stream of interstate commerce it entered by injection into an interstate
pipeline. The natural gas allocated to Peoples is in the stream of interstate commerce, and this
storage does not remove it from interstate commerce.
(c) The District Cannot Tax this Gas
It remains possible that the District could still have the authority to tax the portion of natural
gas allocated to Peoples, despite the fact that the natural gas has been injected into and remains
within the stream of interstate commerce. A state tax does not violate the Commerce Clause if it
(1) is applied to an activity with a substantial nexus with the taxing state, (2) is fairly apportioned,
(3) does not discriminate against interstate commerce, and (4) is fairly related to the services
provided by the state. See Vinmar v. Harris County Appraisal Dist., 947 S.W.2d 554, 555 (Tex.
1997) (citing Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977)); Diamond Shamrock
Ref. and Mktg. Co. v. Nueces County Appraisal. Dist., 876 S.W.2d 298 (Tex. 1994); Rylander v. 3
Beall Bros. 3, Inc., 2 S.W.3d 562, 570 (Tex. App.—Austin 1999, pet. denied). If a tax does not
satisfy this test, called the Complete Auto test, the Commerce Clause prohibits the tax. See Harris
County Appraisal Dist. v. Transamerica Container Leasing, Inc., 920 S.W.2d 678, 682 (Tex.
15
App.—Houston [1st Dist.] 1995, writ denied). The second and third parts of the Complete Auto
analysis, which require fair apportionment and nondiscrimination, prohibit taxes that pass an unfair
share of the tax burden onto interstate commerce. Quill Corp. v. N.D., 504 U.S. 298, 313 (1992).
The first and fourth prongs, which require a substantial nexus and a relationship between the tax and
state-provided services, limit the reach of state taxing authority so as to ensure that state taxation
does not unduly burden interstate commerce. Id.
The Commerce Clause requires "some definite link, some minimum connection,6 between
a state and the person, property, or transaction it seeks to tax." Allied-Signal, Inc. v. Director,
Division of Tax, 504 U.S. 768, 777 (1992) (quoting Miller Bros. v. Maryland, 347 U.S. 340, 344–45
(1954)); 3 Beall Bros. 3, Inc., 2 S.W.3d at 570. The Commerce Clause requirement of a substantial
nexus with the taxing state is satisfied by the taxpayer's physical presence in the state. 3 Beall Bros.
3, Inc., 2 S.W.3d at 570; Lawrence Indus., Inc. v. Sharp, 890 S.W.2d 886, 892–93 (Tex.
App.—Austin 1994, writ denied); see also Quill Corp., 504 U.S. at 312–14.
The record demonstrates that Peoples maintains no office in Texas. Nor does it have any
employees, representatives, or physical facilities in the State. The physical facilities in Harrison
6
The "substantial nexus" requirement is not, like due process' "minimum contacts"
requirement, a proxy for notice, but rather a means for limiting state burdens on interstate commerce.
Quill Corp., 504 U.S. at 313. Accordingly, an entity may have the "minimum contacts" with a taxing
state as required by the Due Process Clause, and yet lack the "substantial nexus" with that state as
required by the Commerce Clause. Id.
16
County belong to Pipeline, as does the decision to use the North Lansing facility. Further, there is
no evidence that any of the natural gas Peoples has purchased is delivered to any customer in Texas.
If we were to look strictly at the generic act of storing gas in a reservoir in Harrison County,
it might appear that such an activity would have a substantial nexus with the State. We note again
that, as required by the Commission regulations, Pipeline—not Peoples—directs that activity, and
we are to consider not whether Pipeline's activities have a substantial nexus with the State, but
whether Peoples' activities do. Peoples engages in the purchase and delivery of natural gas to its
customers in Chicago. Its only connection in this respect to Texas is through the structure and
location of Pipeline's pipeline and Pipeline's decision to store a significant amount of natural gas in
North Lansing. Such a connection is too tenuous to subject Peoples to ad valorem taxation in
Texas.7
The District contends the nexus lies between the natural gas and the State. The natural gas,
it argues, comes from Texas and is, thus, substantially connected to the State such that the State
should be allowed to tax it. The record suggests that much of the gas is Texas-produced.
7
We also note our sister court's opinion in Rylander v. Bandag Licensing Corp., 18 S.W.3d
296 (Tex. App.—Austin 2000, pet. denied). In Bandag Licensing Corp., the Austin court suggests
that "when the corporation conducts its activity solely through interstate commerce and lacks any
physical presence in the state, no sufficient nexus exists to permit the state to assess tax." Id. at 300.
That connection, along with the facts that the corporation's only activity was the "passive possession
of a license to do business in Texas" and that the corporation had no physical presence in Texas, led
the court to conclude that the Commerce Clause prohibited the imposition of a state tax in that
situation.
17
Nevertheless, we do not have specific volumes of that production, nor could we ever know the
location from which Peoples' allocation originated.
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.
Moving to other parts of the test, we look at the relation between Peoples and services
provided in Harrison County. 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.
3 Beall Bros. 3, Inc., 2 S.W.3d at 571. Even though fire and 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 justifications enough for the imposition of a tax."
See Transamerica Container, 920 S.W.2d at 683. 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
18
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.
Having found that the District's tax on Peoples' gas fails to meet, at least, the first and fourth
prongs of the Complete Auto test, we conclude that assessment of ad valorem taxes, on these facts,
runs afoul of the Commerce Clause.
We reverse the trial court's judgment and render judgment that assessing these ad valorem
property taxes for these years is improper.
Josh R. Morriss, III
Chief Justice
Date Submitted: June 18, 2008
Date Decided: September 24, 2008
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