Opinion issued May 5, 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
OPINION
Appellant ETC Marketing, Ltd. protested the appraisal of its natural gas
stored in Harris County and the resulting assessment of ad valorem taxes. In the
district court, ETC Marketing moved for summary judgment, arguing that its
natural gas was in interstate commerce and therefore exempt from ad valorem
taxation. Appellee Harris County Appraisal District (HCAD) also moved for
summary judgment, arguing that the natural gas was not in interstate commerce,
but even if it were, it was nevertheless subject to ad valorem taxation.
The court denied ETC Marketing’s motion for summary judgment and
granted the appraisal district’s competing motion. ETC Marketing appealed the
rulings. We held that the stored gas was subject to ad valorem taxation, and we
affirmed the trial court’s judgment. Represented by new counsel, ETC Marketing
filed a motion for en banc reconsideration, raising new issues and new arguments.1
We withdraw our prior opinion and vacate our prior judgment, and we issue this
opinion and judgment in their stead. The disposition remains the same. The
1
Before filing its motion for en banc reconsideration, ETC Marketing focused
its arguments on whether its gas was subject to taxation under the standard
of Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 97 S. Ct. 1076
(1977). This was the basis of its arguments in its motion for summary
judgment, response to HCAD’s motion for summary judgment, appellate
briefing on original submission, and initial motion for rehearing. The motion
for summary judgment also included an argument that HCAD lacked
jurisdiction to tax the property, albeit with little explanation or argument.
The final judgment in this case granted HCAD’s motion for summary
judgment and denied ETC Marketing’s motion for summary judgment. The
trial court did not specify the grounds upon which its ruling was based.
Because the issue of whether the trial court properly ruled on the competing
motions for summary judgment was raised on the original submission of this
case, we will address the additional argument urged in the motion for en
banc reconsideration.
2
issuance of this opinion renders the motion for en banc reconsideration moot. See,
e.g., Poland v. Ott, 278 S.W.3d 39, 41 (Tex. App.—Houston [1st Dist.] 2008, pet.
denied); Brookshire Bros., Inc. v. Smith, 176 S.W.3d 30, 41 (Tex. App.—Houston
[1st Dist.] 2004, pet. denied).
Background
ETC Marketing and its affiliate, Houston Pipeline Company, conduct
business and maintain offices in multiple locations throughout Texas. Both entities
have offices and employees in Houston and Dallas.
Houston Pipeline operates an intrastate natural gas pipeline. Its system is
located entirely within Texas, although it connects to interstate pipelines. It owns
and stores natural gas in the Bammel reservoir, a depleted oil reservoir in Harris
County. As such, both Houston Pipeline and its contractual partners who store gas
at Bammel rely upon and benefit from local emergency and law enforcement
services provided by Harris County. Houston Pipeline pays ad valorem taxes to the
county based on the appraised value of the land, the equipment used to operate the
Bammel reservoir, and the “cushion gas,” which is natural gas stored for the
purpose of maintaining pressure in the reservoir and which is not sold or intended
for sale.
Natural gas is often traded across state lines, and title to the gas transfers to
whomever the seller “causes [the gas] to be delivered” and at the point where it is
3
delivered. Because natural gas is fungible, the point of sale does not necessarily
correspond to a physical location associated with any particular seller’s natural gas.
Put another way, the natural gas that a marketer offers for sale is not identifiable as
any particular molecules of gas that will be delivered to the purchaser. Instead, the
marketer offers gas for sale, and the purchaser receives a corresponding amount of
gas at the location where it is accepted.
Gas owned by various marketers is physically commingled in the pipeline
system. For example, within the Bammel reservoir, gas destined for sale in Texas
is physically commingled with gas destined for sale in interstate commerce.
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. The pipeline system controls
the physical movement of natural gas, and storage facilities such as the Bammel
reservoir are necessary for the efficient movement of the gas and for the regulation
of pipeline capacities so that sufficient quantities can be supplied to users during
peak demand periods.
ETC Marketing is a natural-gas marketer, which buys, sells, and markets
natural gas. It buys natural gas from multiple sellers, principally at the “Katy Hub,”
which is a central delivery and distribution point for natural gas into and out of
4
Texas. Because of the nature of the operation of the Katy Hub, ETC Marketing is
unable to determine whether the natural gas it purchases there originated in Texas.
When ETC Marketing purchases natural gas, it is “immediately entrusted” to
its affiliate Houston Pipeline for storage, and ultimately for transportation to
purchasers through the pipeline system. ETC Marketing’s storage agreement with
Houston Pipeline allows it to buy gas and “time the market” by holding it for
delivery at a later time. 2 Accordingly, ETC Marketing has stored gas in the
Bammel reservoir for several months at a time, buying it during warmer months
and selling it to northern markets in the winter months. The length of time the gas
is stored depends on the volume, time of year, and demand for the gas.
ETC Marketing takes the position that all of its gas stored in the Bammel
reservoir is in interstate commerce, because its business plan is to sell all of the gas
to out-of-state customers. Daniel Hyvl, senior counsel to both ETC Marketing and
Houston Pipeline, testified that ETC Marketing was created for the purpose of
buying and selling gas in the interstate market, as contrasted with the intrastate
2
Although Houston Pipeline operates an intrastate pipeline, it is authorized to
provide such storage and transportation services to ETC Marketing, which
sells some of its gas in the interstate market, without becoming subject to
federal regulation as a natural gas company. See 15 U.S.C. § 717; 15 U.S.C.
§ 3371 (Natural Gas Policy Act of 1978, § 311). However, due to the nature
of this authorization, Houston Pipeline gives precedence to transportation of
intrastate-bound gas and may refuse to deliver interstate gas if necessary for
the operation of the pipeline.
5
business of Houston Pipeline. He explained that all of ETC Marketing’s gas “is
being sold in interstate commerce, because that’s the business they’re in, to market
the gas . . . and not in competition with the pipeline who’s selling in intrastate
marketing.” However, while ETC Marketing generally has a profit-maximizing
motivation to sell its gas only in interstate commerce, there is no legal requirement
that it do so. Rather, Hyvl explained that ETC Marketing is “free to sell” its gas
wherever it could “get the best price.” He also said: “[T]here is nothing that says
that the gas has to go to a particular location . . . . ETC Marketing has the right to
sell” its gas stored at Bammel “anywhere it wants to sell it.”
HCAD appraised the value of approximately 33 billion cubic feet of natural
gas owned by ETC Marketing and stored in the Bammel reservoir for the calendar
year 2010, and it assessed ad valorem taxes on the value of that gas. ETC
Marketing has admitted that it owns the natural gas that was stored in the Bammel
reservoir and was the subject of HCAD’s appraisal. 3 Yet ETC Marketing protested
the tax to the Harris County Appraisal Review Board (ARB), challenging it, in
part, on the legal basis that the gas was entirely exempt from taxation because it
was in interstate commerce. The ARB upheld the inclusion of the natural gas on
3
In its original petition, ETC Marketing alleged that it “owns Property within
the Defendant’s jurisdictional boundaries for the tax year.” “Property” is a
defined term in the original petition: it means “the property and/or properties
listed in Exhibit ‘A’.” Exhibit A to the original petition identifies the
“Property” as “Bammel Working Gas-32,267,485.”
6
the appraisal rolls, and ETC Marketing appealed to the district court. The appeal
was premised entirely on the legal argument that the gas was exempt from taxation
because it was in interstate commerce. CR 3–8 (original petition); CR 23–32 (ETC
Marketing’s motion for summary judgment).
In the district court, the parties filed competing motions for summary
judgment. As summary-judgment evidence, ETC Marketing attached to its motion
several affidavits, explaining the facts relating to the storage and transportation of
the natural gas at issue and establishing the amount of ad valorem property tax paid
by Houston Pipeline for the 2009 and 2010 tax years. HCAD took positions
opposite from ETC Marketing: that the gas was not in interstate commerce, but
even if it were, it would nevertheless be subject to taxation under the standard of
Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 97 S. Ct. 1076 (1977). After
considering the arguments made by the parties, the trial court denied ETC
Marketing’s motion for summary judgment, and it rendered a final judgment in
favor of HCAD. ETC Marketing appealed.
Analysis
On appeal, ETC Marketing contends that the trial court erred by denying its
motion for summary judgment and by granting HCAD’s motion for summary
judgment. To prevail on appeal, ETC Marketing must demonstrate both that its
natural gas was in interstate commerce, and that the trial court erred in its
7
determination that the gas was subject to ad valorem taxation. We conclude that
even if ETC Marketing’s stored gas was in interstate commerce, it has presented
no compelling legal argument that the gas was immune from local taxation.
Accordingly, we will address that issue directly, and we need not separately
resolve whether the gas was actually in interstate commerce (including a subsidiary
evidentiary issue relevant to that issue 4). See TEX. R. APP. P. 47.1.
We review de novo the trial court’s ruling on a motion for summary
judgment. Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 289 S.W.3d
844, 848 (Tex. 2009). When both sides move for summary judgment, and the trial
court grants one motion and denies the other, reviewing courts consider both sides’
summary-judgment evidence, determine all questions presented, and render the
judgment the trial court should have rendered. Gilbert Tex. Constr., L.P. v.
4
One of the exhibits submitted by ETC Marketing in support of its motion for
summary judgment was an affidavit and report from its designated expert
witness, Richard Smead. Among other things, the Smead report opined that
all of the gas “handled by ETC Marketing that traveled to the Bammel Field
was destined for interconnections with interstate pipelines to be carried to
out-of-state markets,” and therefore was “in interstate commerce.” The
district court sustained HCAD’s objection to Smead’s report on the grounds
that his opinions were “unsupported, conclusory, [and] subjective,” and that
his “legal conclusions that the gas is in interstate commerce are ipse dixit,”
and are not competent summary-judgment evidence under Rule 702 of the
Texas Rules of Evidence and Rules 192.3 and 194.2(f) of the Texas Rules of
Civil Procedure. In light of the disposition of this case, we need not resolve
the issue of whether the trial court erred by sustaining HCAD’s objection to
the report. See TEX. R. APP. P. 47.1.
8
Underwriters at Lloyd’s London, 327 S.W.3d 118, 124 (Tex. 2010). Each party
moving for traditional summary judgment bears the burden of showing that no
genuine issue of material fact exists and that it is entitled to judgment as a matter
of law. TEX. R. CIV. P. 166a(c); see Provident Life & Accident Ins. Co. v. Knott,
128 S.W.3d 211, 215–16 (Tex. 2003). When a plaintiff moves for summary
judgment on its own claim, it must conclusively prove all essential elements of its
cause of action. See Rhone–Poulenc, Inc. v. Steel, 997 S.W.2d 217, 223 (Tex.
1999); City of Houston v. Clear Creek Basin Auth., 589 S.W.2d 671, 678 (Tex.
1979). A defendant moving for summary judgment must conclusively negate at
least one essential element of each of the plaintiff’s causes of action or
conclusively establish each element of an affirmative defense. Sci. Spectrum, Inc.
v. Martinez, 941 S.W.2d 910, 911 (Tex. 1997).
The Texas Constitution provides that “all . . . 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(b). Under the 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,”5 as the gas in this case was.6 If federal law exempts
5
TEX. TAX CODE § 11.01; see also id. § 21.02. With respect to the date of the
valuation, which is not a disputed issue in this appeal, the “owner of an
9
inventory” “may elect to have the inventory appraised at its market value as
of September 1 of the year preceding the tax year to which the appraisal
applies.” Id. § 23.12; see Enron Corp. v. Spring Indep. Sch. Dist., 922
S.W.2d 931, 933 (Tex. 1996). ETC Marketing elected a September 2009
valuation for the purposes of the 2010 tax year.
6
In its motion for en banc reconsideration, ETC Marketing argued that
HCAD lacked jurisdiction to impose the tax at issue because the natural gas
was not located in Harris County for “longer than a temporary period.” The
Tax Code does not define “longer than a temporary period.” See TEX. TAX
CODE § 11.01; see also id. § 21.02. When resolving disputes about what
constitutes a “temporary period,” Texas courts have considered whether the
property is in interstate commerce, whether there was an interruption in
transportation, and whether such stoppage was necessary to facilitate
transportation or occurred to accommodate “the business purposes and
profits of the company.” Friedrich Air Conditioning & Refrigeration Co. v.
Bexar Appraisal Dist., 762 S.W.2d 763, 769 (Tex. App.—San Antonio
1988, no writ); see Midland Cent. Appraisal Dist. v. BP Am. Prod. Co., 282
S.W.3d 215, 220–22 (Tex. App.—Eastland 2009, pet. denied); Dallas Cnty.
Appraisal Dist. v. L.D. Brinkman & Co. (Tex.), Inc., 701 S.W.2d 20, 21–22
(Tex. App.—Dallas 1985, writ ref’d n.r.e.); cf. Virginia Indonesia Co. v.
Harris Cnty. Appraisal Dist., 910 S.W.2d 905, 912 (Tex. 1995) (determining
whether goods bound for export were subject to ad valorem taxation).
Contrary to the new assertions in the motion for en banc reconsideration, the
summary-judgment evidence showed that the gas that ETC Marketing stored
in the Bammel Reservoir was not presold and could be sold both within
Texas and out of state. ETC Marketing contracted to store the gas in
Houston Pipeline’s facilities, located entirely within Texas, for its own
business purposes of timing the market and selling the gas at higher prices
out of state during cold months. This interruption in transportation was not
necessary to facilitate transportation of the gas but occurred to accommodate
the profit-maximizing business purposes of the company. The evidence
further showed that the gas was stored for up to several months. Thus, it was
not merely “briefly” passing through Harris County on its way out of state.
Accordingly, ETC Marketing’s natural gas stored in Harris County was not
exempt from taxation due to its presence for a mere “temporary period.”
10
property from ad valorem taxation, then it is also exempt from the state tax. TEX.
TAX CODE § 11.12.
The Commerce Clause grants Congress the power to regulate interstate
commerce, see U.S. CONST. art. I, 8, cl. 3, and it has been interpreted by the United
States Supreme Court to include a “dormant” Commerce Clause, an implicit
prohibition on a state’s imposition of discriminatory burdens on interstate
commerce. 7 The Dormant Commerce Clause does not relieve those engaged in
interstate commerce from their “just share of the state tax burden even though it
increases the cost of doing business.” 8 “The ‘just share of state tax burden’
includes sharing in the cost of providing ‘police and fire protection, the benefit of a
trained work force and the advantages of a civilized society.’” 9 The burden is on
the taxpayer to prove that a tax is invalid under the Dormant Commerce Clause,
but to do so the taxpayer need only prove that the tax fails one prong of the
7
Am. Trucking Ass’ns, Inc. v. Michigan Public Svc. Comm’n, 545 U.S. 429,
433, 125 S. Ct. 2419, 2422–23 (2005); see also In re Nestle USA, Inc., 387
S.W.3d 610, 624–25 (Tex. 2012).
8
Western Live Stock v. Bureau of Revenue, 303 U.S. 250, 254, 58 S. Ct. 546,
548 (1938); accord Commonwealth Edison Co. v. Montana, 453 U.S. 609,
623–24, 101 S. Ct. 2946, 2956–57 (1981); see also Am. Trucking Ass’ns,
545 U.S. at 438, 125 S. Ct. at 2425.
9
Commonwealth Edison, 453 U.S. at 624, 101 S. Ct. at 2957 (quoting Exxon
Corp. v. Wisconsin Dep’t of Revenue, 447 U.S. 207, 228, 100 S. Ct. 2109,
2123 (1980)).
11
Complete Auto test. 10 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.” 11
As explained above, for the purposes of our analysis we assume without
deciding that the natural gas at issue is in the stream of interstate commerce. We
also assume, as admitted by ETC Marketing, that it owns an amount of gas stored
in Harris County, at the Bammel reservoir, equivalent to the amount of gas
appraised by HCAD. 12 The primary argument advanced by ETC Marketing to
10
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., 282 S.W.3d at 223.
11
Barclays Bank, 512 U.S. at 310–11, 114 S. Ct. at 2276 (citing Complete
Auto, 430 U.S. at 279, 97 S. Ct. at 1079).
12
Some of ETC Marketing’s arguments are premised upon the physical nature
of the gas and the pipeline system, effectively suggesting that its gas is not
actually contained within the Bammel reservoir, but that instead it at all
times flows freely throughout the interstate pipeline system. Our legal
analysis accepts ETC Marketing’s admission that it owns the gas located at
Bammel, just as both parties assumed this fact for the purposes of the
appraisal, and just as ETC Marketing itself assumes for accounting and
regulatory purposes. The Tax Code permits a taxpayer protest on the basis
that property should not be included on the appraisal records. See, e.g., TEX.
TAX CODE § 41.41(a)(3). But the challenge raised by the appeals to the
district court and to this court cannot fairly be considered a challenge to the
factual determination that ETC Marketing owned and stored gas at Bammel;
12
evade the application of ad valorem taxation is the operation of the dormant
Commerce Clause, as measured by the four prongs of the Complete Auto test. See
Appellant’s Br. at 32–46.
I. Substantial nexus to the taxing state
The first prong of the Complete Auto test considers whether the tax applies
to an activity that has a substantial nexus with the taxing state. Complete Auto, 430
U.S. at 279, 97 S. Ct. at 1079. ETC Marketing had offices and employees in Harris
County and elsewhere in the state of Texas. The natural gas at issue was purchased
in Texas at the Katy Hub, and it was transported by Houston Pipeline, which also
has offices and employees in the state of Texas. Houston Pipeline’s entire system
is located within Texas, including the Bammel reservoir. The natural gas in
question was owned by ETC Marketing and stored for up to several months at a
time in the Bammel reservoir, pursuant to a storage agreement with Houston
Pipeline.
These factors establish that ETC Marketing had a substantial physical
presence in Harris County, and they therefore distinguish this case from one it
relies upon in this appeal, Peoples Gas, Light, & Coke Co. v. Harrison Cent.
Appraisal Dist., 270 S.W.3d 208 (Tex. App.—Texarkana 2008, pet. denied). In
instead the appeals assert a legal challenge to HCAD’s assessment of a tax
on that gas based upon ETC Marketing’s legal contention that the gas is in
interstate commerce and therefore exempt from local taxation.
13
Peoples Gas, the court of appeals held that a tax assessment on stored natural gas
was invalid under Complete Auto because a substantial nexus with Texas was
lacking. Id. at 219. But unlike this case, Peoples Gas had no physical facilities,
employees, representatives, or customers in Texas. Id. at 218. Its 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. Id. at
218–19. In contrast, 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 Houston Pipeline. Unlike the pipeline at issue
in Peoples Gas,13 Houston Pipeline’s facilities are located entirely within Texas,
including the Bammel reservoir in Harris County. There was no evidence that the
gas was already bound for another state when it was committed to Houston
Pipeline. 14 Moreover, unlike the scenario in Peoples Gas, in which the court
13
Peoples Gas, Light, & Coke Co. v. Harrison Cent. Appraisal Dist., 270
S.W.3d 208, 211 (Tex. App.—Texarkana 2008, pet. denied) (pipeline at
issue had “many” associated “storage facilities” that were “operated ‘in the
aggregate,’” such that the pipeline’s storage and transportation of gas did not
“use any particular storage field exclusively”).
14
In contrast, in Peoples Gas the appellant had purchased natural gas and paid
for its “contractual storage in the Iowa-Illinois zone,” “transportation to the
Iowa–Illinois zone,” and the contractual right to physical delivery in
Chicago, Illinois. Id. at 213–14.
14
emphasized that the owner of the gas made no decision to store gas in Texas to
serve its own business purpose,15 here there was evidence that ETC Marketing
contracted to store the gas in Houston Pipeline’s facilities, located entirely within
Texas, for its own business purposes of timing the market and selling the gas at
higher prices out of state during cold months.16 And although ETC Marketing
asserts that Houston Pipeline had the contractual right to control where the gas was
stored, the record contains no evidence that Houston Pipeline had storage capacity
for the appraised volume of gas at any location other than at the Bammel reservoir.
The prolonged physical presence of ETC Marketing’s gas, deliberately
stored in Texas, also distinguishes this case from the circumstances presented in
Midland Central Appraisal District v. BP America Production Co., 282 S.W.3d
15
Id. at 216 (“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.”).
16
Our dissenting colleague contends that by observing the differences between
this case and Peoples Gas, we have “implicitly” concluded that the gas at
issue was not in interstate commerce. Not so. Still, we observe the
distinction between the cases because it is ETC Marketing’s express
contention that its gas is in interstate commerce even while it is being stored
at Bammel pending its later decision of where and when to sell the gas. See
Appellant’s Br. at 27. The circumstances that inform a decision about
whether goods are “in transit” also may inform a court’s decision about
whether the first and fourth nexus requirements of Complete Auto are met.
See Diamond Shamrock Ref. & Mktg. Co. v. Nueces Cnty. Appraisal Dist.,
876 S.W.2d 298, 302 (Tex. 1994).
15
215 (Tex. App.—Eastland 2009, pet. denied), in which ad valorem tax was
improperly assessed on oil passing in interstate commerce through an interstate
pipeline, but temporarily held in a tank farm located in Texas. 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. See 282 S.W.3d at 221–23.
ETC Marketing argues that the United States Supreme Court has held that
physical presence does not satisfy the substantial nexus test in ad valorem cases.
We disagree. ETC Marketing relies on Quill Corp. v. North Dakota By & Through
Heitkamp, 504 U.S. 298, 112 S. Ct. 1904 (1992), which reaffirmed that physical
presence satisfies the first prong of the Complete Auto test in sales-and-use tax
cases. See id. at 317–18, 112 S. Ct. at 1916. Texas cases have come to the same
conclusion in other contexts and expressly rejected ETC Marketing’s argument.
See, e.g., Rylander v. 3 Beall Bros. 3, Inc., 2 S.W.3d 562, 570 (Tex. App.—Austin
1999, pet. denied) (franchise tax case, citing Quill Corp., 504 U.S. at 312–14, 112
S. Ct. 1904).17
17
Moreover, this issue was presented to the Supreme Court of Texas in
Virginia Indonesia Co. v. Harris County Appraisal Dist., 910 S.W.2d 905
(Tex. 1995), a case that challenged HCAD’s assessment of ad valorem taxes
on goods stored in Harris County while in transit intended for foreign export.
16
The Commerce Clause requirement of a substantial nexus with the taxing
state is satisfied for purposes of an ad valorem tax by the taxpayer’s physical
presence in the state in the form of physical storage of tangible personal property.
Because ETC Marketing was physically present in the state, and the activity being
taxed—ownership and storage of natural gas—occurred in Harris County, 18 there is
a substantial nexus between the activity being taxed and the state of Texas.
The Court’s majority resolved that appeal by concluding that the tax violated
the federal constitution’s Import-Export Clause, U.S. CONST. art. 1, § 10,
cl. 2, expressly declining to address whether the tax also offended the
Commerce Clause. See VICO, 910 S.W.2d at 915. But in his dissenting
opinion, then-Justice Nathan Hecht did reach the issue, joined by then-
Justice Priscilla Owen. And Justice Hecht observed in that case: “The goods
clearly have a nexus to this state. They are present for relatively prolonged
periods during which they receive local services such as police and fire
protection.” Id. at 925 (Hecht, J., dissenting); see also Peoples Gas, 270
S.W.3d at 218 (“The Commerce Clause requirement of a substantial nexus
with the taxing state is satisfied by the taxpayer’s physical presence in the
state.”).
18
Notably, in similar circumstances the supreme courts of both Oklahoma and
Kansas have recently found the required substantial nexus to exist based
solely on the physical presence of the gas and without regard to any of the
owner’s other activities within the state. See In re Assessment of Pers. Prop.
Taxes Against Missouri Gas Energy, Div. of S. Union Co., for Tax Years
1998, 1999, & 2000, 234 P.3d 938, 959 n.84 (Okla. 2008) (expressly
declining to follow Peoples Gas), cert. denied sub nom. Missouri Gas
Energy v. Schmidt, 559 U.S. 970, 130 S. Ct. 1685 (2010); In re Appeals of
Various Applicants from a Decision of Div. of Prop. Valuation of State for
Tax Year 2009 Pursuant to K.S.A. 74-2438, 313 P.3d 789, 799 (Kan. 2013)
(also declining to follow Peoples Gas: “There is axiomatically a substantial
nexus between Kansas and the gas stored in this state.”), cert. denied, 135 S.
Ct. 51 (2014).
17
Accordingly, we conclude that the tax in this case applies to an activity that has a
substantial nexus with the taxing state. See Complete Auto, 430 U.S. at 279, 97 S.
Ct. at 1079.
II. Fair apportionment
The second prong of the Complete Auto test is whether the tax is fairly
apportioned. Id. “The central purpose behind the apportionment requirement is to
ensure that each State taxes only its fair share of an interstate transaction.”
Goldberg v. Sweet, 488 U.S. 252, 260–61, 109 S. Ct. 582, 588 (1989). To
determine “whether a tax is fairly apportioned” we examine “whether it is
internally and externally consistent.” Id. at 261, 109 S. Ct. at 589.
a. Internal consistency. A tax is internally consistent when it is
“structured so that if every State were to impose an identical tax, no multiple
taxation would result.” Id. We consider the text of the challenged statute and
determine whether multiple taxation would ensue if other States had identical
statutes. Id. Here, the relevant provisions of the Texas Tax Code impose taxes on
“tangible personal property” that is located in the taxing unit on the date of
valuation “for longer than a temporary period.” TEX. TAX CODE §§ 11.01, 21.02. It
has been conceded for purposes of this appeal that ETC Marketing owned the gas
at issue and that it was located in Harris County at the time its value was assessed.
We have also explained that the gas was present in Harris County for longer than a
18
temporary period. See supra note 6. There is no argument that ETC Marketing
contracted to store its gas in any other state. There is no argument that any other
taxing jurisdiction has attempted to impose an ad valorem tax on the gas at issue
for a period of time that overlaps the assessment at issue. 19 Because the record does
not suggest that ETC Marketing attempted to store its gas in two different states at
the same time, its value could not be taxed by another jurisdiction at the same time,
and thus we conclude on this record that the tax is internally consistent. See
Goldberg, 488 U.S. at 261, 109 S. Ct. at 589.
b. External consistency. “The external consistency test asks whether the
State has taxed only that portion of the revenues from the interstate activity which
reasonably reflects the in-state component of the activity being taxed.” Id. at 262,
109 S. Ct. at 589. “We thus examine the in-state business activity which triggers
the taxable event and the practical or economic effect of the tax on that interstate
19
Dan Hyvl, senior counsel to ETC Marketing, specifically testified that the
company had no concern about another state imposing ad valorem tax while
the gas was in transit because once the gas leaves the state, it belongs to the
purchaser. This refutes the suggestion, made in the motion for en banc
reconsideration, that our holding in this case would subject all “natural gas
suppliers” to multiple taxation as natural gas in commerce traverses multiple
jurisdictions. Moreover, ETC Marketing does not suggest that all interstate
natural gas sales involve the particular facts that are dispositive in this case,
including the deliberate storage of gas for more than a “temporary period,”
within one taxing jurisdiction, for reasons that serve the owner’s business
purposes as opposed to being merely incidental to the interstate
transportation of the gas to facilitate its sale.
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activity.” Id. HCAD argues that the tax is externally consistent because it has a
right to impose the ad valorem tax and because the gas is stored for months rather
than simply being present on the date of assessment or valuation. ETC Marketing
argues that the tax is externally inconsistent because it is not possible to determine,
at any given time, the actual, physical location of its natural gas. It says in its brief:
“Given the ethereal nature of gas, it is impossible to determine what portion of the
gas to which ETC has a right, if any, is actually located under Harris County.”
Likewise, it contends that it is not possible to determine whether or how much of
its natural gas originated in Texas. But as we have already explained, we must
reject this reasoning because ETC Marketing has acknowledged its ownership of
the 33 billion cubic feet of natural gas stored in the Bammel reservoir as to which
HCAD assessed taxes. In light of this record, ETC Marketing’s argument that the
tax was externally inconsistent because it was not possible to determine the
location of particular molecules of its gas must fail. The tax reflects the in-state
component of the storage of the entire volume of gas and is externally consistent.
Accordingly, we conclude that the tax in this case was fairly apportioned. See
Complete Auto, 430 U.S. at 279, 97 S. Ct. at 1079.
III. Discrimination against interstate commerce
The third prong of the Complete Auto test is whether the tax discriminates
against interstate commerce. Id. A tax is nondiscriminatory under Complete Auto
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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. Based on its argument that the tax is not fairly apportioned, ETC Marketing
concludes that the tax discriminates “in practical effect.” We have explained why
its arguments as to fair apportionment are not meritorious. HCAD taxed only that
quantity of gas stored in Harris County on the date of taxation and as to which
ETC Marketing acknowledged its ownership. Nothing in the record indicates that
these taxes were selectively imposed on interstate commerce or that the rates of
taxation were different or more onerous for property in interstate commerce.
Nothing in the record indicates any lack of uniformity or unfairness in the process
of assessing ad valorem taxes on ETC Marketing’s gas which we assume to be in
interstate commerce as compared with like property purely in intrastate commerce.
Accordingly, we conclude that the ad valorem taxes here were nondiscriminatory.
See Nueces Cnty Appraisal Dist. v. Diamond Shamrock Refining & Marketing Co.,
853 S.W.2d 212, 217–18 (Tex. App.—Corpus Christi 1993) (“Clearly, this
nondiscriminatory tax passes this test because the taxing state only taxed that
property which was present within its boundaries and received governmental
services regardless of its origin or its destination.”), aff’d, 876 S.W.2d 298 (Tex.
1994); see also Vinmar, Inc. v. Harris Cnty. Appraisal Dist., 947 S.W.2d 554, 559
(Tex. 1997) (Hecht, J., dissenting) (“The tax in this case is nondiscriminatory; that
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is, it does not single out property awaiting export. It is imposed on all personal
property in Harris County on January 1 each year.”); cf. Michelin Tire Corp. v.
Wages, 423 U.S. 276, 287, 96 S. Ct. 535, 542 (1976) (noting that
“nondiscriminatory ad valorem” and other types of taxes share “the characteristic
that they cannot be selectively imposed and increased so as substantially to impair
or prohibit importation”); Dep’t of Revenue of State of Wash. v. Ass’n of Wash.
Stevedoring Cos., 435 U.S. 734, 748, 98 S. Ct. 1388, 1398 (1978) (“The
Commerce Clause balance tips against the tax only when it unfairly burdens
commerce by exacting more than a just share from the interstate activity.”)
The tax at issue in this case is an ad valorem tax of general application, and
we hold that it was not discriminatory. See Complete Auto, 430 U.S. at 279, 97 S.
Ct. at 1079.
IV. Fair relation to State-provided services
The fourth and final prong of the Complete Auto test is whether the tax is
fairly related to the services provided by the state. Id. “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, 199–200, 115 S. Ct. 1331, 1345–46 (1995); see
also In re Nestle USA, Inc., 387 S.W.3d 610, 625 (Tex. 2012). “[P]olice and fire
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protection, 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.” Jefferson Lines, 514 U.S. at 199–200, 115 S. Ct. at 1345–46.
ETC Marketing argues that the “fairly related” prong is not satisfied because
the gas was entrusted to Houston Pipeline, which pays taxes on the Bammel
reservoir and the equipment related to it. It further argues that Houston Pipeline
has complete and exclusive control over the activity being taxed, which is the
storage of the gas in the reservoir. However, the summary-judgment evidence
showed that ETC Marketing retained control over the disposition of the gas for its
own business purposes.
ETC Marketing has the burden of proof on this Complete Auto issue. See
Barclays Bank, 512 U.S. at 314, 114 S. Ct. at 2278. It 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. Accordingly, we
conclude that the summary-judgment evidence shows that the tax in this case is
fairly related to the services provided by the state. See Complete Auto, 430 U.S. at
279, 97 S. Ct. at 1079; accord In re Assessment of Pers. Prop. Taxes Against
Missouri Gas Energy, Div. of S. Union Co., for Tax Years 1998, 1999, & 2000, 234
P.3d 938, 959 n.84 (Okla. 2008) (“suffice it to say that both the pipeline company
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and the owner of gas stored in an underground storage facility benefit from the
state’s services and protection”), cert. denied sub nom. Missouri Gas Energy v.
Schmidt, 559 U.S. 970, 130 S. Ct. 1685 (2010); In re Appeals of Various
Applicants from a Decision of Div. of Prop. Valuation of State for Tax Year 2009
Pursuant to K.S.A. 74-2438, 313 P.3d 789, 799 (Kan. 2013), cert. denied, 135 S.
Ct. 51 (2014).
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Conclusion
Although the parties have vigorously disputed whether the natural gas being
stored at the Bammel reservoir was in interstate commerce for the purposes of
evaluating the validity of an ad valorem tax imposed upon it, it is not necessary for
us to resolve that dispute, or the related evidentiary issue concerning the
admissibility of ETC Marketing’s expert report, in order to resolve this appeal.
Even assuming that the gas is in interstate commerce, it was nevertheless
appropriate for an ad valorem tax to be imposed when the owner stored the gas in
Texas for the business purpose of selling the gas at a higher price at a later time of
the owner’s choosing. Accordingly, we affirm the judgment of the trial court.
Michael Massengale
Justice
Panel consists of Justices Keyes, Higley, and Massengale.
Justice Keyes, dissenting. Dissenting opinion issued January 13, 2015.
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