EES Leasing LLC and EXLP Leasing LLC/Ward County Appraisal District v. Ward County Appraisal District/EES Leasing LLC and EXLP Leasing LLC

COURT OF APPEALS
EIGHTH DISTRICT OF TEXAS
EL PASO, TEXAS

EXLP LEASING, LLC AND §
EES LEASING, LLC,
§
Appellants/Cross-Appellees, No. 08-13-00359-CV
§
v. Appeal from the
§
WARD COUNTY APPRAISAL 143rd Judicial District Court
DISTRICT, §
of Ward County, Texas
Appellee/Cross-Appellant. §
(TC#12-09-22893-CVW)
§

§

OPINION

This is an ad-valorem tax case of first impression. The issues in this appeal, like those in

three other cases on our docket, concern the taxation of natural gas pipeline compressor packages.1

1
These cases are: (1) EXLP Leasing LLC and EES Leasing LLC v. Loving County Appraisal District, No.
08-13-00348-CV; (2) MidCon Compression, LLC v. Reeves County Appraisal District and Loving County Appraisal
District, No. 08-13-00322-CV; and (3) Valerus Compression Services, a Texas Limited Partnership, and Valerus
Compression Services Management, LLC, a Texas Limited Liability Company, General Partner v. Reeves County
Appraisal District and Loving County Appraisal District, No. 08-13-00366-CV. Although this case differs both
factually and procedurally from the others, it raises many of the issues present in those cases. The resolution of these
issues is important to the parties involved in all the cases on our docket because millions of dollars are at stake. See,
e.g., Ender Reed & Connor McNally, Heavy Equipment Tax Loophole Being Exploited, TEX. ASS’N OF CNTYS.
(March 26, 2015),
http://county.org/Legislative/news/Pages/County%20Issues%2003-27-15/Companies-Exploit-Heavy-Equipment-Ta
x-Loophole.aspx (last visited September 21, 2015). It is also important to other entities not parties to these cases but
with a vested interest in their outcome. One such entity is United Rentals, Inc., “the world’s largest equipment-rental
provider,” who submitted an amicus curiae brief in this case and in the others supporting the “[c]ompressor
[c]ompanies.”
These compressor packages facilitate the production and processing of natural gas by regulating

the pressure necessary to extract it and move it. In this case, the trial court ruled—as urged by

Appellants/Cross-Appellees—that sixteen compressor packages located in Ward County on

January 1, 2012 qualified as heavy equipment. But the trial court ruled—as urged by

Appellee/Cross-Appellant—that taxable situs lay in Ward County and that the statutory formulas

for calculating the market value of heavy equipment inventory held for lease or rent and the tax

due on it were unconstitutional as applied. On appeal, Appellee/Cross-Appellant challenges the

heavy-equipment declaration and Appellants/Cross-Appellees challenge the situs and

unconstitutional declarations. We affirm, in part, and reverse and render, in part.

FACTUAL AND PROCEDURAL BACKGROUND

Appellants/Cross-Appellees—EXLP Leasing LLC and EES Leasing LLC 2—are in the

business of leasing compressor packages to two entities: EXLP Leasing Operating and Exterran

Energy Solutions, LP, respectively. These four companies are subsidiaries of “Exterran” and

their business relationships are governed by two Equipment Master Rental Agreements. Pursuant

to these agreements, EXLP Leasing Operating and Exterran Energy Solutions, LP, lease the

compressor packages to third parties at an intercompany rate set by Exterran’s treasury

department. The sixteen compressor packages in dispute here were leased from Appellants’ pool

of approximately 1025 compressor packages assigned to their Midland County facility. In 2011,

Appellants received $15,632,670.00 in rental and lease income from this pool of compressor

packages.

That same year, the Legislature amended the statutes governing the taxation of heavy

2
For easy reference, and unless otherwise indicated, we will refer to EXLP Leasing and EES Leasing collectively as
Appellants.

2
equipment inventory: Sections 23.1241 and 23.1242 of the Texas Tax Code. See Act of May 21,

2011, 82nd Leg., R.S., ch. 322, §§ 1, 2, 3, 2011 TEX.GEN.LAWS 938, 938-40. Of particular

importance were changes to the statutory definitions of “dealer,” “dealer’s heavy equipment

inventory,” “sales price,” and “total annual sales.” See id. at §§ 1, 2, 2011 TEX.GEN.LAWS 938,

938-40; TEX.TAX CODE ANN. § 23.1241(a)(1)(defining “dealer”), TEX.TAX CODE ANN.

§ 23.1241(a)(2)(defining “dealer’s heavy equipment inventory”), TEX.TAX CODE ANN.

§ 23.1241(a)(7)(defining “sales price”), TEX.TAX CODE ANN. § 23.1241(a)(9)(defining “total

annual sales”)(West 2015). These changes, which became effective January 1, 2012, altered the

formulas for calculating the market value of heavy equipment inventory and the tax due on it. See

id. at §§ 9, 10, 2011 TEX.GEN.LAWS 938, 941; TEX.TAX CODE ANN. § 23.1241(b)(establishing

formula for calculating market value of heavy equipment inventory for ad valorem purposes),

TEX.TAX CODE ANN. § 23.1241(b-1)(clarifying that market value of item of heavy equipment

lease or rented then sold is the sales price plus the lease and rental payments), TEX.TAX CODE ANN.

§ 23.1242(a)(4)(defining “unit property tax factor”), TEX.TAX CODE ANN.

§ 23.1242(b)(establishing formula for calculating the unit property tax of each item of heavy

equipment)(West 2015).

Previously, only dealers holding items of heavy equipment inventory for sale (or for lease

or rent with an option to purchase) could calculate the market value of their inventory based on

sales for the previous tax year, divided by twelve. See Act of May 20, 1997, 75th Leg., R.S., ch.

1184, § 2, 1997 TEX.GEN.LAWS 4564, 4565-68 (amended 1999); Act of May 28, 1999, 76th Leg.,

R.S., ch. 1550, §§ 1, 2, 1999 TEX.GEN.LAWS 5337, 5337 (amended 2011). But beginning

January 1, 2012, dealers holding items of heavy equipment inventory for lease or rent (not subject

3
to an option to purchase) could calculate the market value of their inventory based on lease or

rental payments for the previous tax year, divided by twelve. Thus, as amended, the formulas for

calculating the market value of heavy equipment inventory and the tax due on it encompassed the

total revenue generated by a dealer’s entire inventory—through sales and lease or rental

payments—for the previous tax year, divided by twelve. See TEX.TAX CODE ANN.

§§ 23.1241(b), 23.1241(b-1), 23.1242(a)(4), 23.1242(b).3

3
These subsections read as follows:

[23.1241](b) For the purpose of the computation of property tax, the market value of a dealer’s
heavy equipment inventory on January 1 is the total annual sales, less sales to dealers, fleet
transactions, and subsequent sales, for the 12-month period corresponding to the preceding tax year,
divided by 12.

[23.1241](b-1) For the purpose of the computation of property tax on the market value of the
dealer’s heavy equipment inventory, the sales price of an item of heavy equipment that is sold
during the preceding tax year after being leased or rented for a portion of that same tax year is
considered to be the sum of the sales price of the item plus the total lease and rental payments
received for the item in the preceding tax year.

. . .

[23.1242](a)(4) ‘Unit property tax factor’ means a number equal to one-twelfth of the preceding
year’s aggregate ad valorem tax rate at the location where a dealer’s heavy equipment inventory is
located on January 1 of the current year.

[23.1242](b) Except for an item of heavy equipment sold to a dealer, an item of heavy equipment
included in a fleet transaction, an item of heavy equipment that is the subject of a subsequent sale, or
an item of heavy equipment that is subject to a lease or rental, an owner or a person who has agreed
by contract to pay the owner’s current year property taxes levied against the owner’s heavy
equipment inventory shall assign a unit property tax to each item of heavy equipment sold from a
dealer’s heavy equipment inventory. In the case of a lease or rental, the owner shall assign a unit
property tax to each item of heavy equipment leased or rented. The unit property tax of each item
of heavy equipment is determined by multiplying the sales price of the item or the monthly lease or
rental payment received for the item, as applicable, by the unit property tax factor. If the
transaction is a lease or rental, the owner shall collect the unit property tax from the lessee or renter
at the time the lessee or renter submits payment for the lease or rental. The owner of the equipment
shall state the amount of the unit property tax assigned as a separate line item on an invoice. On or
before the 10th day of each month the owner shall, together with the statement filed by the owner as
required by this section, deposit with the collector an amount equal to the total of unit property tax
assigned to all items of heavy equipment sold, leased, or rented from the dealer’s heavy equipment
inventory in the preceding month to which a unit property tax was assigned. The money shall be
deposited by the collector to the credit of the owner’s escrow account for prepayment of property
taxes as provided by this section. An escrow account required by this section is used to pay
property taxes levied against the dealer’s heavy equipment inventory, and the owner shall fund the
4
 Relying on the amendments to Sections 23.1241 and 23.1242, Appellants claimed that they

were dealers of heavy equipment inventory, that their pool of 1025 compressor packages in

Midland County qualified as heavy equipment, and that their market value was $1,302,722: the

sum of $15,632,670.00 in lease and rental payments attributable to this pool divided by 12,

rounded down. In 2012, Appellants began paying the taxes due on this amount on a monthly

basis to the taxing authority in Midland County. As to the sixteen compressor packages located in

Ward County, Appellants calculated their market value to be $26,527.00 but ascribed no value to

them in renditions filed with Appellee/Cross-Appellant—Ward County Appraisal District

(hereinafter, “WCAD”).

WCAD asserted that the sixteen compressor packages operating in Ward County on

January 1, 2012 were taxable as business personal property. See TEX.TAX CODE ANN.

§ 23.01(a)(West 2015)(“Except as otherwise provided by this chapter, all taxable property is

appraised at its market value as of January 1.”). Consequently, WCAD placed the compressor

packages on its appraisal roll and appraised them at market value. For the 2012 tax year, the

sixteen compressor packages were valued at $4,651,200.00. Appellants protested the

determinations that the compressor packages belonged on WCAD’s appraisal rolls and the

valuations ascribed to them. The appraisal review board ruled against Appellants, and they

sought judicial review of these rulings.

In the trial court,4 WCAD argued that Sections 23.1241 and 23.1242 were unconstitutional

on their face and as applied because they permit taxation of leased heavy equipment inventory at a

escrow account as provided by this subsection.

TEX.TAX CODE ANN. §§ 23.1241(b), 23.1241(b-1), 23.1242(a)(4), 23.1242(b).
4
Appellants’ two lawsuits were consolidated into one.
5
value bearing no relationship to any measure of its market value. WCAD also argued that, even if

these formulas passed constitutional muster, Appellants could not take advantage of them because

their compressor packages did not qualify as “heavy equipment” as that term is defined in Section

23.1241(a)(6). WCAD further argued that any tax due was payable to Ward County, not Midland

County, because the compressor packages were located in Ward County on January 1, 2012 and

had been there for more than a temporary period.

Appellants, of course, advocated the opposite and moved for summary judgment on these

three issues. They succeeded in part, obtaining summary judgment declaring that the compressor

packages qualify as heavy equipment:

[T]he Court finds that the Dealer Heavy Equipment Inventory Statute, Section
23.1241 of the Texas Tax Code, applies to Exterran’s compressors. The motion is,
therefore, GRANTED in part and DENIED in part.

Specifically, the Court finds that there is no genuine issue of material fact
that the compressors are self-powered under Section 23.1241(a)(6). The parties
did not dispute that the compressors each weighed over 1,500 pounds and were
intended to be used for mining or industrial uses under Section 23.1241(a)(6).
Exterran’s motion for summary judgment is otherwise denied.

The other two issues—taxable situs and the constitutionality of the formulas—were litigated in a

bench trial. The trial court found against Appellants on these issues, signing a take-nothing

judgment in WCAD’s favor:

IT IS THEREFORE ORDERED THAT the Plaintiffs take nothing and that
judgment is entered for the Defendant.

IT TS FURTHER ORDERED THAT Texas Tax Code §§ 23.1241, 23.1242
are held to be unconstitutional as applied to the Plaintiffs’ compressor packages at
issue in this matter. The subject property at issue in this matter had situs in Ward
County, Texas as of January 1, 2012.

Although Appellants requested the issuance of findings of fact and conclusions of law, the trial

6
court did not oblige.5 Both parties timely appealed.

HEAVY EQUIPMENT

In its sole cross-issue on appeal, WCAD contends that the trial court erred in rendering

summary judgment that “the compressors are self-powered under Section 23.1241(a)(6).” We

disagree.

Standard of Review

We review a summary judgment de novo. Joe v. Two Thirty Nine Joint Venture, 145

S.W.3d 150, 156-57 (Tex. 2004). A movant is entitled to summary judgment if it proves that

there are no genuine issues of material facts and that it is entitled to judgment as a matter of law.

TEX.R.CIV.P. 166a(c); Two Thirty Nine Joint Venture, 145 S.W.3d at 157. Once a movant has

proved it is entitled to summary judgment, the non-movant bears the burden of responding to the

motion and presenting to the trial court any issues that would preclude summary judgment.

Amedisys, Inc. v. Kingwood Home Health Care, LLC, 437 S.W.3d 507, 511 (Tex. 2014).

WCAD does not argue on appeal that summary judgment was improper because genuine

issues of material fact exist. Rather, WCAD argues that the compressor packages are not heavy

equipment as a matter of law. Appellants urge the contrary. Essentially, each party insists its

respective construction of Section 23.1241(a)(6) is the correct one.

Applicable Law

Section 23.1241(a)(6) defines “heavy equipment” as:

[S]elf-propelled, self-powered, or pull-type equipment, including farm equipment
or a diesel engine, that weighs at least 1,500 pounds and is intended to be used for
agricultural, construction, industrial, maritime, mining, or forestry uses.

TEX.TAX CODE ANN. § 23.1241(a)(6). Although the term “heavy equipment” is defined, the
5
Appellants do not complain of the trial court’s failure to issue the requested findings and conclusions.
7
terms “self-propelled,” “self-powered,” and “pull-type” are not. In construing statutory terms—a

question of law subject to de novo review—our primary objective is to determine and give effect to

the Legislature’s intent. Traxler v. Entergy Gulf States, Inc., 376 S.W.3d 742, 747, n.23 (Tex.

2012). To determine that intent, we first begin by analyzing the terms themselves. Id. at 747. If

a term in a statute is undefined and has not acquired a technical meaning, we use its common,

ordinary meaning. Id. When a word has multiple common meanings, we give it the meaning

most consistent with the statutory context in which it is used. State v. $1,760.00 in U.S. Currency,

406 S.W.3d 177, 180-81 (Tex. 2013).

Discussion

The sixteen compressor packages in dispute qualify as heavy equipment because they are

self-powered, as that term is commonly and plainly understood.6

The plain and common meaning of the term “self-powered” is “having its own power or

propelling force.” WEBSTER’S THIRD NEW INTERNATIONAL DICTIONARY 2061 (2002). The term

“powered” is commonly understood to mean “to supply with power, esp. mechanical power.”

AMERICAN HERITAGE COLLEGE DICTIONARY 1092 (4th ed. 2002). The term “power” is defined in

numerous ways, reflecting its wide-ranging, far-reaching meaning: (1) “[t]he energy or motive

force by which a physical system or machine is operated[;]” (2) “[t]he capacity of a system or

machine to operate[;]” (3) “[e]lectrical or mechanical energy, esp. as used to assist or replace

human energy[;]” and (4) “[o]perated with mechanical or electrical energy in place of bodily

6
We note that one of our sister courts reached the opposite conclusion in a similar case. See Valerus Compression
Servs. v. Gregg Cnty. Appraisal Dist., 457 S.W.3d 520 (Tex.App.--Tyler 2015, no. pet.). In that case, the Tyler Court
of Appeals held that the appellants did not meet their summary judgment burden to establish that their compressors
packages were “self-powered” because they failed to adduce evidence explaining how the equipment functioned. Id.
at 530-31. The court reasoned that, “in the absence of such an explanation[,]” it was “impossible to know if the
equipment is ‘self-powered[.]’” Id.
8
exertion.” AMERICAN HERITAGE COLLEGE DICTIONARY at 1092. And one of the more

recognized definitions of “equipment” is “the set of articles or physical resources serving to equip

a person or thing as . . . the implements used in an operation or activity . . . .”

MERRIAM-WEBSTER’S COLLEGIATE DICTIONARY 423 (11th ed. 2003).

The Legislature was aware of the common meanings of these words when defining the

term “heavy equipment.” In defining the term, the Legislature identified farm equipment and

diesel engines as exemplars. These pieces of equipment are alike in that they permit humans to

work more efficiently and faster by harnessing mechanical power. In defining the term “heavy

equipment,” the Legislature also identified the types of industries in which these pieces of

equipment were to operate, including: agriculture, construction, mining, and forestry. These

industries benefit greatly from the efficiencies made possible by mechanical power.

In light of the function of mechanized equipment in industrial settings and the common

meanings of the terms “power,” “powered,” “self-powered,” and “equipment,” the context of

Section 23.1241 indicates that the Legislature intended “self-powered” to mean a piece of a

machinery or equipment supplied with mechanical power through an internal motor or engine.

Here, Appellants adduced uncontroverted evidence that an internal combustion engine inside each

compressor package creates the mechanical power required to operate it.

WCAD acknowledges that the compressor packages are powered by internal combustion

engines but contends that, from an engineering standpoint, they are not self-powered because they

do not have an integrated fuel system and instead must rely on a separate external fuel source.7 In

other words, WCAD is urging us to construe the term self-powered in a narrower and more

7
WCAD concedes that the compressor packages in issue weigh 1,500 pounds each and are intended to be used for
industrial or mining uses.
9
technical sense and, in support of its argument, cites authority from other jurisdictions intimating

that a piece of equipment is not self-powered if it lacks an internal power source. See, e.g., United

States v. Williams, 650 F.Supp.2d 633, 648 (W.D. Ky. 2009)(explaining that “bird dog” electronic

tracking devices, unlike those hard-wired to an automobile, are self-powered transmitters with a

limited battery affixed to an automobile’s exterior by magnets); Allied Asphalt Paving Co. v. Vill.

of Hillside, 731 N.E.2d 425, 429 (Ill.App.Ct. 2000)(“crushing plant” used to recycle discarded

asphalt into reprocessed asphalt did not qualify as construction equipment because a crushing

plant, among other characteristics, was neither self-powered nor self-propelled and had to be

hard-wired to existing power lines or an adjacent generator housed in a trailer); Rickman v. Deere

& Co., 36 F.3d 1093, *1 (4th Cir. 1994)(forage wagon was not self-powered because “it is pulled

by a tractor, which also supplies the power, through a rotating driveline or ‘power take off shaft’

(PTO shaft), to operate the machinery of the forage wagon[]”).

But we are under no obligation to adopt the construction urged by WCAD because there is

no indication that the Legislature intended to define the term in such a manner. As mentioned

above, the Legislature presumably knew of the various meanings of “self-powered,” “powered,”

“power,” and “equipment” in normal usage when it enacted Section 23.1241 in 1997. See Act of

May 20, 1997, 75th Leg., R.S., ch. 1184, § 2, 1997 TEX.GEN.LAWS 4564, 4564-69 (amended

1999). Since then, the Legislature has chosen to continue using the term “self-powered” without

defining or distinguishing it, even though afforded the opportunity to do so in 2011 when it

amended the statutory definition of “heavy equipment.” See Act of May 21, 2011, 82nd Leg.,

R.S., ch. 322, §§ 1, 2, 3, 2011 TEX.GEN.LAWS 938, 938-40. “If the Legislature intended to . . .

[define] the term[] [“self-powered”] . . . [in the manner urged by WCAD][,] we believe it would

10
have done so.” Traxler, 376 S.W.3d at 747. That the Legislature has not strongly suggests that

the term has not acquired a technical meaning. See id.

WCAD also contends that the Legislature could not have intended the term self-powered to

mean “any type of equipment that has an engine or motor” because otherwise there would have

been no need to include the term “self-propelled” in the statutory definition, since “all

self-propelled equipment . . . [weighing] more than 1,500 pounds undoubtedly has an engine or

motor.” But in advancing this argument, WCAD has fallen prey to the logical fallacy know as

false equivalence: one shared trait between two objects demonstrates equivalence. In this case,

the shared trait is an engine or motor. Thus, while it may be true that all self-propelled equipment

can be classified as self-powered equipment because they are both powered by an engine or motor,

the converse is not necessarily true. The compressor packages in issue here prove this. Their

internal combustion engines power them but do not propel them. In short, the terms

“self-powered” and “self-propelled” are not equivalent and, therefore, not redundant.

The trial court did not err in ruling that the compressor packages meet the statutory

definition of heavy equipment as that term is defined under Section 23.1241(a)(6) and in granting

summary judgment on this issue in Appellants’ favor.

WCAD’s cross-issue is overruled.8

MARKET VALUE

In their first issue, Appellants argue that the trial court erred in declaring that Sections

23.1241 and 23.1242 are unconstitutional as applied to the sixteen compressors packages in

8
Because we have concluded that the trial court correctly ruled that the compressors qualify as heavy equipment
under Section 23.1241 because they are self-powered, we need not address WCAD’s argument that the compressors
do not qualify as heavy equipment because they are not “self-propelled” or “pull-type.”
11
dispute.9 We agree.

Standard of Review

We presume a tax statute enacted by the Legislature is constitutional, and a party

challenging the constitutionality of a tax statute bears the burden to demonstrate its unlawfulness.

See Enron Corp. v. Spring Indep. Sch. Dist., 922 S.W.2d 931, 934, 936 (Tex. 1996). If a tax

statute is reasonably susceptible to different constructions, one of which renders the statute

constitutionally valid and one invalid, then we must adopt the construction upholding the validity

of the enactment. See Nootsie, Ltd. v. Williamson County Appraisal Dist., 925 S.W.2d 659, 662

(Tex. 1996).

Applicable Law

Section 1 of article VIII of the Texas Constitution establishes the constitutional standard

for taxation:

Sec. 1. (a) Taxation shall be equal and uniform.

(b) All real property and tangible personal property in this State . . . shall be taxed
in proportion to its value, which shall be ascertained as may be provided by law.
[Emphasis added].

TEX.CONST. art. VIII, § 1(a) and (b). In accordance with these constitutional directives, ad

valorem tax rates must be uniform for all types of property and ad valorem tax values must be

based on the “market value” of the property. Enron Corp., 922 S.W.2d at 935; Nootsie, 925

S.W.2d at 661.

But the constitution does not prescribe a particular formula or standard for determining the

“market value” of property. Enron Corp., 922 S.W.2d at 936. Instead, it directs that “value” is

9
As Appellants correctly point out in their brief, Sections 23.1241 and 23.1242 “stand or fall together.”
12
to “be ascertained as may be provided by law.” Enron Corp., 922 S.W.2d at 936, citing

TEX.CONST. art. VIII, § 1 (b). “The phrase ‘as may be provided by law,’ when used in a

constitutional provision establishing a general legal principle or administrative framework, has

been held to ‘clearly vest[ ] the Legislature with the authority to exert substantial control over the

mechanics of [the subject matter addressed].’” Travis Cent. Appraisal Dist. v. FM Properties

Operating Co., 947 S.W.2d 724, 733 (Tex.App.--Austin 1997, writ denied). Because there are no

specific requirements in the constitution for determining the market value of property, “the

Legislature may classify property differently in arriving upon its market value[,]” “as long as the

classifications are not unreasonable, arbitrary, or capricious.”10 Enron Corp., 922 S.W.2d at 936.

If the Legislature adheres to this maxim in “classify[ing] property differently in arriving upon its

market value[,]” “there is no constitutional impediment to utilizing differing methods for

determining market value for ad valorem tax purposes.” Id. [Emphasis in the original].

Accordingly, “the Legislature has the constitutional authority to provide for a method of

determining the market value of inventory that differs from the method for arriving upon the

market value of other property.” [Emphasis added]. Id.

Discussion

WCAD has failed to demonstrate that Sections 23.1241 and 23.1242 are unconstitutional

as applied to the sixteen compressor packages in dispute.11

10
Appellants, without citing any supporting authority, assert that arbitrary-and-capricious review equates to
rational-basis review. Although WCAD does not address Appellants’ assertion in its briefing, twelve other appraisal
districts have in an amicus curiae brief they submitted in this case. The amici parties contend that the two standards
are not equivalent. According to them, arbitrary-and-capricious review is narrower than rational-basis review. But
we need not decide the answer to this question because it is not germane to the resolution of this case.
11
Appellants assert that WCAD raised a facial, as opposed to an as-applied, challenge to Sections 23.1241 and
23.1242 by contending that lease revenue divided by 12 can never equal market value. “A facial challenge claims
that a statute, by its terms, always operates unconstitutionally.” Tenet Hospitals Ltd. v. Rivera, 445 S.W.3d 698, 702
13
 1. In Proportion to its Value

WCAD argues that Sections 23.1241 and 23.1242 violate the constitutional requirement

that property be taxed in proportion to its market value because, for ad valorem purposes, “market

value” means “fair market value,” or “fair cash value” as calculated under the “willing

buyer-willing seller” test. Under this test, market value corresponds to:

[T]he price which the property would bring when it is offered for sale by one who
desires, but is not obliged to sell, and is bought by one who is under no necessity of
buying it, taking into consideration all of the uses to which it is reasonably
adaptable and for which it either is or in all reasonable probability will become
available within the reasonable future.

City of Austin v. Cannizzo, 153 Tex. 324, 334, 267 S.W.2d 808, 815 (1954); see TEX.TAX CODE

ANN. § 1.04(7)(A)-(C)(West 2013)(defining “market value” in a similar vein). The Legislature,

according to WCAD, acted unreasonably, arbitrarily, and capriciously by ignoring the willing

buyer-willing seller test when amending Sections 23.1241 and 23.1242 because, under these

statutes, the compressor packages are valued at less than 1% of their market value. WCAD’s

argument is unavailing.

To succeed in arguing that Sections 23.1241 and 23.1242 violate the constitutional

requirement that property be taxed in proportion to its market value, WCAD must demonstrate that

the only constitutionally-acceptable method for determining the market value of heavy equipment

inventory held for lease or rent as a whole is to ascertain the prices at which each item of inventory

(Tex. 2014). “By contrast, an as-applied challenge asserts that a statute, while generally constitutional, operates
unconstitutionally as to the claimant because of her particular circumstances.” Id. WCAD counters that Appellants
are incorrect because they “ignore[] the facts in the record and the argument of [its] counsel at trial” in challenging the
constitutionality of the statutes. Sections 23.1241 and 23.1242, according to WCAD, do not always operate
unconstitutionally because there are circumstances under which an item of heavy equipment inventory can equal
market value, i.e., at the end of its useful life or if leased and then sold during the same year. Because the sixteen
compressor packages in dispute here did not have any of these characteristics, WCAD maintains that Sections 23.1241
and 23.1242 operate unconstitutionally as to them. Based on the explanation offered by WCAD, we conclude that it
has raised an as-applied constitutional challenge to these statutes.
14
would sell for in an arms-length transaction and aggregate them. See FM Properties, 947 S.W.2d

at 733. Stated another way, the appraisal districts must prove that it is unreasonable, arbitrary, or

capricious for the Legislature to value heavy equipment inventory held for lease or rent based on

the income generated by the items actually leased or rented. See id. WCAD has failed to so

prove. Put simply, it is not unreasonable, arbitrary, or capricious to determine the market value of

heavy equipment inventory held for lease or rent based on the income generated by the items

actually leased or rented. In fact, valuing heavy equipment inventory in this manner makes sense

because inventory, by definition, is different than other types of property.

Inventory is an idle stock of physical goods a business holds on hand in the regular course

of business awaiting consumption at a future point in time. See FM Properties., 947 S.W.2d at

728, 730. Although each item of inventory has some economic value in an abstract sense, an

owner does not capture the maximum economic value of each item while it sits idly generating no

revenue. The maximum economic value of an item of inventory is unlocked when it generates

revenue. Correspondingly, because inventory is not intended to be held for any period of time,

capturing its value is difficult given that inventory levels tend to fluctuate significantly throughout

the year. Enron Corp., 922 S.W.2d at 939-40; Expo Motorcars, L.L.C. v. Harris County

Appraisal Dist., No. 01-08-00473-CV, 2009 WL 2232017, *4 (Tex.App.--Houston [1st Dist.]

July 23, 2009, pet. denied)(mem. op.). Thus, given that the maximum economic value of

inventory is tied to the revenues it generates and that value is a point-in-time estimate, it is neither

unreasonable nor arbitrary nor capricious for the Legislature to require use of a 12-month trailing,

revenue-based method for valuing heavy equipment inventory held for lease or rent.

This method for valuing inventory of large, expensive goods is neither novel nor unique.

15
The Legislature, “understand[ing] and correctly appreciate[ing] the needs of” businesses dealing

with this type of inventory has responded by passing laws “directed to problems made manifest by

experience[,]” i.e., the special provisions permitting inventory involving motor vehicles,

watercraft and outboard motors, manufactured housing, and—of course—heavy equipment, to be

valued using a 12-month trailing revenue-based method. See Enron Corp., 922 S.W.2d at 934

[Internal quotation marks and citations omitted]; TEX.TAX CODE ANN. § 23.121 (motor vehicles),

TEX.TAX CODE ANN. § 23.124 (watercraft and outboard motors), TEX.TAX CODE ANN. § 23.1241

(heavy equipment), TEX.TAX CODE ANN. § 23.127 (manufactured housing). For inventory

consisting of motor vehicles, watercraft and outboard motors, and manufactured housing, revenues

are based on sales. See TEX.TAX CODE ANN. §§ 23.121, 23.124, 23.127. This sales-based

method for ascertaining the market value of inventory has been upheld as constitutionally

permissible because it is reasonable—not arbitrary or capricious—to require dealers to pay taxes

only on inventory actually sold. See Expo Motorcars, 2009 WL 2232017, at *4-*5 (upholding the

constitutionality of Section 23.121’s method for calculating the market value of motor vehicle

inventory as of January 1 of a tax year based on actual sales from the previous calendar year

because a sales-based method, as opposed to single-date valuation method, achieves a more

accurate reflection of the market value of motor vehicle inventory, since inventory levels fluctuate

widely over the course of a year).

For heavy equipment inventory, revenues are based on sales and lease or rental payments.

See TEX.TAX CODE ANN. § 23.1241. WCAD does not contend that the sales-based portion of the

formula for calculating the market value of heavy equipment inventory is unconstitutional, likely

because such a contention would be futile. See Expo Motorcars, 2009 WL 2232017, at *4-*5.

16
Instead, it contends that the lease- (and rental-) based portion of the formula is unconstitutional as

applied to the sixteen compressor packages in dispute because “none of [them] . . . would sell for

one-twelfth of the preceding year’s lease or rental payments . . . .” But just as it is eminently

reasonable to require dealers of inventory held for sale in the ordinary course of business to pay

taxes only on inventory actually sold, it is eminently reasonable to require dealers of inventory

held for lease or rent in the ordinary course of business to pay taxes only on inventory actually

leased or rented. The nature of the beast dictates this outcome.

An operating lease or rental transaction involving an item of heavy equipment is the

purchase of a service produced by the lessor, not the purchase of a sale of a good. The lessee or

renter is purchasing the right to use an item of heavy equipment for a specific period of time, and

the item’s value is derived from its use at that given moment in time. To the owner of an item of

inventory producing lease or rental income, the value of such an item is the present worth of the

future payments expected over the item’s remaining service life. See FM Properties, 947 S.W.2d

at 734. Given this economic reality, it is reasonable to calculate the market value of such an item,

the efficiency and service life of which is declining during the lease or rental period, based on the

current income generated by the item. By directing that the value of heavy equipment inventory

held for lease and rent is equivalent to the income generated by the lease and rental payments,

Section 23.1241 and 23.1242 “essentially require[] nothing more than that the inventory of a

business should, for taxation purposes, be considered as income-producing property and its market

value determined pursuant to the income approach.” See id. Arguably, employing a 12-month

trailing, revenue-based method for valuing heavy equipment inventory held for lease is inherently

17
fairer and more likely to reflect the market value of that inventory than other approaches. 12

Indeed, WCAD’s proposed method for determining the market value of Appellants’

inventory—the sum of the prices each item of inventory would command if sold in arms-length

transactions regardless of income generated by the inventory as a whole—is arguably

unreasonable. Why insist on taxing an item of heavy equipment inventory held for the sole

purpose of generating income based on a formula better suited for determining the market value of

individual goods held for sale?

The answer, according to WCAD, is because Sections 23.1241 and 23.1242 create a

loophole permitting dealers of heavy equipment inventory held for lease or rent to escape taxation

by mandating that the value of inventory as a whole does not include items not leased or rented,

even though these items have substantial value if sold or owned outright. But that result is not

determinative of whether Sections 23.1241 and 23.1242 are arbitrary, unreasonable, or capricious

classifications by the Legislature. This is because the Legislature has the authority to implement

tax policy inuring to the benefit of the taxpayer rather than to the state. See Enron Corp., 922

S.W.2d at 939. As explained above, it is not unreasonable, arbitrary, or capricious to calculate the

taxable value of heavy equipment inventory held for lease or rent based on the revenues generated

by the portions of inventory actually leased or rented.

WCAD, citing FM Properties, maintain that “[a]n amount that no willing buyer would pay

for a property is simply not market value.” See FM Properties, 947 S.W.2d at 732, citing City of

12
WCAD argues that Appellants’ “lease rates are not from arms-length market leases and bear no relation to market
value” because they are artificially set at an intercompany rate by Exterran’s treasury department. WCAD likens
Appellants’ business dealings “to a homeowner selling his house that is valued at $100,000 to a trust he heads for
$1,000 and arguing that the market value is $1,000 for taxation purposes.” We hesitate to conclude that Appellants
have engaged in artifice. Although it is unclear from the record what factors are used to calculate the lease rate for
their compressor packages, WCAD’s comparison is not an apt one for many reasons, but mainly because a third party
is involved in leasing the equipment, and the revenue from these third-party transactions is what determines the
equipment’s market value for ad valorem purposes.
18
Saginaw v. Garvey Elevators, Inc., 431 S.W.2d 575, 579 (Tex.Civ.App.--Fort Worth 1968, writ

ref’d n.r.e.). But FM Properties does not hold, and does not stand for the proposition, that the

market value of inventory held for the sole purpose of generating income is determined by the sum

of the prices each item of inventory would command if sold in arms-length transactions. In fact,

the court in FM Properties renounced this approach in valuing real estate inventory held for sale in

the ordinary course of a trade or business. The court concluded that valuing inventory as a unit

based on “what a purchaser would pay for property at the present time in a single transaction,”

rather than on “what might be paid by dozens or even hundreds of purchasers if the property were

sold in pieces over an extended period of time[,]” “is inherently fairer and more likely to produce

true market value than other approaches such as multiplying the total number of inventory items on

hand by the retail price of each individual item.” FM Properties, 947 S.W.2d at 729, 731. It was

in this context in which the court opined that the “number of lots times retail price of each lot”

formula did not capture the inventory’s “[m]arket value, as determinable through application of

the ‘willing buyer-seller test’” because this valuation method produced “[a]n amount that no

willing buyer would pay for . . . [the] entire inventory of lots at a given point in time.” See id. at

732.

FM Properties actually supports the proposition that it is constitutionally permissible to

determine the market value of heavy equipment inventory held for lease or rent based on the

revenues generated by the portions of inventory actually leased or rented. FM Properties, 947

S.W.2d at 731-34 (upholding the constitutionality of statutory method for calculating the market

value of real estate inventory based on what a purchaser would pay for all of the inventory in a

single transaction because this valuation method achieves a more accurate reflection of the market

19
value of real estate inventory held for as a unit for the purpose of generating income, since method,

among other reasons, more painstakingly accounts for the net income that a potential purchaser

might anticipate deriving from the purchase of the property, after the deduction of development

and marketing costs and with due regard for the time value of money, rather than merely

recognizing a gross income figure that might be anticipated from the sale of each particular parcel

over a designated period of time without accounting for the inherent costs). Viewing FM

Properties in this light is consistent with the constitutional requirement that value is “ascertained

as may be provided by law” and is in accord with the supreme court’s pronouncement in Enron

Corp. that inventory may be valued differently than other types of property, as long as the standard

for ascertaining its value is neither unreasonable, arbitrary, or capricious.

WCAD also claims that Appellants “ha[ve] stipulated that the value derived by the subject

statute is less than 1% of the market value for this property.” But WCAD mischaracterizes the

nature of Appellants’ stipulations and misstates their effect. Appellants’ did not stipulate that the

value of the sixteen compressor packages as calculated under Section 23.01, as opposed to Section

23.1241, is the measure of their true market value. Instead, Appellants merely stipulated that, if

the compressor packages were valued on a unit-by-unit basis, the values ascribed to each item

would differ depending on the statute employed:

If it is determined that the subject property does not qualify for Dealer’s Heavy
Equipment Inventory under Tax Code § 23.1241 or that Tax Code § 23.1241 is
unconstitutional, the subject property is valued as follows if calculated as business
personal property inventory pursuant to Tax Code § 23.01 and § 23.12 for the 2012
tax year. In the alternative, if it is determined that the subject property does
qualify for Dealer’s Heavy Equipment Inventory under Tax Code § 23.1241 and
that Tax Code § 23.1241 is constitutional--and although EES and EXLP believe
Section 23.1241 adopts a pooled inventory approach to taxation as opposed to a
unit by unit approach--the subject property would be valued on a unit by unit basis
as follows if calculated as Dealer’s Heavy Equipment Inventory pursuant to Tax

20
 Code § 23.1241 based on 2011 and 2012 revenues.

Based on the foregoing discussion, we conclude that WCAD has failed to demonstrate that

Sections 23.1241 and 23.1242, as applied in this case, run afoul of the constitutional requirement

that all property be taxed in proportion to its value. Accordingly, the trial court erred in

concluding otherwise.

2. Equal and Uniform

WCAD also asserts that Sections 23.1241 and 23.1242 violate the constitutional

requirement that taxation be equal and uniform because these statutes favor leased compressors

over owned compressors even when the compressors are alike in all relevant respects. WCAD’s

assertion is without merit.

The constitutional mandate of equality and uniformity requires only that all persons falling

within the same class be taxed alike. Hurt v. Cooper, 130 Tex. 433, 440-41, 110 S.W.2d 896, 901

(1937). In other words, a tax system must operate equally within each class. The relevant class

here is dealers of heavy equipment inventory. Sections 23.1241 and 23.1242 apply

even-handedly to this class because the amount of tax due on this type of inventory is always based

upon the previous year’s revenue, divided by 12. Because there is no evidence that this valuation

method is not applied equally and uniformly to dealers of heavy equipment inventory, there is no

disparate treatment within the class. That Sections 23.1241 and 23.1242 may produce disparate

appraisal values among differently-situated taxpayers does not prove that are unequal and

non-uniform. We conclude that WCAD has failed to prove that Sections 23.1241 and 23.1242, as

applied in this case, violate the constitutional requirement that taxation be equal and uniform.

Accordingly, the trial court erred in concluding otherwise.

21
 Appellants’ first issue is sustained.

TAXABLE SITUS

In their second issue, Appellants contend that the trial court erred in declaring that taxable

situs of the sixteen compressor packages in dispute lay in Ward County. We disagree.

Applicable Law

Although not identified as such in the trial court’s judgment, Section 21.02(a) of the Tax

Code is the statutory basis for the trial court’s conclusion that taxable situs lay in Ward County.

This statute, which codifies the so-called “mobilia” rule and its exceptions,13 provides that:

(a) [Except for certain inapplicable exceptions,] tangible personal property is
taxable by a taxing unit if:

(1) it is located in the unit on January 1 for more than a temporary period;

(2) it normally is located in the unit, even though it is outside the unit on January 1,
if it is outside the unit only temporarily;

(3) it normally is returned to the unit between uses elsewhere and is not located in
any one place for more than a temporary period; or

(4) the owner resides (for property not used for business purposes) or maintains the
owner’s principal place of business in this state (for property used for business
purposes) in the unit and the property is taxable in this state but does not have a
taxable situs pursuant to Subdivisions (1) through (3) of this subsection.

TEX.TAX CODE ANN. § 21.02(a)(1)-(4)(West 2015); see TEX.CONST. art. VIII, § 11 (requiring that

property be assessed for taxation and that taxes be paid in the county where it is situated).

As a general rule, courts presume that “the personalty in question has a tax situs within the

taxing unit’s jurisdiction.” Davis, 632 S.W.2d at 335. To rebut this presumption, the taxpayer

must present evidence that the property has not acquired situs in the jurisdiction and the taxpayer is

not domiciled there, or that the property has acquired situs outside the tax authority’s boundaries,
13
See Davis v. City of Austin, 632 S.W.2d 331 (Tex. 1982).
22
or that a statute directs the property be taxed elsewhere. Davis, 632 S.W.2d at 335. Otherwise,

the presumption becomes conclusive. Id.

Discussion

Appellants have failed to rebut the presumption that, on January 1, 2012, taxable situs of

the sixteen compressor packages in dispute lay in Ward County.

Appellants do not contend that Ward County cannot tax the compressor packages because

they neither conduct business nor maintain facilities in Ward County. Nor do Appellants contend

that the compressor packages were not located in Ward County for a sufficient amount of time to

comply with the requirements of Section 21.02(a). To the contrary, Appellants assert that fixing

situs in accordance with Section 21.02(a) would undermine Section 23.1241’s purpose, i.e., to

value heavy equipment inventory as a whole and eliminate administrative, financial, and logistical

impediments for both dealers of heavy equipment and taxing authorities. These potential pitfalls,

according to Appellants, do not arise when situs is fixed at a dealer’s “business address” or

“business location” as mandated by Section 23.1241(f) and the conforming administrative form

and manual promulgated by the comptroller. Proceeding under this theory, Appellants maintain

that taxable situs of the sixteen compressor packages in dispute lies in Midland County because

this is where they “maintain[] a yard from which its inventory in the Permian Basin region is

leased, to which leased compressors are returned after leases expire, and where the inventory in the

area is serviced.” Appellants are mistaken.

Nothing in Section 23.1241(f) refers to taxable situs. The statutory language does not

unambiguously direct that heavy equipment inventory be taxed at the business address of each

location at which the dealer conducts business. Indeed, the statute does not even mandate that the

23
dealer file the form with the appraisal district in which the inventory’s business location is situated.

So far as “business location” is concerned, Section 23.1241(f) fails to define this term and to

distinguish between a dealer’s principal place of business and other business locations. Nor, as

the Tyler Court of Appeals noted in analyzing this statute, does it “provide instruction for a

business to determine where, among different counties, it must pay taxes.” Valerus, 457 S.W.3d

at 526. Section 23.1241(f) merely directs a dealer of heavy equipment to file an inventory

declaration form and identifies the information that the dealer must report to the taxing authorities:

The comptroller by rule shall adopt a dealer’s heavy equipment inventory
declaration form. Except as provided by Section 23.1242(k), not later than
February 1 of each year, or, in the case of a dealer who was not in business on
January 1, not later than 30 days after commencement of business, each dealer shall
file a declaration with the chief appraiser and file a copy with the collector. The
declaration is sufficient to comply with this subsection if it sets forth:

(1) the name and business address of each location at which the declarant conducts
business;

(2) a statement that the declarant is the owner of a dealer’s heavy equipment
inventory; and

(3) the market value of the declarant’s heavy equipment inventory for the current
tax year as computed under Subsection (b).

TEX.TAX CODE ANN. § 23.1241(f).

Likewise, nothing in the form and the manual promulgated by the state comptroller refers

to taxable situs. See Dealer’s Heavy Equipment Inventory Tax Statement,

http://www.comptroller.texas.gov/taxinfo/taxforms/50-266.pdf; Heavy Equipment Dealer’s

Special Inventory, http://window.texas.gov/taxinfo/proptax/pdf/96-560.pdf. Form 50-266 (the

form) is a tax statement a dealer of heavy equipment must file in conjunction with the tax due

under Section 23.1242. See Dealer’s Heavy Equipment Inventory Tax Statement, “General

24
Instructions”. The accompanying instructions (the manual) identify the six steps a dealer must

undertake “to calculate, report, and pay inventory property taxes.” See Heavy Equipment

Dealer’s Special Inventory, p. 9. Significantly, neither the form nor the manual contains any

information whatsoever helpful in determining taxable situs under Section 23.1241(f). See

Dealer’s Heavy Equipment Inventory Tax Statement; Heavy Equipment Dealer’s Special

Inventory. For example, neither document directs that heavy equipment inventory be taxed at the

business address of each location at which the dealer conducts business. See Dealer’s Heavy

Equipment Inventory Tax Statement; Heavy Equipment Dealer’s Special Inventory. And

although both documents direct a dealer to file with the county tax office a tax statement for each

business location along with prepayment of taxes, neither one identifies where those taxes are to be

paid. See Dealer’s Heavy Equipment Inventory Tax Statement, “General Instructions” & “Where

to File;” Heavy Equipment Dealer’s Special Inventory, pgs. 10-13. Due to these shortcomings in

both documents, they cannot be considered the comptroller’s construction of Section 23.1241(f).

See Valerus, 457 S.W.3d at 525 (concluding that similar shortcoming in a related form, Form

50-265, Dealer’s Heavy Equipment Inventory Declaration, rendered the form nothing more than a

form and precluded its consideration as the comptroller’s construction of Section 23.1241(f)).

Appellants have failed to demonstrate that the Legislature intended to fix taxable situs of

heavy equipment inventory at a dealer’s “business address” or “business location.” Accordingly,

the trial court did not err in concluding that taxable situs of the sixteen compressor packages in

dispute lay in Ward County. See EXLP Leasing, LLC v. Galveston Cent. Appraisal Dist., No.

14-14-00268-CV, 2015 WL 5025534, at *6-*7 (Tex.App.--Houston [14th Dist.] Aug. 25, 2015, no

25
pet. h.)(holding that Section 23.1241(f) does not address the taxable situs of heavy equipment

inventory); Valerus, 457 S.W.3d at 523-27 (same).14

Appellants’ second issue is overruled.

CONCLUSION

The portion of the trial court’s judgment declaring Sections 23.1241 and 23.1242 to be

unconstitutional as applied to Appellants’ compressor packages is reversed, and judgment is

rendered that these two statutes are not unconstitutional as applied. In all other respects, the trial

court’s judgment is affirmed.

September 23, 2015
YVONNE T. RODRIGUEZ, Justice

Before McClure, C.J., Rodriguez, J., and Larsen, Senior Judge
Larsen, Senior Judge (Sitting by Assignment)

14
The EXLP court did not reach the constitutionality issue of Section 23.1241 and Section 23.1242, but rather
concludes that neither party carried “their respective summary judgment burden[.]” EXLP, 2015 WL 5025534, at *1.
The case was remanded to the trial court for “further proceedings on the constitutionality of sections 23.1241 and
23.1242 as applied to the compression unit rental inventories at issue” because the trial court had “insufficient
information to determine as a matter of law” that the statute’s method of calculation “was not ‘based on the[ir]
reasonable market value.’” EXLP, 2015 WL 5025534, at *5-*6, citing Enron, 922 S.W.2d at 935.
26