June1, 1987
Honorable Stan Schlueter Opinion No. JM-714
Chairman
Ways and Means Committee Re: Constitutionality of House Bill
Texas Eouse of Representatives No. 966, which would extend the oil
P. 0. Box 2910 severance tax to oil imported from
Austin, Texas 78769 outside the state of Texas
Dear Representative Schlueter:
Chapter 202 of the Tax Code imposes a severance tax upon the
production of oil in this state. Enactment of House Bill No. 966
would amend various sections of chapter 202, by extending the
imposition of the oil severance tax to all oil imported into the
state, except in certain circumstances. You ask whether the proposed
bill is constitutional. You do not indicate the constitutional
r- provisions that concern you. We conclude that House Bill No. 966, as
it is presently drafted, violates the federal commerce clause, both
with respect to foreign and interstate commerce.
Bouse Bill No. 966 would amend, inter alia, section 202.051 of
the Tax Code to read: "There is imposed a tax on the production of
oil and a tax on the importation of oil." (Amended language under-
scored). Section 202.054 of the Tax Code would provide an exemption
to the reach of the tax and contains the following:
EXEMPTIONS. There is exempted from the taxes
imposed by this chapter on oil imported into this
state oil that:
(1) is located within this state for 30 or
fewer days;
(2) has not been altered from the physical
state in which it was imported; and
(3) is subject to a contract in which the oil
is identified and under the terms of which the oil
is required to be delivered to a point outside of
this state. (Amended language underscored).
Section 202.251 of the Tax Code, which now imposes primary liability
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for the severance tax on the producer and secondary liability for the
severance tax on the first purchaser and each subsequent purchaser,
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Eonorable Stan Schlueter - Page 2 (JM-714)
would be amended to impose primary liability on the importer as well.
The producer and the importer would be primarily liable, but the state
could collect the tax from a first or subsequent purchaser if the
producer or importer failed to pay. Section 202.153 of the Tax Code
would be amended to read:
FIRST PURCHASER TO PAY TAR. (a) A first
purchaser shall pay the tax imposed by this
chapter on oil that the first purchaser purchases
from a producer and takes delivery on the premises
where the oil is produced and on oil purchased
from an importer.
(b) A first purchaser shall withhold from
payments to the producer or importer the amount of
tax that the first purchaser is required by
Subsection (a) of this section to pay. This
subsection does not affect a lease or contract
between the state or a political subdivision of
the state and a producer. (Amended language
underscored).
This section would require a first purchaser of oil to pay a severance
tax on oil that is severed outside of Texas and imported into the
state. Other sections of the Tax Code would be amended to include
importers in the class of persons who must keep certain records.
Because House Bill No. 966 purports to reach both foreign and inter-
state commerce, we will analyze the statute with respect to both. We
first will address interstate commerce.
The comerce clause provides: "The Congress shall have
Power. . . To regulate commerce with foreign Nations, and among the
several States, and with the Indian Tribes." U.S. Const. art. I,
98. cl. 3. The commerce clause has been interpreted not only as
conferring power on the national government to regulate commerce, but
also as limiting the states' powers to interfere with commerce. This
restriction on state power often is referred to as the "negative
implication of the commerce clause" or as the "dormant commerce
clause" principle. See, e.g., Wardair Canada, Inc. V. Florida Depart-
ment of Revenue, 106 S.Ct. 2369 (1986). Under the commerce clause,
the Supreme Court has struck down as unconstitutional a variety of
state reeulatorv and taxation measures as unduly burdening commerce.
See, e.g:, Bacchus Imports, Ltd. V. Dias, 468 U.S. 263 (198%) (holding
that a state tax on alcoholic beverages, which exempted certain
locally produced beverages, was unconstitutional); Boston Stock
Exchange v. State Tax Commission, 429 U.S. 318 (1977) (holding that
New York transfer tax on securities transactions was unconstitutional
because transactions involving out-of-state sales were taxed more
heavily than most transactions involving a sale within the state);
Great Atlantic and Pacific Tea Co., Inc. V. Cottsell, 424 U.S. 366
(1976) (holding unconstitutional a Mississippi regulation providing
that out-of-state milk could be sold in Mississippi only if the
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Eonorable Stan Schlueter - Page 3 (JM-714)
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producing state would accept Mississippi milk on a reciprocal basis);
Pike v. Bruce Church, Inc., 397 U.S. 137 (1970) (holding
unconstitutional a state regulatory order prohibiting taxpayer from
shipping cantaloupes outside the state unless they were packed in
state-approved containers).
The Supreme Court in 1977 enunciated a test under the commerce
clause that conferred upon states greater latitude in imposing state
taxation schemes. The Supreme Court apparently has adopted a
construction that rejects formulaic distinctions in favor of a
construction emphasizing economic effect. See Bellerstein, State
Taxation and the Supreme Court: Toward a Mo~Unified Approach to
Constitutional Adjudication, 75 Filch. L. Rev. 1426 (1977). The
emerging test under the commerce clause was adumbrated in 1975 in
Standard Pressed Steel Co. V. Department of Revenue of Washington, 419
U.S. 560 (1975) and Colonial Pipeline Co. V. Traigle, 421 U.S. 100
(1975). and explicitly articulated in Complete Auto Transit, Inc. V.
Brady. 430 U.S. 274, 279 (1977) [hereinafter Complete Auto Transit].
Now, interstate commerce can be taxed if the four-prong Complete Auto
Transit test is satisfied: the tax must be applied to an activity
having a substantial nexus with the taxing state; the tax must be
fairly apportioned; the tax must not discriminate against interstate
commerce; and the tax must be fairly related to the services provided
by the state. Because we conclude that House Bill No. 966 fails the
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third prong, we need not discuss the first, second, and fourth prongs.
The third prong of the Complete Auto Transit test, i.e., that the
tax must not discriminate against interstate commerce, the test
upon which House Bill No. 966 founders. Under earlier approaches to
the commerce clause, the constitutionality of a state tax measure did
not turn on whether there was tax discrimination against interstate
commerce. Originally, the commerce clause was viewed as prohibiting
virtually all state taxation of interstate commerce. See, e.g., Low
V. Austin, 80 U.S. 29 (1872); Brown v. Maryland, 25 U.S. 419 (1827).
By the middle of the nineteenth century, the Court seemed to be of the
view that the commerce clause prohibited some, but not all, state
taxation of interstate commerce and that a distinction could be made
between those areas of interstate commerce in which there was need for
national tax uniformity and those areas in which local taxation was
permissible. Cooley v. Board of Wardens of the Port of Philadelphia,
53 U.S. 299 (1851). During the 1890s. the Court adopted a new test,
holding that "direct" taxes upon interstate commerce were unconstitu-
tional but that "indirect" taxes were not. See, e.g., Adams Express
Co. V. Ohio, 165 U.S. 194 (1897).
In 1938, the Court recognized the artificiality of the "direct-
indirect" test and adopted a new test whereby state taxes were struck
down under the commerce clause if they imposed the risk of cumulative
burdens upon interstate commerce that were not likewise imposed upon
- local commerce. Western Live Stock v. Bureau of Revenue, 303 U.S.
250 (1938). With the exception of Freeman V. Eewit, 329 U.S. 249
(1946). which marked a temporary reversion to the formulaic
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Honorable Stan Schlueter - Page 4 (JM-714)
distinction between direct and indirect taxes, the Court test focused
on the existence of possible multiple burdens. See, e.g., Northwestern
States Portland Cement Co. V. Minnesota, 358 U.S. 450 (1959). In
1977, the aforementioned Complete Auto Transit case was handed down
setting forth yet another test, one apparently grounded in practical
economic analysis. See Barrett, Constitutional Limitations on
Discriminatory State TaxLaws, 2 N.Y.U. Institute on State and Local
Taxation and Conference on Property Taxation §1.03[21 (1983); Hartman,
Federal Limitations on State and Local Taxation 52:17 (1981); Tribe,
American Constitutional Law 596-14 (1978). See generally 1 Rotunda,
Nowak, and Young, Constitutional Law: Substance and Procedure chs. 4,
13 (1986).
Since Complete Auto Transit, the Supreme Court has formulated the
anti-discrimination test in several related ways. Essentially, the
Court focuses on an analysis of relative tax burdens, specifically
whether a state imposes greater tax burdens upon some taxpayers than
upon others. The Court has declared that "a State may not tax a
transaction or incident more heavily when it crosses state lines than
when it occurs entirely within the State." Annco, Inc. V. Hardesty,
467 U.S. 638, 642 (1984). Applying the Complete Auto Transit analysis
in upholding Montana's severance tax upon coal, the Court defined
state tax discrimination as "differential tax treatment of interstate
and intrastate commerce." Commonwealth Edison Co. V. Montana, 453
U.S. 609, 618 (1981). Under the authority of Maryland v. Louisiana, 4
451 U.S. 725 (1981) [hereinafter Maryland], we conclude that Rouse
Bill No. 966 violates the anti-discrimination test of Complete Auto
Transit.
In 1978 Louisiana enacted a series of provisions that collec-
tively came to be known as the Louisiana First Use Tax on Natural Gas.
See La. Rev. Stat. Ann. §$47:1301-1307 (West Supp. 1987) (First Use
G on Natural Gas); id. $47:1351 (First Use Tax Trust Fund); id.
147:647 (severance taxredit); id. 147.11 (tax credit for elect=
and natural gas service); id. 54m (tax credit for certain munici-
palities). The tax was imposed upon the first use within Louisiana of
any natural gas that was not subject to a severance or production tax
in Louisiana or any other state. La. Rev. Stat. Ann. 547:1303(A)
(West Supp. 1987). A taxable use was defined as
the sale; the transportation in the state to the
point of delivery at the inlet of any processing
plant; the transportation in the state of un-
processed natural gas to the point of delivery at
the inlet of any measurement or storage facility;
transfer of possession or relinquishment of
control at a delivery point in the state;
processing for the extraction of liquefiable
component products or waste materials; use in
manufacturing; treatment: or other ascertainable
action at a point within the state. ?
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Honorable Stan Schlueter -~Page 5 (J-M-714)
La. Rev. Stat. Ann. §47:1302(8) (West Supp. 1987).
As a practical matter, the actual incidence of the tax fell on
natural gas that was produced on the Outer Continental Shelf, where no
state has jurisdiction to impose a tax, 43 U.S.C. 51333(a)(2)(A)
(1978), if that gas subsequently was sold, transported, or transferred
in Louisiana. This apparently was the intent of the Louisiana
Legislature when it enacted the tax. See Hellerstein, State Taxation
in the Federal System: Perspectives onLouisiana's First Use Tax on
Natural Gas, 55 Tulane L. Rev. 601 (1981); Comment, The Louisiana
First-Use Tax: Does it Violate the Commerce Clause?, 53 Tulane L.
Rev. 1474 (1979). The first use tax was imoosed at a rate equal to
that imposed by the Louisiana severance tax on natural gas. La. Rev.
Stat. Ann. 6647:1303(B), 47:633(g). For those taxpayers who were
subject to both the first use tax and the severance tax, a credit was
provided against severance tax liability for first use taxes paid.
The statutes further provided that the tax be imposed upon the owners,
as opposed to the producers, by requiring the tax to be deemed a cost
of the owner in preparation of the marketing of the natural gas, id.
547:1303(C); as a practical matter, that ensured that the tax could
not be passed back to the producer, but rather that it would be borne
either by the owner, which was usually a pipeline company, or by the
ultimate consumers, who were ordinarily out-of-state.
The Supreme Court struck down the Louisiana tax on two broad
grounds, violation of the supremacy clause and violation of the
commerce clause. The tax was held to run afoul of the supremacy
clause by interfering with the authority of the Federal Energy
Regulatory Commission to regulate the determination of the proper
allocation of costs associated with the sale of natural gas to
consumers. See Natural Gas Act 15 U.S.C. 55717 et seq., and the
Natural Gas Policy Act of 1978. 15 U.S.C. 013301 et seq. This ground
need not concern us, because Congress has not legislated in this area
with regard to oil. Significantly, the tax was held to violate the
commerce clause in two ways. First, the tax was held to discriminate
against interstate commerce in favor of local interests through its
use of various tax credits and exclusions. The practical effect of
the statutes, taken together, was that state consumers of outer
continental shelf gas were substantially protected against the impact
of the tax. while out-of-state consumers were burdened with the tax,
and had the benefits of untaxed outer continental shelf gas that could
have been cheaper than locally produced gas; the operation of the tax,
moreover, had the effect of encouraging those persons who produced
outer continental shelf gas to develop and produce Louisiana natural
gas. Second, the tax was not justified as a compensatory tax,
compensating for the effect of the state's severance tax on local
production of natural gas. The Court concluded that the state had no
sovereign interest in being compensated for the severance of resources
from federally-owned outer continental shelf land.
The bill would add an importation tax to the chapter imposing a
severance tax. It is clear that an importation tax considered alone,
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Honorable Stan Schlueter - Page 6 (~~-714)
would violate the commerce clause because it would burden interstate
commerce only: such a tax scheme would be facially unconstitutional.
See, e.g., Boston Stock Exchange v. State Tax ~Commission, w;
Halliburton Oil Well Cementing Co. v. Reily, 373 U.S. 64 (1963);
Welton V. Missouri, 91 U.S. 275 (1876). It is urged that the proposed
Texas importation tax not be viewed in isolation, but that it be
considered in conjunction with the Texas severance tax, which is
imposed at the same rate as would be the proposed importation tax. It
is suggested that the two taxes taken together are compensatory and
that such a taxing scheme would impose an equitable and nondiscri-
minatory burden on all oil in the state, regardless of the state in
which it is severed. On the basis of the Maryland case, we disagree.
But before we explain the reasons for our conclusion, we will first
discuss compensatory taxes.
Even though a tax statute results in unequal tax treatment of
different groups of taxpayers, the statute still may not be held to be
discriminatory under the commerce clause if other related taxes
equalize the tax burdens borne by the different groups, i.e., if the
taxes are held to be compensating. The principle of cornEating or
complementary taxes is one that the Supreme Court has long held will
save an otherwise discriminatory tax from constitutional attack. As
long ago as 1868, the Court held that an excise tax on bringing liquor
into a state for sale and a tax on manufacturing liquor in that state
were held to be complementary. Hinson V. Lott, 75 U.S. (8 Wall.) 148
(1868). In 1928 the Court upheld a mileage tax imposed on buses used
in interstate commerce on the theory that buses used in intrastate
commerce were subjected to a gross receipts tax. Interstate Busses
Corp. v. Blodgett, 276 U.S. 245 (1928). Therein the Court set forth
the rationale for a complementary tax scheme:
The two statutes are complementary in the sense
that while both levy a tax on those engaged in
carrying passengers for hire over state highways
in motor vehicles, to be expended for highway
maintenance. one affects only interstate and the
other only intrastate commerce. Appellant plainly
does not establish discrimination by showing
merely that the two statutes are different in form
or adopt a different measure or method of assess-
ment , or that it is subject to three kinds of
taxes while intrastate carriers are subject only
to two or to one.
Id. at 251.
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In Gregg Dyeing Co. v. Query, 286 U.S. 472 (1932), the Court
upheld a state statute imposing a tax on gasoline imported into the
state and stored for future use or consumption, because the state
enacted complementary tax statutes imposing equivalent excise taxes on
the sale and use of gasoline in the state. The Court declared:
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Ronorable Stan Schlueter - Page 7 (JM-714)
The question of constitutional validity is not to
be determined by artificial standards. what is
required is that state action, whether through one
agency or another, or through one enactment or
more than one, shall be consistent with the re-
strictions of the Federal Constitution. There is
no demand in the Constitution that the State shall
put its requirements in any one statute. It may
distribute them as it sees fit, if the result,
taken in its totality, is within the State's
constitutionsl power.
Id. at 480.
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The classic example of compensating or complementary taxes is a
sales tax and a use tax. Use taxes specifically are designed to
prevent sales tax avoidance by taxpayers buying outside the state
personal property subject to the sales tax. See 55 Tulane L. Rev.
601, 621 (1981). A use tax that is imposed on thr privilege of using
property within the state prevents sales tax avoidance, because
the taxpayer buying outside the state is taxed when the property
is brought into the state for use. The Supreme Court in 1937
specifically upheld a use tax against a commerce clause challenge;
examining the way in which the two taxes interacted, the Court found
no discrimination. The Court concluded:
When the account is made up, the stranger from
afar is subject to no greater burdens as a
consequence of ownership than the dweller within
the gates. The one pays upon one activity or
incident, and the ocher upon another, but the
sum is the same when the reckoning is closed.
Equality exists when the chattel subjected to the
use tax is bought in another state and then
carried into [the state]. It exists when the
imported chattel is shipped from the state of
origin under an order received directly from the
state of destination. In each situation the
burden borne by the owner is balanced by an equal
burden where the sale is strictly local.
Henneford V. Silas Mason Co., 300 U.S. 577, 584 (1937).
It is urged that the proposed Texas tax , when considered together
with the Texas severance tax, fairly could be deemed compensatory.
The Supreme Court has been less than clear in setting forth a specific
test. For example. older decisions held that different types of taxes
on unrelated activities were complementary. See, e.g., Interstate Bus
Corp. V. Blodgett, supta; Hinson v. Lott, supra. In Alaska V. Arctic
Maid, 366 U.S. 199 (1961) the Court focused on the competitive effects
ofhe taxation scheme in determining whether two taxes were comple-
mentary. In more recent cases, the Court was less willing to consider
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Eonorable Stan Schlueter - Page 8 (JM-714)
unrelated activities as complementary. See, e.g., Maryland; Armco,
Inc. v. Hardesty. supra.
The most recent formulations of the test focused on whether the
taxes were imposed upon "substantially equivalent events" in order for
them to be deemed compensatory. In Armco, Inc. V. Hardesty, 467 U.S.
at 643. it was held that "manufacturing and wholesaling are not
'substantially equivalent events' such that the heavy tax on in-state
manufacturers can be said to compensate for the admittedly lighter
burden placed on wholesalers from out of state." An examination of
the relevant cases reveals two principles for which the compensatory
tax cases can be cited. First, only one state's tax laws will be
considered in determinina whether two taxes are comnensatorv. See.
=, Austin V. New Hampshire. 420 U.S. 656 (1975); Travis v: Yam
Towne Manufacturing Co., 252 U.S. 60 (1920). Second, two comple-
mentary taxes must impose essentially equivalent economic burdens, or
at least not impose a greater tax burden upon interstate taxpayers.
See, e.g., Halliburton Oil Cementing Co. V. Reily, supra. The Court,
though, has not defined what constitutes "substantially equivalent
events." In Armco, Inc. v. Hardesty. supra, and Maryland, the Court
did indicate what were not "substantially equivalent events."
In Maryland, the case that controls the instant request, the
Court held that the Louisiana first use tax could not be justified as
compensating for the effect of the state's severance tax on local
production since the two events were not considered to be sub-
stantially equivalent. The Court declared: "[Tlhe concept of a
compensatory tax first requires identification of the burden for which
the State is attempting to compensate." Id. at 758. The Court viewed
the severance tax as compensating the state for its depletion of its
natural resources. The Louisiana first use tax was not designed for
the same purpose since it was levied upon natural gas taken from the
continental shelf, and the state had no right to be compensated for
those federally owned resources.
But the First-Use Tax is not designed to meet
these same ends since Louisiana has no sovereign
interest in being compensated for the severance of
resources from the federally owned OCS land. The
two events are not comparable in the same fashion
as 8 use tax complements a sales tax. In that
case, a State is attempting to impose a tax on a
substantially equivalent event to assure uniform
treatment of goods and materials to be consumed
in the State. No such equality exists in this
instance.
Id. at 759. Analogously, we think that the Court would hold that the
8rBte of Texas has no right to be compensated for oil severed from
other states and would declare the proposed Texas scheme
unconstitutionsl as to interstate oil.
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Honorable Stan Schlueter - Page 9 (JM-714)
By its terms, House Bill No. 966 reaches also oil entering Texas
from outside the United States. The commerce clause, of course,
reaches foreign commerce as well as interstate commerce. The leading
case under the foreign commerce clause is Japan Line, Ltd. V. County
of Los Angeles, 441 U.S. 434 (19791, which held unconstitutional a
California ad valorem property tax applied to cargo containers of
Japanese shipping companies. The Court ruled that the Complete Auto
Transit four-prong test should be applied under the clause. The Court
also provided that, under the foreign commerce clause two additional
tests must be met: the tax must not create a substantial risk of
multiple international taxation (as opposed to actual multiple
taxation) and the tax must not prevent "the federal government from
'speaking with one voice' when regulating commercial relations with
foreign governments." Id. at 451. Because we have already concluded
that the third prong ofthe Complete Auto Transit test is violated, we
need not discuss the other tests.
SUMMARY
The proposed House Bill No. 966, as it is
presently drafted, which purports to extend the
Texas severance tax to oil imported into the
state, violates the commerce clause of the United
States Constitution, with respect to both foreign
and interstate coxanerce.and is unconstitutional.
[I[zIw
Attorney General of Texas
JACK HIGHTOWER
First Assistant Attorney General
MARY KELLER
Executive Assistant Attorney General
JUDGE ZOLLIE STEARLEY
Special Assistant Attorney General
RICK GILPIN
Chairman, Opinion Committee
Prepared by Jim Moellinger
Assistant Attorney General
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