Hon. Robert S, Calvert O&ion No, V-994.
Comptroller of Public Accounts
Austin, Texas Ret The authority of the Comp-
troller to collect gross re-
ceipts tax from the El Paso
Natural Gas Company under
Dear Sir6 facts submitted.
Your request fot an opinion reads tn part1
“Please advise me if under the following facts
the El Paso Natural Gas Company is subject to the
gross receipts tax provided for under Article 7060,.
R. C. S, 19250
“The Company has five industrial customers
within the State of Texas, as follows-
“1 - Phelps Dodge Corporation (successor to
Nichols Copper Company) under a renewal contract
dated February 20, 1939 (effeotive June, 1941) for a
term expiring December 4, 1951. This contract is in
renewal and extension of an original contract dated
June 19, 1929 between El Paso Gas Utilities Corpora-
tion (later assigned to El Paso Natural Gas Co.) and
Nichols Copper Company (later assigned to Phelps
Dodge Corporation).
“2 - Standard Oil Company of Texas under a re-
newal contract dated March 6# 1947 for a term expb-
ing March 5, 1952.
“3 - The Texas Company under a renewal con-
tract dated March 17, 1947 for an additional term of
five years,
“4 - American Smelter 81Refining Company un-
der a renewal contract dated January I, 1948 for a term
of ten years.
“5 - Southwestern Portland Cement Company un-
der a renewal contract dated May 23, 1945 for a term
of five years,
Hon. Robert Se Calves& Page 2 (V-994)
“6 - In addition, residue gas is sold to Sid Rick-
ardson Carbm Co. for utilization in its carbon black
plant in Ector County under contract dated Novembar
24, 1948 for a term ending December 31, 1953.
-Prior to Aprdl 1, 1948 none of the industrial
customers were located in the City limits of El Paso.
Effective April 1, 1948 the city extended its limits so
as to include three of the plants,‘”
Article 7060, V.C.S,, reads in part:
“Each individual, compsny, corporation, or asso-
ciation owning, operating, managing, or controlling any
p/ o a , works 0 0 0 located within any incorporated town
or city i-State, and used for local sale and distri-
bution in said town or oity, and charging for such gas
-11
o.os make quarterly, on the first day of January,
April, July, and October of each year, a report to the
Comptroller under oath . e (1showing the gross amount
received from such business done in each such incor-
porated city or town within this State in the payment of
charger for such gas OOo for the quarter next preced-
ing. Said individual, company, corporation, or associa-
tion, at the time of making said report b , 0 for any in-
corporated town or city of ten thousand (10,000) inhab-
itants or more, aocordlng to the last Federal Census
next preceding the’filing of 8ald report, the said individ-
ual, company, corporation. or association, at the time
of making said report, shall pay to, the Taeasurer of
this State an occupation tax #or the quarter beginning
on aaid date an amount equal to one and five thousand
one hundred twenty-five ten-thoussadths (1,5125) per
cent of sa6d gross receipts0 as shown by said weport,”
(Emphasis added throu(lhout.)
The facts wMeh have boas aebm(tted fn aonnection with
this request are that prior to April 1, 1948, mane 01 the sompamy’s
hdurtskl customers we?e located wlithin the c&y limits of El Paso,
but effective April 1, 1948, the city extended fis Urn&s so as to in-
cludo tke plants of the Phelps Dodge Corperation, the Standard Oil
Compa8y ef Texas, and The Texas Company,* The gas which is de-
l&verea to the three above-mentioned custotiers is transported from
tke #as fields loaated in New Mexico and delbered directly to the
three customers for their own consumption and not for resale. Tk
g~a moves in a continuous stream from New Mexico to the plants of
the three industrdal customers. The terms of the $as sales contracp
provide for delivery by the seller to the prem&ses of the customers
plants,
Hon. Robert S. Calvert, Page 3 (V-994)
We must first determine if the El Paso Natural Gas
Company is a ‘gas works” and subject to the occupation tax levied
by Article 7060, V.C.S.
The only case which has construed the statute with re-
gard tg the meaning of “gas works”, as used in the statute, is Util-
ities Natural Gas co. v. State, 133 Tcx. 313, 128 S.W.2d 1153 C-l-939).
That case involved the liabimv of a pas -niiw
- line comnany
- . for ‘tax-.
es levied by Article 7060, V.C-,S., on seles to a public utility com-
pany of gas which was used as fuel to produce steam for an electric
generating plant. The Court said (at page 1155)r
u , , . we have no doubt that the simple fact that
a delivery of gas is made in the city, by means of said
pipe line, to a single customer, and to nobody else, was
not intended by the legislature to be comprehended by
the term ‘distribution’ as used, This term as useddoes
not mean the transfer of the possession of gas, by means
of the pipe line, to a single purchaser where such pur-
chaser is the onlv customer to whom the eas comnanv
sells gas in the city. It means the transftr of posses-
sion of gas to various individuals or concerns in thecity.
Any other construction of the term would, in our opin-
ion, involve a departure from the legislative intent,”
The test laid down by that decision is that there must
be a sale of gas to “various” purchasers or consumers for there to
be a “distribution” ox gas as this term is used in the statute,
In Opinion No. O-3776, dated August 1, 1941, this office
held that if there was a sale of gas to more than one customer or
purchaser within a city the distributor was a “gas works” under the
statute and subject to the tax. We quote from that opinion:
“It is the opinion of this department in line with
the above quoted cases that any individual or corpora-
tion selling or distributing liquid petroleum gas to more
than one consumer in any incorporated city within the
population brackets stated in Article 7060 ~ s ~ would be
subject to the gross receipts tax levied therein,”
rft is thus our opinion that the El Paso Natural Gas Com-
pany, by virtue of the fact that it sells and distributes natural gas
to three industrial consumers within an incorporated city, is a ‘“gas
works” and subject to the occupation tax on the gross receipts of
such sales as levied by Article 7060, V.C.S.
The next problem is that of determining whether-the sales
to the three industrial consumers are exempt from State taxation under
. .
Hon. Robert S. Calvert, Page 4 (V-994)
the “Commerce Clause”, Article I, Section 8, of the Constitution
of the United States.
It is elemental that a State cannot levy a tax so as to
place a direct burden on, discriminate against, or interfere with
interstate commerce,
We will not attempt to review or to reconcile the deci-
sions of the U. S, Supreme Court on this subject. It is an area of
“nice distinctions”.1 The Constitution has granted to Congress, by
the Commerce Clause, the power to regulate the taxation of inter-
state commerce, Congress has, however, left the determination of
what State taxes are permissible, and are not permissible, to the
courts. It is consequently impossible to determine with exactness,
or lay down inflexible rules with respect to, the power of the States
to tax instrumentalities of commerce. The U. S. Supreme Court
recognized this fact when it said. “The federal courts have sought
over the years to determine the scope of\a state’s power to tax in
the light of the competing interests of interstate commerce, and of
the states, with their power to impose reasonable taxes upon inci-
dent~2connected with that commerce , , . We continue at that task
000 The scope of that power, in view of the recent decisions, is
apparently growing larger, 3
For many years it was well settled that gross receipts
from interstate commerce, or sales, could not be directly taxed by
a State. This rule of law has, however, been greatly narrowed by
the decisions of the Supreme Court. While the Court has said that
the principle of the immunity of interstate commerce from State
taxation will be “jealously guarded”, the tendency has been to limit
the field of immunities from State taxation. The Circuit Court of
Appeals, in Stone v. Interstate Natural Gas Co., 103 F,Zd 544, 549
(C,C,A, 5th 1939, aff. 308 U.S. 522), saidt
““The principle of stare decisis in constitutional
interpretations has recently received shattering blows
in the Supreme Court, and especially in the field of im-
munities from general taxation, The increasing social
burdens assumed by our governments, both State and
national, will require increasing and more searching
1 G., H, and S, A, R. Co. v. Texas, 210 U.S. 217, 225 (190S),
2 Memphis Natural Gas v. Stone, 335 U.S. 80, 85 (1948).
3 Interstate Oil Pipe Line v, Stone, 337 U.S. 662 (1949)l Central
Greyhound Lines vg Mealey, 334 U.S. 653 (1948); MempbisNat-
ural Gas v. Stone, supra.
. .
Hon. Robert S. Calvert, Page 5 (V-994)
taxation for their support. Any immunity from equal
general taxation appears more and more inconvenient
The recent reexamination of the basis for
SF?=. immunities has resulted in an upheaval. The cur-
rent of authority has been turned. For the judicial nav-
igator ,the cases are, no longer the beacons marking out
a fixed if tortuous channel. He must for awhile fix his
eyes anew upon the Constitution as the pole star of his
firmament and steer his course rather by principle than
by precedent.“4
The Supreme Court formerly used various tests in de-
termining the validity of State tax laws.~ In Illinois Natural Gas Co.
v. Central Illinois Public Service Co., 314 U.S. 498, 504 (1942). the
Court said:
“This Court has held that the retail sale of gas at
the burner tips by one who pipes the gas into the state,
or by one who~is a local distributor acquiring the gas
from another who has similarly brought it into the state,
is a sale in intrastate commerce, since the in:terstate
commerce was said to end unon the introduction of the
gas into the service pipes of-the distributor, Public Util-
ities Commission v. Landon, 249 U.S. 236; East Ohio Gas
Co. v. Tax Commission, 283 U.S. 46%;. Iii applying this
mechanical test ior determininp when interstate corn -
merce ends and intrastate commerce begins, this Court
has held that the interstate transportation and the sale
of gas at wholesale to local distributing companies is not
subject to state control of rates, Missouri Y. Kansas Gas
Co., su ra; see Public Utilities
Gifira,*; cf. P blic Utilities C%z?zvyOG$?o
-73 U.S. 8J,“89, or to a state privilege tax, S Tax
Emmiss,ion v. Interstate Gas Co,, su ra, Yet, state reg-
ulation of local retail rates to ultima *-s- e consumers has
been sustained where the gas so distributed was purchased
at wholesale from one who had piped the gas into the state,
Public Utilities Commission v. Landon, supra, as has a
state tax measured by receipts from localretail sales of
pas bv one who has similarl? brought the QaS into the state.
&ast bhio Gas Co. v. Tax Commission, &,
‘In other cases, the Court, fn determining the valid-
ity of state regulations, has been less concerned% find a
point in time and space where the interstate commerce in
4 See also Coverdale v. Arkansas-Louisiana Pipe Line Co., 303
U.S. 604 (1938).
. .
Hon, Robert S. Calvert, Page 6 (V-994)
gas ends and intrastate commerce begins, and has
looked to the nature of the state regulation involved,
the objective of the stats, and the effect of the regula-
tion upon the national interest in the commerce, Cf.
South Carolina Highway Dept. v. Barnwell Bros., 303
U S 171 185 187 et seq.; California v. Thompson,
3i3’U.S.‘109,‘113,‘~ckworth v. Arkansas, ante,
p. 390. Thus, in Pennsylvania Gas Co. v. PublicServ-
ice Commission, 252 . .
transported byipe line from one state into another
and there sold directly to ultimate local consumers, it
was held that, although the sale was a part of interstate
commerce, a state public service commission could
regulate the rates for service to such consumers. While
the Court recognized that this local regulation would to
some extent affect interstate commerce in gas, it was
thought that the control c&rates was a matter so pecu-
liarly of local concern that the regulation should be
deemed within state power. Cf. Arkansas Louisiana
Gas Co, v. Dept. of Public Utilities, 304 U.S. 61. And,
similarly, this Court has sustained a non-discrimina-
tory tax-on the sale to a buyer within the taxing state of
a commodity shipped interstate in performance of the
sales contract, not upon the ground that the delivery was
not a part of interstate commerce, see East Ohio Gas
Co. v. Tax Commission, supra, but because the tax was
not a prohibited regulationor burden on, that com-
merce. Wiloil Corporation v. Pennsylvania, 294 U.S.
169; McGoldrick v. Berwind-White C O., 09 U.S. 33, 50.
In Southern Gas Corp. v. Alabama, 301 U.S. 148, 156-57,
on which the Illinois Supreme Court relied, we held only
that the sale of gas to a local industrial consumer by one
who was piping the gas into the state was a local busi-
ness sufficient to sustain a franchise tax on the privilege
of doing business within the state, measured by all the
taxpayer’s property located there, including that used for
wholesale distribution of gas to local public service com-
panies I)
“In the absence of any controlling act of Congress,
we should now be faced with the question whether the in7
terest of the state in the present regulation of the sale
and distribution of gas transported into the state, bal-
anced against the effect of such control on the commerce
in its national aspect, is a more reliable touchstone for
ascertaining state power than the mechanical distinctions
on which appellee relies,*
While there may have been doubt under the older deci-
sions as to the point at which inter&ate commerce ended and intra-
state commerce began, there is little doubt, in view of recent de-
cisions, that the sales by the El Paso Natural Gas Company to the
Hon. Robert S. Calvert, Page 7 (V-994)
three industrial consumers in El Paso are interstate sales. The
case of Panhandle Eastern Pipe Line Co, v. Public Service Commis-
sion of I n iana. . .
ana of the sale of natural gas which had been transported from gas
fields in Texas and Kansas by an interstate pipe line directly to in-
dustrial consumers in Indiana. The Court said (at page 512)1
“Nor do we question that these sales are inter-
state transactions. The contrary suggestion left open
in the state supreme court’s treatment rests upon the
view that gas transported interstate takes on the char-
acter of a commodity which has come to rest or broken
bulk when it leaves the main transmission line and, un-
der reduced pressure, enters branch lines OT laterals
irrevocably on its way to final distribution or consump-
tion. Those merely mechanical considerations are no
lon er effective, ,it ever they were exclusively, to deter-
mine tor regulatory purposes the interstate or intrastate
character of the continuous, movement and resulting sales
we have here.
“Thus gas furnished to local utilities for resale is
supplied unquestionably, both as to transportation and
as to sale, in interstate commerce. Yet it is subjected
to practically identical changes in pressure with the gas
sold by appellant directly for industrial use. Neither
practical common sense nor constitutional sense would
tolerate holding that reduction in prersure makes the
fndustrial sales to Anchor-Hocking wholly intrastate for
purposes of local regulation while deliveries at similar
pressure to utility companies remain exclusively inter-
state, Variations~ inmain pressure are not the criterion
of the state’s regulatory powers under the commerce
clause. Cf. Interstate Natural Gas Co. v. Federal Pow-
er Comm., 331 U.S. 682 689, 67 S.Ct. 1482, 1486 The
sales here were clearly’in interstate commerce,” ‘5-
Section l(b) of the Natural Gas Act of 1938’ providesa
“The provisions of this chapter shall apply to the
transportation of natural gas in interstate commerce,
to the sale in interstate commerce of natural gas for re-
sale for ulti&ate.public consumption for domestic, com-
mercial, industrial, or any other use, and to natural-gas
5 See also Illinois Natural Gas Co, v. Central Illinois Public Serv-
ice Co., 314 U *S . 498 ( 1942).
6 15 U.S.C.A. g 717, et seq,
Hon. Robert S. Calvert, Page 8 (V-994)
companies engaged in such transportdtion or sale, but
shall nbt apply to any other transportation dr sale of
natural gas or to the facilities used tor such distribu-
tion or to the productinn or gathering of natural gas.”
The Court in the Panhandle Eastern Pipe Line case, in
upholding the power of the State to ,regulate direct sales to indus-
trial consumers, said (at page 516)i
“The omission of any reference to other sales,
that is, to direct sales for consumptive use, in the af-
firmative declaration of coverage was not mnadvertent.
It was deliberate. For Congress made sure its intent
could not be mistaken by adding the explicit prohibition
that the Act ‘shall not apply to any other *** sale **+.’
(Emphasis added.) Those words plainly meanit the
Act shall not apply to any sales other than sales ‘for re-
sale for ultimate public consumption for domestic, com-
mercial, industrial, or any other use.’ Direct sales for
consujnptive use of whatever sort were excluded.
“The line of the statute was thus clear and com-
plete. It cut sharply and cleanly between sales for re-
sale and direct sales for consumptive uses. No excep-
tions were made in either category for particular uses,
quantities or otherwise. And the line drawn was that
one at which the decisions had ariived in distributing
regulatory power before the Act was passed.”
The Court further said (at page 519);
“Congress, it is true, occupied a field. But it was
meticulous to take in only territory which this Court
had held the states could not reach. That area did not
include direct consumer sales, whether for industrial
or other uses. T-had been regulated by the
states regulation had been repeatedly sustained.
In no instance reaching this Court had it been stricken
down.
“It is true that no case came here involving state
regulation of direct industrial sales wholly apart from
sales for other uses. In the cases sustaining state pow-
er, whether to regulate or to tax, the company making
the industrial sales was selling also to domestic and
commercial users. But there was no suggestion, cer-
tainly no decision, that a different rasult would follow
if only direct industrial sates were being made, Neither
the prior judicial line nor the statutory line was drawn
Hon. Robert S. Calvert, Page 9 (V-994)
between kinds of use or on the relation between sales
for different uses. Both lines were drawn between sales
for use, of whatever kind, and sales for resale. Cf C 1
orado Interstate Gas C,o. v. hederal Power CommO;’ 3%-
U.S. 581, 595, 596, 65 S&t. 829, 836, 89 L,Ed, 126 0,
“The’ Natural Gas Act therefore was not merely
ineffective to exclude the sales now in question from
state control. Rather both its policy and its terms con-
firm that control. More than ‘silence’ of Congress is
involved 0 q n p*q
We.may point out here that the Court has said1
“In a case like. this nothing. is gained, and clarity
is lost, by not starting with recognition of the fact that
it is interstate commerce which the State is seeking to
reach~and candidlv facinn the real auestion whether what
theate is exacting is a-constitutionally fair demand by
the State for that~aspect of the interstate commerce to
which the State bears a special relation ; v ( distinctions
would be clearer land more reasonably made if II 0 0 a tax
. 0 0 had been frankly sustained on the ground that the tax
did not burden interstate commerce in the constitution-
al sense rather tlrrn on the ground that it was not inter-
state commen‘ee.
The Supreme Court has sustained State taxation on, and
regulation of, the sale of gas and electricity to customers for actual
consumption, In Missour;v, Kansas Natural Gas Co., 265 US, 298,
309 (1924), the Court said!
“The business of supplying, on demand, local con-
sumers is a local business:
businessi &~‘
even
though
though the gas bebrought
from another State and drawn for distribution directly
from interstate mains1 and this is so whether the local
distrrbution be made by the transporting company or by
indeoendent
independent distributinn
distributing oompanies, In such case the lo-
cal, interests ns paramount,~. and
iid-&?nterference
the interference with
wath in-
terstate;rammerce, nf any@ indirect and of minou Hmpor-
tancc,“O
7 Central Greyhound Lines v, Mealey, 334 U,S. 653, 661 (1948),
8 See also.Southern Natural Gas Corp. v, Alabama, 301 U,S, 148
(lJl,7,l East Ohio Gas Co,v, Tax Commission, 283 US, 465 (193A)r
Utilities Commission v, Landon, 249 US, 236 (1919),
Hon. Robert S. Calvert, Page 10 (V-994)
The Court in Memphis Natural Gas Co. V. Beeler, 315
US. 649, 653 (1942), said:
“This Court has often bad occasion to rule that
the retail sale of gas at the burner tips by one who pipes
the gas into the state or by a local distributor acquiring
the gas from another who has similarly brought it into
the state is subject to state taxation and regulation.”
The Couzt in McGoldrick v. Berwind-White Coal Min-
ing Co., 309 U.S. 33, 45 (1940), held:
“Section 8 of the Constitution declares that ‘Con-
gress shall have power . . . to regulate commerce with
foreign Nations, and among the several States , . . .’
In imposing taxes for state puaposes a state is net ex-
ercising any power which the Const&ution has conferred
upon Congress. It is only when the tax operates to reg-
ulate commerce between the states or with fozelgn na-
tions to an extent which infringes the authority conferred
uwn Conaress. that the tax can be said to exceed consti-
titional lymitations. See Gibbons v. Ogden, 9 Wheat. 1,
18 I South Carolina Highway L)ept. v. Barnwell Bz,os.,
303’U.S. 1 t7 185. Forms of state taxation whose tend-
ency is to pr’ohibit the corkmerce or place it at a disad-
vantage as compared or in competition with intrastate
commerce, and any state tax which discriminates against
the commerce, are familiar examples of the exercise of
state taxing power in an unconstitutional manner, because
of its obvious regulatory effect upon commerce between
the states.
“But it was not the purpose of the commerce clause
to relieve those engaged in interstate commerce of their
‘ust share of state tax burdens, merely because an inci-
ental or consequential etfect of the tax is an increase in
the cost of doing the business, Western Live Stock v. Bu-
reau. 303 U.S. 250, 254. Not all state taxation is to be
condemned because, in some manner, it has an effect up-
on commerce~~between the states, and there are many forms
of tax whose burdens, when distributed through the play of
economic forces, affect interstate commerce, which nev-
ertheless fall short of the regulation of the commerce which
the Constitution leaves to Congress. A tax may be levied
on net income wholly derived from interstate commerce.
Non-discriminatory taxation of the instrumentalities ofin-
tezstate commerce is not prohibited.”
Hon. Robert S. Calvert, Page 11 (V-994)
T& mow potent decision by the U. S. Supreme Coupt
OILWr rubject b Interstate Of1 Pipe Line Co. v, Stone, 337 U.S. 662
(1949). That case involved the validity f Mi ssissippt statute wbLrh
lmporcd a gross receipts tax on tbe priv”&it a OS operating 4 pip
line within that State. The Court (at page 6 %6) rrid~
“The statute is not invalidated by the aommexce
clause f0 c ofi merely because, u**
nke the statute attacked in Gmphis Natural Gas co, v(
e contrary rhouIdai no o yp Grand
~;~$;kCJo,, 142 US 217 35 L,ed. 994, dt 121 if& 6
om 807, which &ly rules the case at bat&
That ease sustained a state statute which imporod upon
an interstate gailroad corporalen ‘an annual exotse tw
by apportioned gtosr
ege of exercising its framchfaes
Grand Trunk decision bar been approved b
as recently as the
ted New York to impose a tax on the g;o$s tcoeiptr from
the operation of an interstate bus line, provided that tax
was apportioned according to mileage traveled within b&e
state, The Mealey Case is not distinguished by saying
that it involved only a tax on oes receipts and not a tax
0~ interstate commetce itee f , for gross receipts taxer
have long been regarded as ‘direct. In cases which are
rupporpd to support the proposition that ‘dWqct. taxes
& tnteirtstu commerce are invalid under the commerae
claurrc,
“Since all the activities upon which the tax is im-
posed are carried on in Mississippi, there is no due
ocess obJect;Lon to tira tax. The tax does not disczim-
Ynate against Interstate tremmerce in favor of compet-
ing intrastate commeras of like character, The nature
of tlw subject QI taxatlod makes apportionment unneces-
nary1 theta is no attem t to tax iaterstate activity car-
ried on outside Misslss Pppi’s borders, No other state
can repeat the tax& For these reasons the commerce
clauro does not invalidate this tax..
The tax in this instance is levied upon the local sale to
the ultimate consumer, The tax is not discriminatory, nor does &t
lay a direct burden on interstate commeroq The tax cannot result
in multiple taxation because no other state can repeat the tax, The
tax ia thus not prohibited by the Commerce Clause. Opi,nion No.
2998, dated February 2, 1937, is overruled in so far as it conflicts.
Hen, Rebert S. Calvert, Page 12 (V-994)
It is our conelusion that, inasmuch as the City of El
Paso has a population of more than 10,000, the El Paso Natural Gas
Company is liable for an occupation tax equal to one and five thou-
sand ene hundred twenty-five ten-thousandths (1,5125) per cent of
the gross receipts from business done within the city from April 1,
1948, the date the company began operating a “gas works” within
that city.
SUMMARY
A pipe line which sells to three industrial con-
sumers within a city is operating a “gas works” and
is liable for the occupation tax levied by Article 7060,
V.C.S. Opinion No. O-3776.
Taxes on the local sale of gas to ultimate con-
sumers is not prohibited by the “Commerce Clause”
of the U.S. Constitution. Opinion No. 2998 overruled
in so far as it conflicts.
Yours very truly
APPROVED4 PRICE DANIEL
Attorney General
W. V, Geppert
Taxatisn Division, .’
Charles D. Mathews * ‘hank Lake
Executive Assistant Assistant
FL!wb:mwb