Williams Natural Gas Co. v. . State Board of Equalization

HODGES, Chief Justice.

Three public service corporations, Williams Natural Gas Company, Williams Pipe Line Company, and Williams Telecom Group (Williams Companies) ask this Court to assume original jurisdiction. They request a writ prohibiting the State Board of Equalization (Board) from assessing their public service property at a greater ratio than that applied to public service property owned by railroads and airlines. Original jurisdiction is assumed and the petition for a writ of prohibition is denied.

The Williams Companies assert that the assessment of their property at a ratio higher than that used to assess railroad and airline property is unlawfully discriminatory. They have challenged the Board’s assessment’in the Court of Tax Review. There are seventy to ninety other challenges pending in that court. All were brought by public service corporations seeking to have their assessment ratio lowered to the ratio applied to railroad and airline companies.

The Board has responded through the Attorney General to the Williams Companies’ application to this Court to assume original jurisdiction. The Oklahoma Tax Commission has adopted that response. Motions to intervene have been granted to the State School Board Association, the Association of County Commissioners, several pipeline companies with cases pending before the Court of Tax Review, the Oklahoma City Public Schools, and Public Service Company of Oklahoma. Oral arguments were heard on this matter on October 19, 1994.

ORIGINAL JURISDICTION

The Williams Companies, the Board, the School Board Association, and the Oklahoma City Schools ask this Court to assume original jurisdiction on the basis of publici juris. They point to the many other challenges pending in the Court of Tax Review which raise the issues presented by this original action. They, urge resolution of the “pure questions of law” raised in this action which must ultimately be determined by this Court. Further, they point out that if the matter is not resolved before April 1, 1995, when the ad valorem taxes are due, the taxes will be paid under protest. Those funds will then be placed in an escrow account and will be unavailable to schools and county governments.

Every recipient of ad valorem tax revenue is potentially impacted by this action. These include common schools (K-12), vocational technical education, county government, county health departments, emergency medical service districts, solid waste management districts, county and city/county libraries, and cities (sinking funds only). The projected revenue shortfall for these institutions is $63.8 million. This represents 6.8% of total property tax revenue.

*1221This Court has assumed original jurisdiction pursuant to the doctrine of publici juris to address ad valorem tax issues emanating from the Board. See State ex rel. Poulos v. State Bd. of Equalization, 646 P.2d 1269 (1982); State ex rel. Poulos v. State Bd. of Equalization, 552 P.2d 1134 (1975). The public importance of the issues presented by this action are heightened by the adverse impact on school districts and county government if the controversy is not rapidly resolved. In addition, judicial economy will be served by today’s resolution of the central issues in numerous ad valorem tax protests. Original jurisdiction is therefore assumed to' address the issues raised by the Williams Companies.

BACKGROUND

In Oklahoma’s Ad Valorem Tax Code, the Legislature has listed three classes of property: 1) real property; 2) personal property; and 3) public service corporation property. Okla.Stat. tit. 68, § 2803(A) (1991). Real and personal property are assessed locally by county officials. The Board, however, is “responsible for valuation of railroad, airline and public service corporation property and the adjustment and equalization of all property values both centrally and locally assessed.” Id. at § 2802(26). The Board assesses ad valorem taxes on public service corporations by 1) establishing a fair cash value for property and 2) fixing an assessment percentage for property. The second step is challenged in this action.

During the 1960s and 1970s, Congress became concerned about the number of failing railroads. See Chrysler Rail Transp. Corp. v. Holt, 845 F.Supp. 463, 465 (W.D.Mich. 1994). Congress found that the states had been forcing railroads to carry more than their share of the tax burden. To prevent discriminatory taxation of railroad property by the states, Congress enacted the Railroad Revitalization and Regulátory Reform Act of 1976 (4-R Act), 49 U.S.C. § 11503 (1988). The Act provides in part:

The following acts unreasonably burden and discriminate against interstate commerce, and a State, subdivision of a State, or authority acting for a State or subdivision may not do any of them:
(1) assess rail transportation property at a value that has a higher ratio to the true market value of the rail transportation property than the ratio that the assessed value other commercial and industrial property has to the true market value of the other commercial and industrial property.
(2) levy or collect a tax on an assessment that may not be made under clause (1) of this subsection.
(3) levy or collect an ad valorem property tax on rail transportation property at a tax rate that exceeds the tax rate applicable to commercial and industrial property in the same assessment jurisdiction.

Id. at § 11503(b) (emphasis added).

Tax discrimination against airline property which burdens interstate commerce was similarly remedied under provisions of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), 49 U.S.C.App. § 1513 (1988). That Act provides in part:

(1) The following acts unreasonably burden and discriminate against interstate commerce and a State ... may not do any of them:
(C) levy or collect an ad valorem property tax on air carrier transportation property at a tax rate that exceeds the tax rate applicable to commercial and industrial property in the same assessment jurisdiction.

Id. at § 1513(d)(1)(C).

In response to these federal acts, the Oklahoma Legislature enacted section 2864(C) of title 68. That section provides that “[i]n determining the assessment ratio for all air carrier property and all railroad property, the State Board shall only consider the ratio of the aggregate assessed value of the fair cash value of the locally assessed commercial/industrial real property of the state.”

In June of this year, the Board adopted an assessment ratio of 12.08% for airline and railroad property. In July, the Board adopted a ratio of 22.85% for the Williams *1222Companies and other public service corporations.

The Williams Companies claim the assessments 1) violate the Equal Protection Clause of the Fourteenth Amendment to the United States Constitution, 2) violate article X, section 5 of the Oklahoma Constitution which requires uniform taxation within a tax class, and 3) violate sections 2803(C) and 2847 of the Ad Valorem Tax Code, Okla.Stat. tit. 68, §§ 2801-2899 (1991), which require uniform treatment in ad valorem taxation.

EQUAL PROTECTION

The Williams Companies assert that the Board’s assessments violate the Equal Protection Clause of the Fourteenth Amendment to the United States Constitution because their property subjects them to a higher assessment percentage than the assessment percentage applied to the property of airlines and railroads. Thus, they argue, their property has been subjected to discriminatory treatment. The Board responds that the Legislature has created a subclass of property for ad valorem taxation purposes of public service corporations, the railroad and airline companies, in response to the federal legislation.

The Equal Protection Clause of the Fourteenth Amendment requires that no state “deny to any person within its jurisdiction the equal protection of the laws.” State legislatures are given “especially broad latitude in creating classifications and distinctions in tax statutes.” Regan v. Washington, 461 U.S. 540, 547, 103 S.Ct. 1997, 2002, 76 L.Ed.2d 129 (1983). Unless a classification “jeopardizes exercise of a fundamental right” or it “characterizes based upon an inherently suspect characteristic,” the Equal Protection Clause requires only that the classification “rationally further a legitimate state inter-' est.” Nordlinger v. Hahn, — U.S. -, -, 112 S.Ct. 2326, 2332, 120 L.Ed.2d 1 (1992) (citing Cleburne v. Cleburne Living Center, Inc., 473 U.S. 432, 439-441, 105 S.Ct. 3249, 3254-3255, 87 L.Ed.2d 313 (1985); New Orleans v. Duke, 427 U.S. 297, 303, 96 S.Ct. 2513, 2516-2517, 49 L.Ed.2d 511 (1976)). “This standard is especially deferential in the context of classifications made by complex tax laws.” Id.

The present controversy, however, raises the threshold issue of whether a classification has occurred. If the Legislature has made railroads and airlines a subclass of public service corporations, that is permissible provided that “the relationship of the classification to its goal is not so attenuated as to render the distinction arbitrary.” Id. If, on the other hand, the Legislature has left the Williams Companies and other public service corporations within the same tax class, the difference in the assessment percentages cannot withstand scrutiny under the Equal Protection Clause. See, e.g., Allegheny Pittsburgh Coal Co. v. Webster County, 488 U.S. 336, 345,109 S.Ct. 633, 638-639,102 L.Ed.2d 688 (1989) (“The equal protection clause ... protects the individual from state action which selects him out for discriminatory treatment by subjecting him to taxes not imposed on others of the same class.” Hillsborough v. Cromwell, 326 U.S. 620, 623, 66 S.Ct. 445, 448, 90 L.Ed. 358 (1946)).

The Williams Companies argue that the Legislature has not created a separate tax class or subclass for railroads and airlines because it did not amend section 2803. That section lists only three ad valorem tax classes. However, it is the intent of the Legislature to create a tax class that controls rather than the statutory format it chooses.

Section 2864(C) provides a different taxing method for a clearly defined subclass of public service corporations, the railroads and airlines. No longer are other public service corporations of the same class. They are outside the protection afforded by Congress and are no longer similarly situated to airlines and railroads. The fact that the Legislature chose to include the provision in section 2864 rather than section 2803 does not change that. Just as the Legislature made public service corporation property a subset of the larger set of commercial and industrial property, it made railroad and'airline property a subset of public service corporation property.

The Legislature was required to recognize the supremacy of federal law. It responded by creating a subclass for railroads and air*1223lines. This is not a situation where federal law has preempted a state statute due to a conflict. The Oklahoma Legislature responded to the federal act by amending the ad valorem tax scheme so that it would not conflict with federal law.

There is nothing arbitrary or irrational in that classification. It is limited to those protected by the federal acts. The Legislature’s method of creating the class was consistent with the “large leeway” states are given “in making classifications and drawing lines which in them judgment produce reasonable systems of taxation.” Lehnhausen v. Lake Shore Auto Parts Co., 410 U.S. 356, 359, 93 S.Ct. 1001, 1003, 35 L.Ed.2d 351 (1973).

The classification furthers a legitimate state interest. The Legislature enacted section 2864(C) to bring Oklahoma’s ad valorem taxing scheme into compliance with federal laws which gave special protection to railroads and airlines. Compliance with federal law achieved by legislative creation of a tax subclass does not violate the Equal Protection Clause.

The parties have cited four state court decisions which have addressed equal protection and uniformity of taxation issues in this context. The Williams Companies rely upon Northern Natural Gas Co. v. State Board of Equalization and Assessment, 232 Neb. 806, 443 N.W.2d 249 (1989) cert. denied, 493 U.S. 1078, 110 S.Ct. 1130, 107 L.Ed.2d 1036 (1990). There, a pipeline company sought to have its property assessment equalized with railroads. On appeal from the State Board of Equalization and Assessment the Supreme Court of Nebraska found the decision denied equal protection to the pipeline company. It held:

The State Board of Equalization and Assessment, by not taxing the personal property of certain property in a class, although acting involuntarily and under compulsion of federal law, nevertheless, by complying with that mandate, has denied another taxpayer in that same class the equal protection of the law contrary to the 14th amendment to the Constitution of the United States.

Id. 443 N.W.2d at 251 (Syllabus by the Court n. 8) (emphasis added).

The key distinction between the facts of that case and the present one is that the Nebraska Board treated taxpayers of the same class differently. The Nebraska Constitution requires that “[tjaxes shall be levied by valuation uniformly and proportionately upon all tangible property....” Neb. Const, art. VIII, § 1. Essentially, the Nebraska taxing scheme treats all tangible property as being within the same class unless certain property, such as motor vehicles and agricultural land, has been exempted. Thus, when a federal court enjoined the state of Nebraska from assessing the personal property of railroads, the result was that the assessments upon others within the class became disproportionately higher. 443 N.W.2d at 256.

When the Nebraska Supreme Court ordered that pipelines be given the same exemption as railroads, it created a revenue crisis. The Nebraska Legislature responded by making the personal property of railroads “a separate and distinct class of property and exempt[ed] the class from property taxation. ...” See Neb.Rev.Stat. § 77-202.47(4) (1990).

Oklahoma enjoys a different system of taxation. Our Constitution permits the Legislature to establish different tax classes in which property can be valued differently. See Okla. Const. art. X § 22. Airlines and railroads are in a legislatively created subclass of public service corporation property. This factual distinction brings this case under the persuasive authority of cases cited by the Oklahoma Board. See In re ANR Pipeline Co., 254 Kan. 534, 866 P.2d 1060 (1994), cert. denied, — U.S. -, 115 S.Ct. 296, 130 L.Ed.2d 209 (1994). See also State v. Colonial Pipeline Co., 471 So.2d 408 (Ala. Civ. App.1984); Federal Express Corp. v. Tennessee State Board of Equalization, 717 S.W.2d 873 (Tenn.1986). Those cases held that legislative tax classifications of railroads and airlines on one hand and other entities on the other hand, did not violate the Equal Protection Clause.

Specifically, the Kansas Supreme Court in ANR rejected a pipeline’s request to have its real property assessed on the same basis as *1224railroad property. In doing so, that court held that taxing railroad property differently from pipeline property did not violate either the Equal Protection Clause or the equal taxation provision of the Kansas Constitution.

The ANR court refused to follow the Nebraska decision noting that “[t]he Nebraska Constitution does not have property classifications.” 866 P.2d at 1067. It observed that, unlike the Nebraska tax scheme, the Kansas Constitution “classifies all real and personal property and fixes the assessment rate for each subclass.” Id. at 1066. A 1992 amendment to the Kansas Constitution made railroad real property an exception to the public utility subclass to which it belonged. Id. at 1066-1067. The ANR court held that the challenged assessments did not violate the Kansas or United States Constitutions.

Oklahoma’s tax scheme is similar to that of Kansas in that railroad property -has been separately classified for different tax treatment. While the Kansas classification is found in its constitution, the Oklahoma classification is statutory pursuant to the express power to classify granted to the Oklahoma Legislature.

Finally, the Williams Companies’ equal protection challenge to Oklahoma’s Ad Valo-rem Tax Code constitutes an indirect attack on the validity of the 4-R Act and TEFRA. It should be noted that the constitutionality of the 4-R Act has been upheld in federal courts. See Arizona v. Atchison T. & S.F.R., 656 F.2d 398 (9th Cir.1981); Louisville & N.R. v. Louisiana Tax Comm’n, 498 F.Supp. 418, 421 (D.La.1980); Tennessee v. Louisville & N.R., 478 F.Supp. 199 (D.Tenn.1979), affd, 652 F.2d 59 (2d Cir.1981), cert, denied, 454 U.S. 834, 102 S.Ct. 135, 70 L.Ed.2d 114 (1981). No state or federal court has declared either the 4-R Act or TEFRA unconstitutional. Oklahoma’s classification of railroads and airlines presents no equal protection violation.

OKLAHOMA CONSTITUTION

The Williams Companies next urge that the Board’s assessments violate article X, section 5 of the Oklahoma Constitution. That section requires that “[t]axes be uniform upon the same class of subjects.” However; because this Court has determined that a subclass of public service corporations was created by the Legislature, the applicable provision is section 22 of article X. It provides that “[njothing in this Constitution shall be held, or construed, to prevent the classification of property for purposes of taxation; and the valuation of different classes by different means or methods.” Railroads and airlines are a distinct subclass of public service corporations whose property may, un-' der the Oklahoma Constitution, be valued with a different assessment ratio.

OKLAHOMA’S AD VALOREM • TAX CODE

The Williams Companies also argue that the Board’s assessments violate sections 2803(C) and 2847 of the Ad Valorem Tax Code. Section 2803(C) requires that “[cjlas-sification as provided by this section shall require uniform treatment of each item within a class or any subclass as provided in Article X, Section 5 of the Oklahoma Constitution.” Section 2847 requires in part that the assessment ratio “shall be selected by the State Board of Equalization and, subject to the requirements of federal law, uniformly applied to calculate the taxable values of public service corporation property within the state for the applicable assessment year.”

These sections are statutory requirements of uniform ad valorem taxation within a class. Again, this case does not present an intra-class disparity of treatment. The airlines and railroads are within a legislatively created tax subclass. Therefore, no conflict with these sections is presented.

The Williams Companies have failed to demonstrate a violation of equal protection or ad valorem uniformity requirements. The Petition for Writ of Prohibition is denied.

ORIGINAL JURISDICTION ASSUMED; PETITION FOR WRIT OF PROHIBITION DENIED.

SIMMS, HARGRAVE, SUMMERS and WATT, JJ., concur. *1225KAUGER, J., concurs in result. LAVENDER, V.C.J., and ORALA and ALMA WILSON, JJ., dissent.