Co-author Matthew Wheatley
The owner of 33 BCF of gas cant’ just stuff it in his pocket and move it county-to-county to avoid taxes. So, the question: Is gas in storage subject to ad valorem tax on personal property? The Harris County Appraisal District thought so. The taxman prevailed in ETC Marketing v. Harris County Appraisal District.
The gas was stored in a depleted oil reservoir. The storage agreement between ETC – owner of the gas – and affiliate Houston Pipeline – transporter – enabled ETC to hold the gas for delivery to other states when demand is higher. ETC contended the gas was exempt from taxation because it is in interstate commerce.
When is Personal Property Taxable?
Tangible personal property is appropriate for taxation if it is located in the jurisdiction “for longer than a temporary period.” Property is immune from taxation if the owner can prove the tax:
- applies to activity lacking a substantial nexus to the taxing state,
- is not fairly apportioned,
- discriminates against interstate commerce, or
- is not fairly related to services provided by the state.
(Notice who has the burden of proof.)
Why Was the Stored Gas Taxable?
There was a substantial nexus between the activity and Texas. The gas was purchased, transported, and stored in Texas, and ETC had facilities and employees in Texas. Houston Pipeline’s facilities are also located entirely within the state.
The tax is fairly apportioned because it is “internally and externally consistent.” It is internally consistent because it is “structured so that if every state were to impose an identical tax, no multiple taxation would result.” The gas was stored in Texas “for longer than a temporary period” and ETC did not attempt to store the gas in any other state at the same time.
The tax is externally consistent because “the state has taxed only that portion of the revenues from the interstate activity which reasonably reflects the in-state component of the activity being taxed” … the entire volume of gas.
The tax did not discriminate against interstate commerce because it “places no greater burden upon interstate commerce than the state places upon competing intrastate commerce of like character.” Even if the gas was in interstate commerce, it could be taxed when stored for the business purpose of selling at a later time of the owner’s choosing. HCAD taxed only that quantity stored in Harris County on the date of taxation and as to which ETC acknowledged ownership.
The tax was fairly related to services provided by the state. ETC enjoys the benefit of police and fire protection and other public services which facilitate gas storage.
Not Everyone Agreed
A dissent made these points:
- The tax imposes a burden on working gas in interstate trade that is “clearly excessive in relation to the… local benefits.”It threatens the free movement of commerce by placing a financial barrier by imposing a tax not levied by taxing authorities in other jurisdictions.
- Local law enforcement, fire, and other public services serve the facility itself, which ETC pays substantial property taxes on, in addition to the taxes paid on cushion gas it permanently stores at the facility. The tax is thus not fairly related to state-provided services.
What is it about Kern County?
Two things: It produces 75 percent of all California onshore oil. And it’s home of the “Bakersfield Sound”. Examples:
Buck disciple Dwight Yoakum