United States

Texas: Natural Gas Temporarily Stored in Texas Subject to Property Tax

Jan 19, 2015
From KPMG TaxWatch

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A Texas court of appeals recently held that natural gas purchased and temporarily stored in Texas before being sold to out-of-state customers was subject to ad valorem tax. The taxpayer, a Texas-based natural-gas marketer, purchased natural gas from several sources. The gas, which is intermingled at all times with gas owned by other marketers, was stored in a reservoir owned by a related intrastate pipeline for up to several months before it was sold to customers in northern states during the winter months. Under Texas law, all tangible personal property in the state is taxed in proportion to its value if it is located in the state “for longer than a temporary period,” unless exempt under federal law. The Harris County Appraisal District (HCAD) assessed ad valorem tax on the value of the taxpayer’s gas stored in the reservoir. The taxpayer acknowledged it owned the natural gas stored in the Texas reservoir, but protested the assessment on the basis that the gas was exempt from taxation because it was in interstate commerce. The matter eventually went to the appeals court.

The court of appeals assumed (without deciding) that the gas was in interstate commerce and held that it was nevertheless appropriate for Harris County to assess ad valorem taxes when the gas was stored in a Texas reservoir prior to being sold. In reaching this conclusion, the court addressed each prong of Complete Auto Transit’s four-part test and concluded that imposing an ad valorem property tax on the gas did not violate the Commerce Clause. First, the taxpayer had nexus with the local jurisdiction because it had an office, and employees in Harris County, in addition to owning gas stored for “prolonged” periods in the jurisdiction. The court rejected the taxpayer’s reliance on another Texas case where the taxpayer had no physical presence in the locality and did not store gas in Texas for any business purpose of its own. [It was instead stored in Texas for business reasons of the pipeline contracted for delivery of the gas.] In contrast, the taxpayer at issue had a physical presence in the county and contracted to store the gas in the affiliate pipeline’s facilities (which were entirely in Texas) until it was sold up north. There was no evidence that the gas was bound for another state when it was committed to the pipeline, which was entirely within Texas. The court also held that the tax was fairly apportioned because no other state attempted to tax the natural gas during the same period. Next, the court concluded that the tax did not discriminate against out-of-state taxpayers and that the tax was fairly related to the benefits provided by the state related to gas storage. One justice dissented, observing that he would have held that the tax was unconstitutional because the gas was within the flow of interstate commerce and the prongs of Complete Auto were not satisfied. For more information on ETC Marketing, LTD., v. Harris County Appraisal District please contact Josh Hennessey at (713) 319-2881.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.