May 08, 2017
From KPMG TaxWatch
The Texas Supreme Court recently affirmed an appeals court decision holding 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 was 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 court of appeals assumed (without deciding) that the gas was in interstate commerce and held that it was permissible for Harris County to assess ad valorem taxes when the gas was stored in a Texas reservoir prior to being sold. The taxpayer appealed. The Texas Supreme Court, perhaps because there was a conflict at the appeals court level over this issue, agreed to review.
At the outset, the Texas Supreme Court held that the taxpayer was precluded from arguing that state law—notably the “longer than a temporary period” statutory requirement—prohibited Harris County from taxing the gas. The taxpayer, the court determined, had procedurally failed to preserve its temporary-period argument. The court subsequently analyzed and concluded that the gas was in interstate commerce. It then determined that a Commerce Clause analysis was required and went on to examine each prong of Complete Auto Transit’s four-part test. With respect to the substantial nexus requirement, the court addressed, in a lengthy discourse, whether the natural gas remained in transit when it was stored in Texas. Although related, this was a slightly different inquiry than whether the gas was in “interstate commerce” and was a necessary pre-requisite to a finding that the gas had a “substantial nexus” with Harris County. To resolve this issue, it was necessary to determine whether the stoppage or storage was to facilitate a continuous journey or was to avoid transportation of the gas until a business purpose arose. The court determined that it was the latter―the taxpayer stored the natural gas in Texas until the profitable winter season. Thus, the gas being stored in Harris County broke the continuity of transit, and the court concluded that the gas had a substantial nexus to the state such that the first prong of Complete Auto was satisfied. The court also held that the tax was fairly apportioned and did not discriminate against out-of-state taxpayers. Finally, the court rejected the taxpayer’s assertion that the benefits provided by the state were provided to the storage facility, and the taxes paid by the storage facility owner covered those services. This position was adopted by another appeals court and the dissenting justice in the court below. However, the court observed that the state provides services to the taxpayer’s stored gas as well. “When the fire department arrives to quench an inferno at the pipeline’s facility, the fire chief does not instruct her crew to extinguish only the flames that threaten the pipeline’s property. Instead, the fire department protects the entirety of the personal property, structures and stored gas alike.” The court concluded that the tax was permissible under the Commerce Clause. For more information on ETC Marketing, LTD., v. Harris County Appraisal District please contact Josh Hennessy 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.