Goods in the Stream: Texas Courts Limit Taxing Jurisdictions’ Ability to Tax Property in Transit


The United States and Texas Supreme Courts have declined to review the appeals of two Texas appraisal districts’ power to tax oil and natural gas in transit. In both cases, Texas courts of appeals held that oil and natural gas moving in the stream of interstate commerce are not subject to ad valorem taxation in Texas. These decisions solidify the law in Texas that property moving in transit is not taxable.

The two Texas courts of appeals decisions are The Peoples Gas, Light, and Coke Company v. Harrison Central Appraisal District, 270 S.W.3d 208 (Tex. App.—Texarkana 2008, pet. denied), cert. denied, 2011 WL 1457556 (April 18, 2011), and Midland Central Appraisal District v. BP America Production Company, 282 S.W.3d 215 (Tex. App.—Eastland 2009, pet. denied), cert. denied, 2011 WL 1457552 (April 18, 2011). Haynes and Boone represented three of the oil companies in the Midland case through the appeal to the U.S. Supreme Court.

The Property at Issue. The cases address natural gas (Harrison) and oil (Midland) in transit through interstate pipeline systems regulated by the Federal Energy Regulatory Commission. The pipeline owners were not parties to the lawsuits. In Harrison, Peoples Gas, Light, and Coke Company (“Peoples”) owned the natural gas in dispute. While on its journey ultimately for use in Illinois, the pipeline operator temporarily stored the gas in the pipeline’s storage facility in Harrison County. In Midland, several oil companies owned the oil in dispute. During the oil’s journey primarily to out-of-state refineries, the oil passed through a tank farm facility in Midland County, where it remained anywhere from 6 to 72 hours. While present in the tank farm, the oil could be blended (to enhance the grade of the oil), batched (to separate the grade of oil), or staged (to accumulate sufficient volumes for transmission).

The Controversy. The appraisal districts taxed the natural gas and oil in their respective counties as of January 1 of the applicable taxing years. The gas and oil owners protested and appealed the appraisal districts’ actions. The appraisal districts contended that the large quantities of constantly present property allowed them to assess a tax. The oil and gas owners countered that the temporary nature of the property’s presence in the state barred any attempt to tax it.

Both state law and federal law supported the owners’ arguments. The courts of appeals focused primarily on federal law. Because the Commerce Clause of the United States Constitution grants to Congress the power to regulate interstate commerce, states are limited in their ability to regulate and tax goods that are considered to be in the stream of interstate commerce. Each court of appeals considered whether the products had entered and remained in the stream of interstate commerce such that they were shielded from state taxation by the Commerce Clause.

Stream of Interstate Commerce. Goods have entered the stream of interstate commerce if they are: (1) shipped, (2) placed with a common carrier, or (3) moving in a continuous route or journey in interstate commerce. In both cases, the courts determined that, because the products had been injected into federally regulated, interstate common carrier pipelines and remained in the control of the pipeline owners, there was little doubt such products were in the stream of interstate commerce.

Removal from the Stream of Interstate Commerce. Although property might have entered the stream of interstate commerce, breaks in interstate transit may subject property to state ad valorem taxation. Whether property is sufficiently removed from interstate commerce to subject it to state ad valorem taxation turns on the relevant facts of each situation.

Key factors in determining whether a break in continuity of transit supports taxation include the owner’s control over the property’s transportation, the method of transportation, and the purpose of the interruption. For example, stoppages for safety or that are necessary for the journey suggest that the property remains in interstate commerce. In contrast, stoppages related to the owner’s business purposes suggest that the property has been removed from interstate commerce. In Midland and in Harrison, the pipelines (by federal regulation) exercised full control over transportation of the oil and gas. The oil owners and gas owners had no control over the movement of the products. The courts relied heavily on these facts in concluding that the delays in transit while moving through Texas did not remove the products from the stream of interstate commerce.

Taxation of Goods in the Stream of Interstate Commerce. Finally, that goods may be in interstate commerce does not end the inquiry. A state tax survives a Commerce Clause challenge if the tax: (1) is applied to an activity with a substantial nexus to the taxing state, (2) is fairly apportioned, (3) does not discriminate against interstate commerce, and (4) is fairly related to the services provided by the state. This test looks for a nexus or some definite link between a state and the person, property, or transaction it seeks to tax.

The Harrison court concluded the gas did not have a sufficient nexus with the state to permit taxation. Peoples did not deliver gas to any customer in Texas. Also, Peoples maintained no office and had no employees or representatives in Texas. The Midland court reached the same conclusion but based on different facts. As the Midland court observed, the oil itself had a substantial nexus to Texas (much of it was produced in Texas and some was destined for Texas refineries). The court, however, concluded that the taxed activity (i.e., ownership of the oil present but in transit on January 1 in a tank farm constituting an integral part of an interstate, common carrier pipeline system) did not create sufficient nexus to tax the oil.

Accordingly, both courts of appeals ruled that the Commerce Clause of the United States Constitution shields the subject products from state ad valorem taxation.

Looking Forward. Because these two cases were based on particular facts, it is not entirely clear how their holdings and rationale would apply to oil or gas in other pipelines and storage facilities in Texas. For instance, the same rationale might not apply to oil and gas in an intrastate pipeline system or to oil in a tank farm at a refinery or other location. Nor is it clear how the decisions might apply to different goods and/or circumstances. However, the cases lend companies significant support for arguing that the Commerce Clause prevents state taxation of other types of property moving in interstate commerce. If you have any questions about the application of these cases to your situation and their effect on your possible tax exposure, please contact one of the attorneys listed below for further guidance. You may also view the alert in the PDF linked below.


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