552 ETC Mktg., Ltd. v. Harris County Appraisal Dist., 476 S.W.3d 501 (Tex. App.—Houston [1st Dist.] 2015, pet. filed)

Tuesday, December 6th, 2016

Richard F. Brown

The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.

ETC Mktg., Ltd. v. Harris County Appraisal Dist., 476 S.W.3d 501(Tex. App.—Houston [1st Dist.] 2015, pet. filed) (Ad valorem taxation of interstate gas in storage) held that natural gas stored in Texas for future transportation and sale in interstate commerce was subject to ad valorem taxation in Texas. ETC Marketing, Ltd. (“ETC”), a natural gas marketer, conducted business in Texas and had multiple employees and offices there. Its purpose was to buy and sell natural gas in the interstate market. It bought principally from the “Katy Hub,” a central delivery and distribution point for natural gas in and out of Texas, and sold to out of state customers. ETC “immediately entrusted” gas it purchased to its affiliate Houston Pipeline Company (“Houston”), an intrastate pipeline company located wholly in Texas. Houston stored ETC’s gas for up to several months in the Bammel reservoir which Houston owned in Harris County, Texas. This allowed ETC to market and sell the gas at a more financially advantageous time. All of the gas from ETC and others in the pipeline and in storage is commingled and segregated only by paper allocations. Houston paid ad valorem taxes on the equipment and property it owned in Harris County, including that related to the Bammel reservoir. In 2010, the Harris County Appraisal District (“HCAD”) appraised natural gas ETC had purchased at the Katy Hub and stored with Houston in the Bammel reservoir and assessed ETC ad valorem taxes. ETC challenged the assessment arguing that the stored gas was in interstate commerce and exempt from state ad valorem taxation.

The Commerce Clause, which governs the power to regulate interstate commerce, has been interpreted to include a “dormant” Commerce Clause which implicitly prohibits a state’s imposition of discriminatory burdens on interstate commerce. It does not relieve those engaged in interstate commerce from sharing the state tax burden for services the state provides. To prove a tax invalid under the Dormant Commerce Clause, a taxpayer must demonstrate that the taxed activity lacks a substantial nexus to the taxing state, is not fairly apportioned, discriminates against interstate commerce, or is not fairly related to state provided services.

ETC argued there was no substantial nexus between the activity to which the tax applied and the taxing state. The court identified many factors in support of its holding that there was a substantial nexus between ETC’s natural gas in the Bammel reservoir and the state of Texas. ETC had multiple offices and employees in Texas. It purchased the gas in Texas, transported it through an intrastate pipeline company located wholly within the state, made the decision to store it in Texas, admitted to owning the gas at the time and place of appraisal, deliberately stored it in Harris County for months at a time for its own business purposes, had the right to sell it wherever it wished and had not already designated it for transport to another state.

The court held that the tax was fairly apportioned. It taxed only the tangible personal property stored in the jurisdiction of the taxing entity for longer than a temporary period. It was “internally consistent” in that it would not result in multiple taxation to an entity taxed in another state under an identical statute (because it only taxed gas in storage in Texas on a particular date). It was “externally consistent” in that it taxed only that portion of revenue from interstate activity reflecting the in-state component of the activity taxed.

The court held the tax did not discriminate against interstate commerce. Tax was imposed only on the quantity of gas stored in Harris County, which ETC acknowledged it owned on the date of taxation. The tax placed no burden on interstate commerce that was not placed on comparable competing intrastate commerce. There was no evidence the taxes were selectively imposed on interstate commerce or that rates or procedures were more onerous than for property not in interstate commerce.

ETC argued that the tax was not fairly related to the services provided by the state, because Houston paid ad valorem taxes on the Bammel reservoir and had control over the activity taxed. The court held that ETC retained control over the disposition of the gas for its own business purposes. It also found that such services as police and fire protection and maintenance of a civilized society are justifications enough for the imposition of a tax, and both the owner of the gas and the pipeline company benefited from state provided services. Therefore, the tax was fairly related to services provided within the state.

“Under the Tax Code, unless exempt by law, tangible personal property is taxable if it is located in the taxing unit ‘for longer than a temporary period.’” The significance of the case is the holding that gas destined for the interstate market, but held in storage for several months in Texas before a sale into the interstate market, is subject to Texas ad valorem tax.