666 ETC Mktg., Ltd. v. Harris County Appraisal Dist. ETC Mktg., Ltd. v. Harris Cnty. Appraisal Dist, 518 S.W.3d 371 (Tex. 2017)

Wednesday, February 14th, 2018

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. ETC Mktg., Ltd. v. Harris Cnty. Appraisal Dist, 518 S.W.3d 371 (Tex. 2017) (Ad valorem taxation of natural 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 for 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. To maintain pressure in the system, Houston maintains a permanent supply of “cushion gas” in the reservoir. Houston paid ad valorem taxes on the cushion gas, equipment, and property it owned in Harris County, including that related to the Bammel reservoir. Houston did not pay tax on stored gas owned by marketers like ETC, and ETC did not pay tax. In 2009, 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 case turned upon the Commerce Clause, which governs the power to regulate interstate commerce. If a tax implicates interstate commerce, the most recent test adopted by the U.S. Supreme Court for determining whether a state tax violates the Commerce Clause is set forth in Complete Auto Transit, Inc. v. Brady. To remain valid under the Commerce Clause, the ad valorem tax must (1) apply to an activity with a substantial nexus to the taxing state, (2) be fairly apportioned, (3) not discriminate against interstate commerce, and (4) be fairly related to the services provided by the state. The court also assumed that the older “in transit” test articulated in Minnesota v. Blasius has some continuing validity. If property is “in transit,” it is not taxable. However, if it stopped, the purpose of the stoppage is critical to determining if the property remained “in transit.” The court concluded that the “in transit” test was part of determining the substantial nexus.

Despite the natural gas coming to rest in the Bammel reservoir and HCAD’s arguments urging the court to determine the gas did not even implicate interstate commerce, the court followed Maryland v. Louisiana, which holds that gas crossing a state line at any stage of its movement to the ultimate consumer is in interstate commerce during the entire journey. ETC’s gas is in interstate commerce.

A majority of the analysis focused on the substantial nexus prong of the Complete Auto test. First, concentrating on what is actually taxed by HCAD, the natural gas itself, the court determined the scope of the inquiry turned on the link between the natural gas and the jurisdiction taxing the property, rather than whether ETC was located within the taxing jurisdiction. The natural gas was located in Harris County for a substantial period of time, because it was stored in the Bammel reservoir. The link between the property and the state is the relevant consideration for the “nexus” inquiry.

The court then considered whether there was “continuity of transit,” because the natural gas comes to a stop for a period of time in the Bammel reservoir and then resumes its journey. Because the natural gas was not held in the Bammel reservoir for some purpose related to the continuation of the journey (i.e., a temporary stop), but rather for the pleasure of the owner in timing the supply and demand of the natural gas market, the court held that the transit stopped in Harris County.

The “fairly apportioned” prong of the Complete Auto test is satisfied if the ad valorem tax is “internally and externally consistent.” Because the property is taxed based upon its location within a taxing unit on a certain day of the year, the court determined that it did not create a greater burden on property in transit than on property not in transit within the taxing unit. The property can only be in one place at one time. Therefore, the natural gas would not be taxed multiple times in different jurisdictions while it was being held in the Bammel reservoir. This path of analysis also led the court to conclude that the ad valorem tax was not discriminatory and that it treats the property in transit identically to the property within the taxing unit that is stationary. Last, the court held that the ad valorem tax helped pay for community services, like police and fire protection, which benefit ETC’s stored natural gas, because such services will protect the property, if need be.

The holding does not constitute blanket approval of any taxation of stored natural gas, but nondiscriminatory taxation of surplus gas held in storage without a destination for future resale does not violate the Commerce Clause.