The Texas Supreme Court (Court) ruled in ETC Marketing v. Harris County Appraisal District¹ that the Harris County property tax as applied to surplus gas stored in Texas for future sale did not violate the Commerce Clause of the US Constitution because it met all four prongs of the Complete Auto²test (i.e., the taxpayer had substantial nexus with the state and the tax was fairly apportioned, nondiscriminatory and fairly related to the services provided by the state).

In upholding the imposition of the tax, the Court applied the "in transit" test, finding the taxpayer stored gas in Harris County while waiting for market forces to cause the demand and price to increase, and the storage was not due to a physical requirement of transporting the gas. Previous decisions from the Texas Court of Appeals (App. Ct.), including its earlier rulings in ETC Marketing³ and Peoples Gas,⁴ turned on whether the taxpayer, not the property, had substantial nexus with the state. The Court's ruling, however, rejected the App. Ct.'s reliance on the physical presence of the taxpayer (instead of being focused on the nature of the property subjected to the tax), finding such reliance was "misplaced." The Court also "disapproved" the App. Ct.'s analysis on the holding in Peoples Gas to the extent it was inconsistent with this decision.⁵

The "in transit" test

Before Complete Auto, the Court observed, the established method for determining whether the Commerce Clause prohibited the taxation of property in interstate commerce was an "in transit" test established under Minnesota v. Blasius.⁶ According to the Court, this test provides that property in transit is not taxable because it is in the flow of interstate commerce. On the other hand, property that lacks continuity of transit is considered outside of the flow of interstate commerce and, therefore, may be taxable.

Lacking dispositive evidence that the Complete Auto test supplanted the "in transit" test, the Court harmonized these two tests. Notably, the "in transit" test is implicated twice in this analysis. First, as a threshold matter, the test is used to determine whether the property is in the stream of interstate commerce, thereby implicating the Commerce Clause or "dormant Commerce Clause."⁷ Second, the test is used to determine whether the substantial nexus prong of the Complete Auto test is satisfied.

The Court discussed in detail the physical process of storing gas and the reasons the taxpayer stored the gas. The Court focused on whether the storage of the gas was a physical requirement of transit of the gas or simply for the convenience of the taxpayer.⁸ Since the taxpayer voluntarily stored the gas at its own convenience, the Court found that the taxpayer's storage of the gas broke continuity of transit and therefore established a taxable situs where it was stored. The Court examined precedential cases in which property was deemed to have remained in transit or to have broken continuity of transit, finding that the taxpayer's facts aligned with the latter line of cases.

Implications

The Court prefaced its analysis of the substantial nexus prong of the Complete Auto test by stating:

The court of appeals here, in distinguishing Peoples, emphasized that "ETC Marketing had offices and employees in Harris County and elsewhere in the state of Texas." 476 S.W.3d at 508. These distinctions may be among the quintessential due-process considerations of personal jurisdiction — i.e., a defendant's so-called "minimum contacts" with a state. But they are irrelevant to this Commerce Clause challenge.

The Court then focused on the connection between the stored gas — the property subject to the tax in question — and the taxing jurisdiction in order to conclude that the stored gas had broken continuity of transit and, therefore, had a sufficient connection with Harris County to permit the county to subject the gas to property tax. The Court's holding in ETC Marketing represents at least a slight departure from the Court of Appeals' substantial nexus analysis in Peoples Gas.

As a result, taxpayers similarly situated to ETC Marketing and relying on Peoples Gas in making nexus determinations for Texas property tax purposes should revisit those determinations under the Court's application of the "in transit" test enunciated in ETC Marketing.

Finally, it is not yet known whether ETC Marketing will file a petition for certiorari with the US Supreme Court.

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ENDNOTES

¹ ETC Marketing, Ltd. v. Harris County Appraisal District, No. 15-0687 (Tex. 2017).

² Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977).

³ ETC Marketing, Ltd. v. Harris County Appraisal District, No. 1-12-00264-CV (Tex. App. Ct. 2014); see also, Peoples Gas, Light & Coke Co. v. Harrison Cent. App., 270 S.W.3d 208 (Tex. App. Ct. 2008), pet. denied.

⁴ Peoples Gas, Light & Coke, Co., v. Harrison Cent. App., 270 S.W.3d 208 (Tex. App. Ct. 2008), pet. denied.

⁵ For additional information on the Court of Appeals' ruling in ETC Marketing, see Tax Alert 2014-1765.

⁶ Minnesota v. Blasius, 290 U.S. 1, 9 (1933).

⁷ In the concurring opinion, Justice Brown, joined by Justice Willett, observes the Court's obligation to apply Complete Auto and its notions of a "dormant Commerce Clause," or, the limitation of states' power to interfere with interstate commerce. Justice Brown invokes words of former US Supreme Court Justice Antonin Scalia in stating the view that the dormant Commerce Clause is not a valid interpretation of the Constitution but is instead a matter of "interpretive jiggery-pokery," (King v. Burwell, 135 S. Ct. 2480, 2500 (2015) (Scalia, J., dissenting)). ETC Marketing v. Harris County Appraisal District, No. 15-0687 (Tex. 2017) (Brown, J. concurring).

⁸ Chief Justice Hecht's dissenting opinion applied the same "in transit" test but concluded that physics necessitates the storage of gas until such time as a consumer of the gas has a demand — otherwise, the pipeline will explode. ETC Marketing, Ltd. v. Harris County Appraisal District, No. 15-0687 (Tex. 2017) (Hecht, J. dissenting).