The Texas Supreme Court recently granted a petition for review in ETC Marketing, Ltd v. Harris County Appraisal District, 467 S.W.3d 501 (Tex. App.—Houston [1st Dist.] 2015, pet. granted). The question before the high court in ETC Marketing, Ltd is whether an operator of an intrastate natural gas pipeline in Texas is required to pay ad valorem taxes on the value of 33 billion cubic feet of gas stored in a Harris County reservoir. The stakes are high as the 33 billion cubic feet of gas could give rise to a $162 million ad valorem tax bill.

ETC Marketing argues that the Commerce Clause of the U.S. Constitution prohibits local taxation of the gas stored in the reservoir because the gas is in interstate commerce; an argument that was successfully made by other similarly-situated Texas taxpayers. Most notably, in Peoples Gas, Light, & Coke Co. v. Harrison Cent. Appraisal Dist., 270 S.W.3d 208, 211 (Tex. App.—Texarkana 2008, pet. denied), the Court of Appeals for the Sixth District of Texas found that stored gas was not subject to ad valorem tax because “[i]f the interstate movement has begun, it may be regarded as continuing, so as to maintain the immunity of the property from state taxation, despite temporary interruptions due to the necessities of the journey or for the purpose of safety and convenience in the course of the movement.”

While the Court of Appeals for the First District of Texas, which heard ETC Marketing, Ltd on appeal,  was not required to follow the ruling in Peoples Gas, Light, & Coke Co. (because it was decided  by another district court), the Court of Appeals for the First District of Texas attempted to distinguish it.   The three-judge First District panel, which ruled in the taxing district’s favor in a two to one decision, found that ETC Marketing’s facts were distinguishable from those in Peoples Gas, Light, & Coke Co. because, unlike ETC Marketing, the taxpayer in Peoples Gas, Light, & Coke Co. had no other connection to Texas apart from the storage of gas in the state.  ETC Marketing maintains substantial operations in Texas.

This case is obviously one of critical importance for taxpayers, who will no doubt wait for the Texas Supreme Court’s decision with bated breath. The case could answer important questions for Texas taxpayers (and, provide guidance to taxpayers in other states), including the following:

  •  When is property in interstate commerce?
  • Does storage constitute a break in interstate commerce?
  • What type of connection to the state is required before a taxpayer can be subject to Texas ad valorem tax?

Oral argument in ETC Marketing, Ltd is set for December 6, 2016.

Contact the Authors: Stephen Long, Jimmy Lucas