THE 

## AYTCBRNEX GENERAL
OF TEXAS “,,,,

_.

Oct.ober 22, 

## 1968

lionorable

Robert S. Calvert, OpinionNo. My 298 Comptrollerof Public Account~s Austin, Tex'as Re : Whether rental payments made for pipelines located in an opep easement are subject to the Texas Dear Mr. Calvert: Sales Tax.
You have requestedour opinion concerningthe taxability under the~Texas~ Limit.ed

Sales, Excise and Use Tax Act of a lease transactionin which Lessor let, leased, and demised a pipeline to Lessee. The pipeline in question is one of several such pipes running through one of Leesorts two shafts. These two shafts are connectedby a tunnel which runs under and across the Houston S ’hlp Channel. Ina supplementallet.ter youhave further request~ed that we render ouropinion in.such .a,manner. as to c,over

other existing factual situations with which you are confront.ed, and they~will.be

discussedduring the cours&oofthis opinion t,o providelegal guidelineswhich, will enable your,

office to dispose of such matters, The pertinentpart of this act, Texas TsxationGeneral Article 20.02 (Supplement 1967) (here,inafter cited by article number) states.:

"There shall be Imposed a limited ~' sales tax at the rate of t.wo per cent (2%) on the receipts from the sale at retail of all tan#lblepersonalproperty within the State. ,' .1
The word "sale" as used in this statute encompasses the words lease or rental:

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Honorable-Robert

S. Calvert, Page 2 (M- 298). '.

'Sale'means abd lnciudes

change, lease or rental, conditional or otherwise, in any manner or by any meanswhatsoever, of tangibleper- :sonal property~for a consideration."

'. (hphasis added.) Article 20.01(K). And lease price or rental price have been defined in Article 20.01(H)as follows:

"(2)~ 'RentalPrice' or 'Lease Price'means the total smount for which tangiblepersonalproperty is rented or leased, valued in money, ', whether paid in money or otherwise,' without any deduction on account of any ~ofthe following:

rented or leased. :' .:;I, I?(>) . The cotit

of mai . terial used, labor orser- ',, vice ~002, 'Interest chtiged'; losses, or any other expenses. "(c) The cost of transportation of tangiblepersonal property at any time. "(2) The total amount~ifor,which tangkblepersonalproperty is rented. norleased includes 'all of the follow: '_' ing: "(a) Any'services wh;l‘ch \ ,are a part of the lease or 4yta.l.

-143S-HonorableRobert S. Calvert, Page 3 (M-298)
"(b) Any amount for which credit .lsgiven to the lessee or rentee by the lessor or rentor." ,In the'leaseyou have submitted to us, the lessor in Article IV'stated, "It is understoodthat the Lessor does not representor warrant that it,has good title to the ri tunnel P t or .easement.to constructand or maintain said into tihich

the pipeline that is leased is contained. It is unimportant,for sales tax purposes,whether the lessor avows or disavows true title to the lessee, when in fact lessor's title has not been challenged 'and lessee continues to pay an agreed rental. As between this lessor and lessee, it would appear that title, or at least the power, if not the rightto lease, is understoodto lay with the lessor, since possessionof property is prima facie evidence of title to it. ContinentalCredit Corporation v. Norman, 303 S.W.2d 449 TTex. Civ~. App. 1957, error re ,, n.r.e.)
It is quite apparent from a perusal of these rele-. vant statutes that where there is a transfer of possession of tangiblepersonaltyfor value, a fortiori a rental or lease, a taxable incidenthas occurred. This office, in Attorney General OpinionNo. ~-165 ( ‘1967), announcedthis same position, althoughreaching a non-taxab3.e"r~s~~~t~'d'ile to the novel fact situationpresented. There the '~::i., telephonecompany and the utility companyhad jointly agreed to a'inutual sharing of their respectivewooden poles. Such an arrangement prevented each,companyfrom having to erect duplicatepoles in t,he asme location which resulted in a considerable monetary savings to each. The parties jointly called this arrangementa 'pole-rental', In the course of the opinion , we held that "theremust be more than the denominationby the parties that such transaction be a,,rental.There must be a transferof possession. f f ionwas shown in that case on*whicz tEa%pzieoa rz:","!?--

(hphasis added ) N t ability,and the telephone,poles there ihvol'ved

were con-', sidered to be a part of the repty and not tangible ,personal ty
. In the present case, however, the necessary transfer ,, of possession'.did

occur. Here, in the lease entered into

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'November19, 1964, between the lessor Pipe Line Company and the lessee ~&J.pe Line Company, the transfer of,possessIon was clearly illustratedin the introductory "whereas provision"of that 'lease:

It is "NOW, THEFiEFORE, for and in consideration of the sum of One Dollar ($1.00) and other good and valuable consideration, paid said lessor by said lessee, the re-, ceipt of which is hereby acknowledged, said lessor does hereby let, lease, and'. demise unto said lessee, for the term of' five (5) years'

from the 13th day of April, 1965, one (1) eight inch (8") welded pipeline No. 4 into and through said shafts and tunnel.

. ,. ." also ~ascertainable In Article IX of this lease:
"It is expresslyunderstoodand agreed bet,ween

the partiesheret~othat any failure or default on the part~'of the lessee to strictly keep and perform each and every covenant,condition,and limitationherein containedand set forth shall forfelt.all rights,privilegesand options of said lessee hereunder.and that uoon a dkclarit, -

Since the necessary transfer of possessiontook place, the only relevant remainingquestlon.is whether the one eight i,nch welded pipeline in issue is tangible

. personaltyor i&c fixture adjunct to the realty. .This. questionpresents two basic issues: first, whether an easementis realty; and second,whether a pipeline is personaltyor a.fixtureand hence part of the realty.

.

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Adverting to the first issue, it has long'beenheld in Texas that an easement is an interest in land and therefore is realty.' Burgess vq.City and County of Dallas Levee ImprovementDistrict,153 S W 2d 402 405 (Tex. Civ.

. 41 error ref'd w.o.m.). Thherefore'as long as t:i owner'and lessor of an easement,be it a public dr private concern, leases a part of its interest in the land to a lessee for the purpose of Installinga pipeline, it is of little consequencethat the lessor is not also the fee owner of the real estate, For the',lessor-easement-holder is no less an owner of realt also possessingfee title. $ by not See West v. Giesen 2 2 S.W. 312 (Tex. Civ. App. 1922, error ref'd). ..: Therefore,those chattelswhich are affixed to the easementwhich meet the test of fixtures, later discussed,become a part of the realty for all purposes. However, the,??elationship of the parties Involved,e,g., landlord-tenant

or mortgagor-mortgagee, must be carefully scrutinizedbefore a final determination of the classification

of the chattelmay be made. See 25 Tex. Jur. 2d Fixtures, Sets. 17-p. Turning to the second issue propounded in this i question, thisoffice is unable to determine,as. a matter of lawi the proper classific,ation of pipelines without a full developmentand presentationof the pert11 nent facts in this case. No decision by the Texas courts, has been found which would lend credence to a determination that pipelinesare either fixtures or personalty. Also jurisdictions outside our own lend little pelp, being divided on the resolutionof this question.

1. Manv jurisdictions have held that pipelines are fixtures, See, e.g., Californian, DomesticWater Co. v. Los Angeles Count& 10

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HonorableRobert S. Calvert, Page

Little help is gained from treatmentgiven to propertyother 6 (M-298)
studying the dizergent than pipelines.
It should be noted, however, that a former Attorney General,when faced with a similar issue, decided,based upon the facts presented,that the pipeline there in questionwas not a fixture ahd hence was personalty. AttorneyGeneralNo. O-5268 (1943). Unfortunately,:this decisionhas since been frequentlymisinterpreted as announcingthat the on1 test for determiningthe~status of'propertywas whet FG' to the lessee. er a right of removalwas preserved

2 R-1. 15, 55 Am. DC& 621 (1851). On the, other hand, some jurisdictions have taken the contraryposition assi&&ng pipelines the status of personalty. 1"i z '6. Melrose v. Cooley, 50 Cal.App. 768' 105 (1920);Shaw v. Welch, 136 &. 736, 18 P. ,2d

189, 190 (1

933) Yellowstone e Line Co. v. State Board bf Eq uallzation, Mt bO3 358 P 2d 55 btc (19bO) ;cf :: Crabb ;. Kefrstone

Pipe &'Supply Co., n? S.W.2d 9 (T Ci A 1944 error ref'd) Also in Mar~~'Co.v&ncpPv. State, 168 S.W.2d'510 (Tex. Ci A inter re:ed !%. 1943 error ref'd) the court (19617 Rev: Cfv. Stat, Ann. art 7146 as not necessarily making appurtenances-,: under the soil fixtures.
For a full treatmentof the Texas cases see 25 Tex.Jr.2dFixtures, Sets. ll14 (1961). For other .iurlsdictions see. %t;ict~ 4 Misc. 2d 384 243 N.Y.S.2d 223 * -In.'reOLido

Beach-SewageCollection '2T$asau County ct. i963) (holdingsew&s;: are fixtures);Indianola County Club v. Fireman's Ins. Co., 250 IEl, 92 N W 2d 402 404 (lm) m)that a buried electric cable is a

.

-1442-HonorableRobert'S.'~Calvert, Page 7 @-29f3)
Albeit, the right of removalwas an importantfactor inthat fact,situation, it cannot be regarded as the only ' test or the paramount one. Indeed, the right of removal is a factor o be consideredin determiningthe status of property,

3 but It must be applied in conjunction with the other determinativefactors. See Van Valkenburgv. Ford, 207 S.W. 405:(Tex. Civ. App. lg18), aff'd Z!'8S w 194 (Tex. Comm'n.App. 1921, Qinlon adoptea): . 0

As between the two immediateparties to the contract, in-the absence of any other evidence,the right of removal may be determinative;, but it is now well settled that such a determination

will not act to the detrimentof a third party (or a taxing authority): beloni;q2;;e;?;lis affixyd z; ;;;es;oil

. . . . stances It is difficult to determine just ~whether

a fixture has become a part of the realty, or 'whether it retains its original characteras personalty;as for instance, where it Is questionable whether annexation is of a permanent oharacteror not. In such cases where the true status of the property Is doubtful, It would perhapsbe permissible for the,partiesby agreementto impress it with the characterof personaltyso long as the agreementwas made in good faith, and not for the purpose of evading or contravening the statutoryprovision,[or applicabletax2.

. . .'

3. In furtheranceof this test, especially part,two, it is st.ated at ip5 Tex.Jur.2d Fixtures, Sec. 7 at page 339:
'~ j!Chatt els lose their identity as personal propertywhere they are so annexed to'the rgalt~y that they cannot be det.ached without damage to the freehold,or without destroying the usefulnessof the prdperty to which they are annexed. Conversely,the things affixed retain their characteras' personaltywhere, they can be removedwith slight tr no injury to the realty, or to themselves.

~.,, -1443s.i’

HonorableRobert S. Cal,vert, Page 8 (M-298)

.I. GinnerlsMutual Underwriters v. Wiley & House, 19 S W 629 632 (T Cl ~App.1912, Lo writ); ice Van %ke%urg v.,Ford, supra; Philliz;.vCi;ewsome, lm. 1123 1124 (T

. APP. 1915,'nowrit); 1 Thompson,Real Property 381 (1964). This office, therefore,belleves that the answer to, whether a chattel is personaltyor realty should be gleaned not merely from the contractual presence of a right of re- '~ moval but more importantlyshould be gleaned from the classical tripartiteapproach of Hutchins v. Masterson & ,,. Street, Assignees& C., 46 Tex. 551 (1877):

"It is said, the weight of modern authoritiesestablishthe doctrine. that .' the true criterionfor determingwhether a chat~tel

has become an Immovablefixture, consists In the united applicationof the following tests:

"1st. Has there been a reals

. or constructive

annexationof the ~ article in question to realty? "2nd. .' Was there a fitness ,oradaptationof such,articleto the uses or purposes of the realty with which it is connected? "3rd. Whether or not it was the intentionof the party making 'the annexationthat the chattel should become a.permanentaccession t.o the rreehold? - - ,&J this ,in-'. ,I' ,," tentionbeing inferab e from the nature of the article,fi2 the relation and'

situat.ion

of t,he : parties interested, the policy : of the law in respec fig the mode of annexationand purpose,oruse for which the annex- ,ation is made."

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.. (M-298),

This test has been numerouslyapprovedand cited in this State. E.g.; Carter v, Straus - Frank Company, 297 S.W.2d 195, 1977 Public Service Companyec:: SmTCh,P!$S.W.id"&y(Tei. mv. App. 1929, error dism'd).

In Hutchins, at page 554, the court went on to
.. say that.

of the three part.s ,there presented,preeminence has been given to the intent of the parties. In addition to the first two parts of the Hutchin's test, the character of the property should also be determinedfrom the intentionof the parties (part three of the test) which may be ascertainedfrom decid~ing whether the pipeline has: e.g., (1) a long useful life; (2) a relatively high initial investment which can only be recouped from prolongedusage of the pipeline; (3) an appreciable amount of cost and labor to insure a long useful life a non-corrosivecoating that will last many ~ g,:,j; (4) whether the pipeline increases the property value for ad valorem tax purposes; (5) and after the pipeline is no longer used, whether it is left in t~he ground or,,!extracted. Therefore,it will be necessary in each instance for the,Comptroller, by applying the applicablelegal guid~elines

presented,to make at factual determination of the true characterof each plpeline:inissye;. and where it Is found to be personaltyunder the test imposed, a proper assessmentshould be made where the pipeline is the subject of a.taxablerental or sale.

SUMMARY The determination

whether the rental of a pipeline Is subject to the Limited Sales, EXCiSe and Use Tax and is thereforepersonalty,or whether 4 the rental of a pipeline is not subject to this tax at?d

is thereforea fixture ad~junct

to the realty, is a factques-

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HonorableRobert S. Calvert, Page 10 (M-298)

'* tion which must be answered in the flrst~intitance

by'the,~Comptroller of Public Accountsby employi@ the leg'al guidelinesherein,stat~eb, ruly yours, ,:

Preparedby Alvin,L. Zlmtn'erMn AssistantAttorney General ., &&zy I' &nertil of'Texas

APPROVED: '.: OPINION CCMMITTEE: Hawthorne Phillips,Cha1rW.n Kerns Taylor, Co-Chairman Arthur Sklbell .I 4 Bob &?avis R. D. Green Rex White
A. J. Carubbi,Jr. Executiye.Assls,tant,

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