THE AYTCBRNEX GENERAL 

OF TEXAS “,,,, 

_. 

Oct.ober 22, 1968 

lionorable Robert S. Calvert, Opinion No. My 298 

Comptroller of 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 requested our opinion concerning the 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 connected by a tunnel 

which runs under and across the Houston S’hlp Channel. Ina 

supplemental let.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 discussed during the cours&oof this opinion t,o 

providelegal guidelines which, will enable your, office to 

dispose of such matters, 

The pertinent part 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#lble personal property 

within the State. ,' .1 

The word "sale" as used in this statute encompasses 

the words lease or rental: 

-1437- 
I,: “’ 

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 tangible per- 

: 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)~ 'Rental Price' or 'Lease 

Price' means the total smount for 

which tangible personal property is 

rented or leased, valued in money, ', 

whether paid in money or otherwise,' 

without any deduction on account of 

any ~of the 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 tangible personal property at any time. 

"(2) The total amount~ifor,which 

tangkble personal property is rented. 

nor leased includes 'all of the follow: '_' 

ing: 

"(a) Any'services \ wh;l‘ch 

,are a part of the lease or 

4yta.l. 

-143S- 
Honorable Robert 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'lease you have submitted to us, the lessor 

in Article IV'stated, "It is understood that the Lessor 

does not represent or warrant that it,has good title to 

the ri 

tunnel P t or .easement.to construct and 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 understood to lay 

with the lessor, since possession of property is prima 

facie evidence of title to it. Continental Credit 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 tangible personalty for value, a fortiori a rental or 

lease, a taxable incident has occurred. This office, in 

Attorney General Opinion No. ~-165 (‘1967), announced this 

same position, although reaching a non-taxab3.e"r~s~~~t~'d'ile 

to the novel fact situation presented. There the '~::i., 

telephone company and the utility company had jointly 

agreed to a'inutual sharing of their respective wooden 

poles. Such an arrangement prevented each,company from 

having to erect duplicate poles in t,he asme location 

which resulted in a considerable monetary savings to each. 

The parties jointly called this arrangement a 'pole-rental', 

In the course of the opinion , we held that "there must be 

more than the denomination by the parties that such transaction be a,,rental. There must be a transfer of 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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Honorable Robert C. Calvert, Page 4 (MY 298) 

'November 19, 1964, between the lessor Pipe Line Company 

and the lessee ~&J.pe Line Company, the transfer of,possessIon was clearly illustrated in 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 expressly understood and agreed 

bet,ween the partiesheret~o that any failure 

or default on the part~'of the lessee to 

strictly keep and perform each and every 

covenant, condition, and limitation herein 

contained and set forth shall forfelt.all 

rights, privileges and options of said 

lessee hereunder. and that uoon a dkclarit, 

- 

Since the necessary transfer of possession took 

place, the only relevant remaining questlon.is whether 

the one eight i,nch . welded pipeline in issue is tangible 

personalty or i&c fixture adjunct to the realty. .This. 

question presents two basic issues: first, whether an 

easementis realty; and second, whether a pipeline is 

personalty or a.fixture and hence part of the realty. . 

-1440- 
Honorable Robert S. Calvert, Page 5 w 298) 

Adverting to the first issue, it has long'been held in 

Texas that an easement is an interest in land and therefore is realty.' Burgess vq.City and County of Dallas 

Levee Improvement District, 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 Installing a pipeline, it is of little consequence that 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 possessing fee title. $ 

by not 

See West v. Giesen 2 2 S.W. 

312 (Tex. Civ. App. 1922, error ref'd). 

..: 

Therefore, those chattels which are affixed to 

the easement which 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 scrutinized before a final determination of the 

classification of the chattel may 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 development and 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 pipelines are either fixtures or personalty. 

Also jurisdictions outside our own lend little pelp, being divided on the resolution of this question. 

1. Manv jurisdictions have held that 

pipelines are fixtures, See, e.g., Californian, 

Domestic Water Co. v. Los Angeles Count& 10 

-1441- 
: : 

Honorable Robert S. Calvert, Page 

Little help is gained from 

treatment given to property other 

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 

question was not a fixture ahd hence was personalty. 

Attorney General No. O-5268 (1943). Unfortunately,:this 

decision has since been frequently misinterpreted as 

announcing that the on1 test for determining the~status 

of'property was whet FG' 

to the lessee. 

er a right of removal was preserved 

2 R-1. 15, 55 Am. DC& 621 (1851). 

On the, other hand, some jurisdictions 

have taken the contrary position 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 treatment of the Texas 

cases see 25 Tex.Jr.2d Fixtures, Sets. ll14 (1961). For other .iurlsdictions see. 

%t;ict~ 4 Misc. 2d 384 243 N.Y.S.2d 223 

* -In.'reOLido Beach-Sewage Collection 

'2T$asau County ct. i963) (holding sew&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- 
Honorable Robert'S.'~Calvert, Page 7 @-29f3) 

Albeit, the right of removal was an important factor 

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 considered in determining the status of 

property, 3 but It must be applied in conjunction with the 

other determinative factors. See Van Valkenburg v. Ford, 

207 S.W. 405:(Tex. Civ. App. lg18), aff'd Z!'8 S w 194 

(Tex. Comm'n. App. 1921, Qinlon adoptea): 

. 0 

As between the two immediate parties 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 detriment of 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 

character as personalty; as for instance, 

where it Is questionable whether annexation 

is of a permanent oharacter or not. In such 

cases where the true status of the property 

Is doubtful, It would perhapsbe permissible 

for the,parties by agreement to impress it 

with the character of personalty so long as 

the agreement was made in good faith, and 

not for the purpose of evading or contravening 

the statutory provision,[or applicable tax2. . . .' 

3. In furtherance of 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 

property where they are so annexed to'the 

rgalt~y that they cannot be det.ached without 

damage to the freehold, or without destroying 

the usefulness of the prdperty to which they 

are annexed. Conversely, the things affixed 

retain their character as' personalty where, 

they can be removed with slight tr no injury 

to the realty, or to themselves. 

~.,, 

-1443s 
.i’ 

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

.I. Ginnerls Mutual 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,'no writ); 1 Thompson, Real Property 

381 (1964). 

This office, therefore, belleves that the answer to, 

whether a chattel is personalty or realty should be gleaned 

not merely from the contractual presence of a right of re- '~ 

moval but more importantly should be gleaned from the 

classical tripartite approach of Hutchins v. Masterson & ,,. 

Street, Assignees & C., 46 Tex. 551 (1877): 

"It is said, the weight of modern 

authorities establish the doctrine. that .' 

the true criterion for determing whether 

a chat~tel has become an Immovable fixture, 

consists In the united application of the 

following tests: 

"1st. Has there been a reals . 

or constructive annexation of the ~ 

article in question to realty? 

"2nd. 

.' 

Was there a fitness 

,oradaptation of such,article to 

the uses or purposes of the realty 

with which it is connected? 

"3rd. Whether or not it was 

the intention of the party making 

'the annexation that the chattel 

should become a.permanent accession 

t.o the rreehold? - - ,&J this ,in-'. ,I' ,," 

tention being 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 annexation and 

purpose,or use for which the annex- 

,ation is made." 

-1444- 
Honorable Robert S. Calvert, Page 9 .. (M- 298), 

This test has been numerously approved and 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 determined from the 

intention of the parties (part three of the test) which 

may be ascertained from 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 

prolonged usage of the pipeline; (3) an appreciable 

amount of cost and labor to insure a long useful life 

a non-corrosive coating 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 applicable legal 

guid~elines presented, to make at factual determination 

of the true character of each plpeline:in issye;. and 

where it Is found to be personalty under the test imposed, a proper assessment should be made where the pipeline is the subject of a.taxable rental or sale. 

SUMMARY 

The determination whether the 

rental of a pipeline Is subject to the 

Limited Sales, EXCiSe and Use Tax and 

is therefore personalty, or whether 4 

the rental of a pipeline is not subject 

to this tax at?d is therefore a fixture 

ad~junct to the realty, is a factques- 

- 1445- 
. ., . 

Honorable Robert S. Calvert, Page 10 (M- 298) 

'* tion which must be answered in the 

flrst~intitance by'the,~Comptroller of 

Public Accounts by employi@ the 

leg'al guidelines herein,stat~eb, 

ruly yours, 

,: 

Prepared by Alvin,L. Zlmtn'erMn 

Assistant Attorney 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, 

-1446-.