### In The C ou rt o f A p p ea ls Si x t h Appe l l at e Di st r i c t o f Te x as a t Te x ar ka na

______________________________ No . 0 6- 07 -0 01 03 -C V

______________________________ THE PEOPL ES GAS, L I GHT, AN D COKE COMPANY, Appe llant V. HARRI SON CENTRALAPPR AI SALDI STRI CT, Appellee

On Appea l from the 71st J udicial District Court

Har rison County , Texas Trial Court No. 05-0381

B e f o r e M o r r i s s , C

. J. , C a

rt e r an d M o s e l e y , JJ. Op ini on by Chi e f Jus tic e Mo rr iss2 O P I N I O N The lar g e amount of natural g as ordinar ily stored under

Har rison County

has g reat value. The Ha rr iso n Ce ntr al App ra isa l D istri c t ( the Di str ic t) ha s a c te d to a sse ss a larg e a d v a lor e m ta x bill ag ainst a portion of that g as—g as allocable t o the account of P eoples Ga s, L ight, a nd Coke Company (P e op le s) . F ro m a

jud g me nt f

a vo ri ngthe Di str ic t, P e op le s a pp e a ls. The g as in question is stored in a larg e, deple ted natural g as field now us ed as a natura l ga s storag e fa cility

—the N o rt h L ansi ng fac ility —part of the interstate pipeline sy stem operated by Natura l G a s Pi p e li n e Co mp an y o f A me r ic a ( Pi p e li n e )

. Pe o p le s is a d is tr ib u ti o nc o mp an y

tha t purc ha se s n a tur a l g a s f

ro m su pp lie rs and de liv e rs it to u se rs in C hic a g o, I lli no is. Pip e lin e , n ot a pa rt y t o this matter, operates the interstate pipeline sy stem pursuant to regulations promulgated by the Fe dera l Energ y

Reg ulatory

Commi ssion ( the Commiss ion). Peoples buy s natural g as alre ady on the interstate pipeline sy stem owned a nd operated by Pipeline. Pipeline r epre sentatives testify ing at trial

e mph a size that the re are many sto ra g e fa c ili tie s a sso c ia te d wi th its pip e lin e and that the pip e lin e is operated " in the ag g reg ate." I n other words, Pipeline's storing and transporting g as does not use any particula r storag e fie ld exclusi vely

. Pipeline pay s ad valore m tax es on what is called " cushion gas " i n North L ansing , the signific ant volume of natural g as that re main s i n t h e s t orag e fa cility and provide s the nec essar y pressure and bala

nce to f acilitate the sa fe, e fficie nt operation of the pipeline. B eg inning in 1999, the District allocate d to Peoples a po rt ion of the " working " natural g as bala nce—the volume of g asPipeline's r epre sentative e x plained that its allocation methods were not for the purpose of 1 deter mining owne rship. I t merely did what i t was asked t o do for the c ourts to decide the issue of owner ship. Pur su ant t o Co mmi ssi on

tari ff s, Pip e lin e of

fe rs se ve ra l ty

pe s o f c on tr a c ts t o s hip pe rs on its 2 pip e lin e sy ste m. M os t c omm on a re the " NSS " and

" DSS" c on tr a c ts. NSS sto ra g e re qu ir e s a c us tom e r s uc h a s Pe op le s to re qu e st o r nom inate a wi thd ra wa l to g e t del ive ry

on a date c e rt a in. DSS storag e ser

vice, on the othe r hand, a llows for no-notice delivery

. 3 (above the " cushion" ) that is transporte d and deliver ed to pipe line customers—a nd assessed ta x es

on the va lue of

that po rt ion

of the natur a l g a s st or e d at N or th L ans in g. P e op le s su c c e ssf ull y challeng ed the assessment and, on advice of its a ppraisal consultant firm, the District remove d Peoples from the ta x rolls. The same thinghappene d in 2000. For tax y ear s 2003–2005, the District ag ain attempted to a ssess taxes ag ainst Peoples on a portion of the g as stored at North L ansing . This time, on advice f ro m a new c onsultant firm, the District ref

used to remove Peoples from the tax rolls. I nstead, the D istrict assessed Peoples' portion of the g as at Nor

th L an s i ng , for those y ear s, at values e x cee ding nine milli on, forty milli on, and forty -three milli on dollars, re spectively . Those tax y ear s and tax levies are at issue in this case. The g as volume figu re s al l o cable to Peoples are based on Pipeline' s rec ords. Pipeline 1

co mp ar es t h e t o t al co n t ra ctu al b al an ce fo r a l l t h e N S S s h i p p er s t h at h av e c o n t ra ct s o nP i p el i n e's 2 Gu lf Coa st L e g to t

he " wo rk ing " natur a l g a s b a lanc e a t N or th L ans inga t th e e nd

of the y e ar. Th is y ie lds a pe rc e nta g e that is mul tip lie d by e a c h sh ipp e r' s N SS c on tr a c tua l ba lanc e on the Gu lf Coa st L egof the pipeline at the end of the y ear to arrive at the allocation it attribut es to a c ustomer.4

The trial court ruled that the Dis trict has the a uthority to assess the ad va lorem taxes for the y ear s in question on the ga s it a llocated to People s. We r eview de novo the trial cour t's c onclusions of l aw determining eac h question of law indepe ndently

. Qu ic k v . Ci ty of A us tin , 7 S.W .3d 109, 116 (Tex. 1999). We review

the trial cour

t's f indings of fac t for lega l and factual sufficiency , as we do with jury finding s. See Ashcraft v. Lookadoo , 9 52 S.W. 2d 90 7, 91 0 ( Te x. Ap p. —D a lla s 1 99 7, pe t. denied)

. Our analy sis l e a d s u s , thr o u g h th e f o ll o w in g lo g ic a l s te p s , to c o n c lu d e th a t t a xin g th is g as infring es the Commerc e Clause: (1 ) P e op le s o wn s th is g a s f or a d v a lor e m ta x pur

po se s. (2) The Commerce Clause shields this gas f rom ad va lorem taxation. (A) T his ga s is in int erstate commerc e. (B ) This storag e does not re move this ga s from interstate commerc e. (C ) T he Di str ic t c ann ot t a x this g a s. F or the se re a so ns , w e re ve rs e the jud g me nt o f the tr ia l cou rt and re nd e r j ud g me nt t

hat a sse ssi ngthe se ad valor em prope rty

taxes for these y ear s was improper

. ( 1) Peoples Owns this Gas for Ad Valorem Tax Purposes The District a

nd Peoples ag ree that, under the Commi ssion's re g ulations, Pi peline does not own the g as in its pipeline sy stem. Peoples contends that it does not own, fo r ad v alorem tax purposes, a

ny amount of the massive volume of natura l ga s l y i n g b en eath Ha rrison County ; the District responds that someone must own the g as, and , s i n ce Pipeline c erta inly does not, Peoples

mu st be the ta xab le ow ne r o f t he po rt ion

of the g a s a llo c a

ble to i ts a c c ount.5

" Pr op e rt y ta xes a re the pe rs on a l ob lig a tio n of the pe rs on wh o ow ns or a c qu ir e s th e pr op e rt

y

on J anu ary

1 of t he y ear fo r wh ich th e ta x is im po sed ." T EX . T AX C ODE ANN . § 32.07(a) (Ve rnon 2008). The Texas Tax Code does not define "ow n" or "ow ner" for pur

poses of a ssessing a d valore m taxes. Tex as cour

ts have g ener ally

define d taxable " owner " as the individual or entity holding leg al title to the property

or holding an equitable rig ht to obtain leg al t itle. See Chi ldr ess C ou nty v . S tat e , 12 7 T e x. 34 3, 92 S.W. 2d 10 11 , 1 01 5 ( 19 36 ); Travis Cent. Appraisal Dist. v. S i

g n a t ure Flight Support Corp. , 1 40 S.W. 3d 83 3, 84 0 ( Te x. Ap p. —A us tin 2004 , n o p e t.) ; Comerica Ac ceptanc e Cor p. v . Dal las Ce nt. Ap

prais al D ist

. , 52 S.W .3d 495, 497 (Tex. App.—Dallas 2001, pe t. denied). I f a n in div idu a l or

e nti ty do e s n ot h old

pe rf e c t le g a l tit le , ho we ve r, that in div idu a l or e nti ty may sti ll be conside red the taxable owner of proper ty "if he is the rec ord owne r, or is vested w ith the appar ent le g a l title , or is in poss e ssi on the re of , co up le d with su c h cla ims and e vid e nc e s of ow ne rs hip a s w ill ju st if y th e ass um pt io n t hat he i s t he o wne r t here of. " Chi ldr ess C ou nty , 92 S.W. 2d a t 10 15 ; Sig na tur e Flight Support Corp. , 1 4 0 S

. W

. 3 d at 8 4 0

. T h e t er m "o wn er " h as n o fi x edl ega l m ea n i n g: Th e me anin g of the te rm ow ne r is no t the same un de r a ll c ir c ums tanc e s. I t is n ot a t e c h n i c a l t e r

m o r w o r d a t a l l , b u t o n e o f w i d e a p p l i c a t i o ni nv ar i o u s c o n n e c t i o n s . In all instances its meaningmust be asce rtained f rom the conte x t and subject matter

. Realty Trust Co. v. Craddock , 1 3 1 T e x. 8 8 , 1 1 2 S

. W

. 2 d 4 4 0 , 4 4 3 ( 1 93 8) ; see Signature Flight Support Corp. , 1 40 S.W. 3d at 83 9. Th a t sai d, we e xami ne the " c on te xt an d s ub je c t matte r" he re to deter mine whether

Peoples owns the g as in question.6

We beg in with a short explanation of the hig hly regulated natur al g as transpor tation and storag e sy stem and the de aling s between P i p el i n e and its customer s, including People s. The Commi ssion r estructur ed the natural g as transpor t and storag e industry

in 1992. This restructuring

cre ated a sy stem of commer cial rig hts for the pipeline customer that was separ ate f rom the phy sical operation of the pipeli n e s y s t em . Buy ers a nd sellers c onduct transa ctions at commerc ial points—"pape r points" or imag i n ar y p o i n ts—along the pipeline at whic h a purc hase ma y be completed, points that do not nece ssarily ref lect the phy sical location of the g as purcha sed. Pursuant to t his re str uc tur ingand

to fa c ili ta te purc ha se tr ans a c tio ns , Pip e lin e e sta bli sh e d g e og ra

ph ic a l zon e s, such as the South Te x as zone, the "T EX-OK " zone, a nd the I owa- I llinois zone, which help identify the dis tanc e the g a s is tr ans po rt e d f ro m the po int a t wh ic h it wa s inj e c te d int o the pip e lin e sy ste m. Apply ing the Comerica / Tra v is C ou nty test, we c onclude Peoples is the owne r for ad valor em taxation purposes. As the parties ag ree , Pipeline ha s complete control of the phy sical oper ation of the pipeline sy stem. Pipeline decide s wher e and when the natura l ga s is stored. There is no phy sical

connec tion between a

Pipeline customer' s storag e ac count balanc e and phy sical volumes at any particula r storag e fa cility

. T he District ac knowledg es that Pipeline' s acc ounting methods a re completely

divorce d from the phy sical re ality of the natural gas location. Pipeline' s customers purcha se volumes of natural g as at what the parties r efe r t o as a "pa per" pooling point after which time, Peoples emphasizes, the purcha ser r etains no control to dir ect the phy sical movement of the7

natura l ga s purcha sed. Peoples also e mphasizes that P i p el i ne' s storag e fie lds are ope rate d on an ag g reg ated ba sis. That is, none of its servic es ar e spec ifically linked to any

particula r storag e fie ld. Relevant doc uments show that Peoples purcha sed natura l g as and paid for its transpor tation to t he I ow a -I lli no is zo ne . O f c ours e , th e fun gible and e the re a l natur e of

natur a l g a s ma

ke s it impossibl e to asc erta in the phy sical location of a g iven allocate d portion of natura l ga s at any moment. Peoples contends that this doc umentary evidenc e in the form of C ommissi on-appr oved

a g re e me nts be tw e e n Pe op le s and Pip e lin e su g g e sts that Pe op le s' a llo c a tio n o f n a tur a l g a s is "c ontrac tually " located in the I owa- I llinois zone. Obviously , Pipeline cannot identify particula r volumes of g as as belong ing to a particula r customer when phy sically transporting or storing natural g as. Consist ent with Commi ssion reg ulations, Pi peline is in full custody , control, and posse ssion of the natural g as within the pipeline sy stem. Only Pipeline can dire ct the phy sical movement of the g as once it is pl ace d in the pipeline; and, eve n afte r a pur chase of g as at a paper pooling point, the purcha ser obtains no c ontrol over the phy sical movement of the volume of natura l ga s purcha sed. Pe op le s h a s n o le g a l r ig ht t o th e natur a l ga s loc a te d at No rt h L ans ing ; it c ann ot s pe c if ic a lly re qu e st g as from that fac ility and could not me rely back a truck up to the fa cility

and re move any

amount of natura l ga s. Nor is there any indication that it could do any such t h i n g i n I llinois . Peoples emphasizes that it owns mere ly contra ctual rights t o phy sically rec eive natural gas in C hicag o and that its purchase s from Pipeline ca ll for contra ctual storag e in the I owa- I llinois zone.L ast y ear , the Kansa s Supreme Court de cided a ca se similar to the instant case

. See In the 3 Matter of the Appeal of the Dir ector of Prop. Valuation , 284 Kan. 592, 161 P.3d 755 (2007). I n that c a se , s e ve ra l no n- Ka

ns a s e nti tie s ( mun ic ipa l ut ili tie s, natur a l g a s ma rk e tin g c omp any , a

nd pu bli c utilit ies) had c ontrac ted for g as storag e or de fer red de livery

with an interstate pipe line that m ai ntained storag e fa cilities in Kansas. Id

. T h e p arti e s s ti p u late d th a t n o n e o f th e e n ti ti e s had fac iliti es wit hin Kansa s or sol d, trade d, or deliver ed natur al g as any wher e in Kansa s. Id. a t5 9 4

. In Kansa s, a public utility ' s proper ty is not ex empt from ad valore m taxes. The tax ing entity argued that non-Ka nsas companies wer e public utilit ies within the following definition: "tha t ow n, control, and ho ldfor res ale st ored nat ural gas i n an un dergro un d fo rm ati on in th is st ate ." Id. at 597. Ba sed on the leg al and c ontrac tual relationship between the pipe line and its customers e stablished by Com mis sio n- a

pp ro ve d ta

ri ff s, the Ka ns a s Su pr e me Court

c on c lud e d th e e nti tie s w e re no t pu bli c utilit ies beca

use t hey did not "c ontrol" and "hold for resale" the stored natural g as. Id. a t 60 6. With that, the non-Ka

nsas companie s' allocations wer e exempt fr om a d valore m ta x es. I t did, howe ver, touch on the owne rship aspec t of the " public utilit y " de finition: Th e re is n o s e ri ou s d isp ute that th e Ta xpay e rs ow n ( or a t le a st h old

c on tr a c tua l r ig hts to) storag e bala

nces of natura l ga s contained in unde rg round formations in the state. Ne ve rt he le ss, wh e the r t

he Tax pa y e rs a c tua lly

c on tr ol a nd ho ld t he natur a l g a s is doubtful. I t is undisput ed that tariff s issued by

the . . . Commiss ion . . . establish that control and posse ssion of natural g as deliver ed to i nterstate pipe lines for tr a ns po rt a t i o n an d s t o r a g e i s v e s t e d i n t h e p i p e l i n e s u n t i l t h e g a s i s r e d e l i v e r e d to their customer s. I t is also undisput ed that the interstate pipelines ca nnot track a

nd 8 Nonethele ss, by regulation, owner ship rig hts could not be transferr ed to P ipeline. That said,

acc ording to the District, leg al title must lie with Peoples. No doubt g as is stored bene ath Har rison County ; there must be a

n owner of that g as for

tax purposes. Consi deringthe nature of the produc t at issue her e, the nature of the pi peline in which customers' fung ible g oods must be commingled, a nd the hig hly

regulated industry

in which Pipeline and Peoples c onduct their busine s s and which prohibits Pi peline fr om having owner ship rights in the g as but requir es t h at it maintain phy sical control of the na

tural g as, we conclude the t rial court corr ectly decide d that, for tax purposes, Peoples

o w n s ana l l o c a t i o no f

t h e n a tu r a l g a s s t o r e d

i nH ar r i s o nC o u n t y. 3acc ount for discre te pac kag es or molec ules of natur al g as deliver ed for storag e. As

the Supreme Court said in C e n tr a l I l l i no is , u n d er feder al re g ulations the pipeline customers have " littl e o r no control ove r whe re the sever ed natur al g as is stored or for ho w l on g." Id. at 6 0 3

. Ou r c o n cl u s i o n o n t h e o wn er s h i p i s s u e i s co n s i s t en twi t h t h e K an s as S u p re m e C o u rt 's conclusion. Congr ess has g rante d the Commiss i on exclusive jurisdiction t o regulate the natural g as 4 industry throug h the Natur al Gas A ct (NG A). Schneidew i n d v. A N R Pipeline Co. , 485 U.S. 293 (1988). 9 ( 2) The CommerceClause Shields this Gas f rom Ad Valorem Taxation Peoples argues that, eve n if it could be said that it is the ta x ab l e o wn er in thi s matter, the Com me rc e Cla

us e sh ie lds it f

ro m th e Di str ic t' s a sse ssm e nt s inc e the n a tur a l g a s is in i nte rs ta te

commerc e and sinc e the tax cannot pass the t est that would permit the District to assess such a tax on this property . We ag ree . Th e Com me rc e Cla

us e g ra nts Con g re ss t

he po we r t o r egula te int e rs ta te c omm e rc e . U .S. C O N ST . art. I , § 8, cl. 3. Cong ress prote cts interstate business a ctivity by restric ting state regulation of interstate commerc e. See M arathon Ashland Petroleum, L.L.C . v. Galve ston Cent. Appraisal 4 Di st. , 236 S.W .3d 335, 337–38 (Tex. App.—Houston [1s t Dist.] 2007, no pet.). ( a) This Gas Is in Interstate Commerce Traditionally , the United States Supreme Court ha s identified three way s in w hich g oods can enter the stream of interstate commerc e: (1) the g oods have been shipped, (2) the g oods have be en pla c e d w itha

c omm on c arr ier, or (3) th e g oo ds have sta rt e d a c on tin uo us ro ute or

jou rn e y int o10

interstate c ommerce . See Co e v . E rrol , 1 16 U. S. 5 17 , 5 27 (1 88 6) ; Marathon Ashland Petroleum, L.L. C. , 236 S.W .3d at 338. The g oods become a par t of interstate c ommerce when their movement demonstrates that the g oods have started and are bound for a nother state. See Hughes Bros. Timber Co. v . M inn eso ta , 272 U.S. 469, 476 (1926). Goods are not a par t of interstate c ommerce when the

rec ord shows only prepa

ration or intent to send those g oods out of state. See id. ; Marathon Ashland Pe tro le um , L. L.C. , 236 S.W .3d at 340–41. Her e, it is appare nt that the natura l ga s has bee n place d with a common ca rr i er , Pipeline. Unlike the taxpay er in Ma ra tho n A sh lan d P e tro le um , L. L.C. , Peoples does not maintain any control

over the phy sical movement of the g as. Moreove r, that common car rier is a n in t er s t at e p ipeline specific ally

g overne d by the Commi ssion. There is lit tle dispute that the natura l ga s in the pipeline is i n in te rs ta te c omm e rc e . A c ri tic a l qu e sti on is wh e the r the g a s in No rt h L ans ingsto ra g e is s imi larl y in interstate commer ce. ( b) This St orage Doe

s Not Remove this Gas from Interstate Commerce The District take s the position that, althoug h an extremely small portion of the natura l ga s (that p o rt i o n actua lly

moving in the pipeline) is actually in interstate commer ce, the rest of the

n a tu r a l g a s i s s t o r e d an d t h e r e f o r e s u b j e c t t o l o c a l t a x a t i o n w h e r e v e r i ti s l o c a t e d

. M o r e s p e c i f i c a l l y, the Di str ic t argue s that the fa c t that the po rt ion of natur a l g a s a llo c a te d to Pe op le s h e re is n ot a c tua lly

mov ingin t

he pip e lin e and

is, ra the r, sto re d b e ne a th H arr iso n Co un ty take s th e g a s o uts ide int e rs ta teI n Virginia Indonesia Company , th e Te xas Sup re me Court de te rm ine d whe the r t he I mpo rt
5 Ex port Clause would permit imposit ion of an a d valore m tax . Simi lar c onsiderations ar e involved when deter

mining the "c ontinuity of transit" for pur poses of the Commerc e Clause. See 910 S.W .2d at 912. 11 c omm e rc e , le a vin g it s ub

je c t to ta xati on

a s a pa rt of the ma ss o f p ro pe rt

y wi thi n th e State of

Te xas. See Coe , 1 16 U. S a t 52 7; Ma ra tho n A sh lan d P e tro le um , L. L.C. , 236 S.W .3d at 338. We conclude this conte ntion fails in the fac e of two are as of the l aw: authorities determining the ef fec t of transportation stoppage on whether a produc t is in interstate commerce and author ities

mor e sp e c if

ic a lly a dd re ssi ngsto ra g e of

natur a l g a s. First, we look to the line of ca ses examining g ene ra l l y t h e circumstance s surrounding the stoppag e of products that have been injected into the stream of interstate c ommerce and dete rmining wh et h er a stoppag e in a jurisdiction would subject the g oods to local taxation. See I n d ep. W a r e h o u s es , I

n c . v . S c he e le , 33 1 U.S. 7 0, 73 (1 94 7) ; se e als o Vi rg ini a I nd on esia Co. v . H

arris Cou nty Ap prais al D ist

. , 910 S.W .2d 905, 912–13 (Tex. 1995). W h en there is a brea k in the 5 interstate transit, the proper ty may come to r est within a state and become subject to the power of the state to impose a nondiscr iminatory proper ty tax. Indep. W

arehouses, Inc

. , 331 at 72–73. The

c ru c ia l qu e sti on

in d e ter mi ni ngwh e the r t he state may

e xer t it s taxing po we r i s w he the r t he re is "cont in ui ty

of t rans it ." Id. at 7 3 (c i t i n g Carson Petroleum Co. v. Vial , 279 U.S. 95, 101 (1929)). The Un ite d St a te s Su

pr e me Court

e xpla ine d th e c on c e pt: I f t he i n t e r s t a t e m o v e m e n t h a s b e g u n , i t m ay b e r e g ar d e d a s c o n t i n u i n g , s o a s to m ai n t ain t he immunity

of the prope rty

from state ta x ation, despite tempora ry interrup t i o n s due to the nec essities of the journe y or for the purpose of

safe ty and12

convenie nce in the c ourse of the movement. . . . F ormalities, s u ch as t h e forms of bil lin g , a nd me re c ha ng e s in the me tho d o f t

ra ns po rt a tio n d o n ot a ff

e c t th e c on tin

uit y of the tr ans it. Th e qu e sti on is alw ay s o ne of

su bs tanc e , a

nd in e a c h c a se it i s nece ssary to consider the pa

rticular oc casion or pur

pose of t he interr

uption during which the tax is sought to be levied. . . . Id. (q u o t i n g Minnesota v. Blasius , 2 90 U. S. 1 , 9 –1 0 ( 19 33 )) . We mus t look a t the fa c ts of e a c h c a se and will consider the owner 's i ntention, the owner ' s ability to chang e destination, the a g ency or method of transpor

tation, the actua l c ontinuity of the journey , and the pur pose of the inter

ruption. See Cha mp lai n R e alt

yCo. v . To wn o

f B att le bo ro , 260 U.S. 366, 377 (1922). The c hara cter

of the shipm ent in such a c ase de pends on the c ircumstance s, including w hat the owner

has done to pre pare for the jour ney and to ca

rry it out. V

ir g in ia Indonesia Co. , 910 S.W .2d at 912–13. For

instance, w hen the stoppag e of proper ty in interstate commerce is nece ssary for the safe ty and convenie nce of the g oods, we do not c onsider the continuity of tr an s i t b ro k en. Indep. W arehouses, Inc

. , 331 U.S. at 7 3 . On the other hand, if the stoppag e is attributable to the business purpose of the owner , then we de em the continuity of transit terminate d and the g oods are subject to tax i n the jurisdiction of the stoppag e. Virginia Indonesia Co. , 910 S.W .2d at 912. Put another way , [w] here proper

ty has come to r est within a State, being held there at the plea sure of the owner , for disposal or use, so that he may dispose of it e ither within the State, or for shipment elsew here , as his interest dictate s, it is deemed to b e a p art of the g ener al mass of prope rty

within the State and is thus subject to its t axing power

. Indep. W arehouses, Inc ., 331 U.S. at 73.13

I n the instant case , the re cord shows a nd the law r equire s that Peoples has n o co ntrol over the phy sical oper ations of the pipeline. Control lies solely with Pipeli n e. Since Peoples has no control over

wher e that natur al g as is stored and how much is store d at any g iven location, we c annot

say that Pe op le s ma de the de c isi on to st ore g a s at N or

th L ans ingin o rd e r t o s e rv e its bu sin e ss purpose. Simply

put, it made no decision at a ll reg ardingthe phy sical l ocation of the s tored natural g a s. The District c ontends Peoples bene fits from the storag e at North L ansing since it ca n buy g as at a c heape r rate in the summer m o n t h s an d store it for late r use in the winter months when the demand in the Chica g o are a incr ease s dra m at i ca l ly . I t may well be the c ase that the advent of a pipeline sy stem that will allow for storag e of a signific ant amount of natura l ga s is benefic ial to local distributing companie s g ener ally . I ndeed, suc h a sy stem would seem to be be nefic ial to all. Such a bene fit, howeve r, does not a l t er the fa ct that Peoples, while be nefitting from a stora g e sy stem g ener ally , makes no de cision to store the natura l g as at North L ansing specific ally . The re cord shows that th e c on tr a c ts b e tween P eop les and Pip e lin e do no t sp e c if

y that th e g a s w ou ld b e loc a te d in Te xas. I n f

a c t, t ho se a g re e me nts pr ov ide fo r " c on tr a c tua l" sto ra g e in I ow a and I lli no is. Th e tr

uth i s , P i p el i n e o p er at es i t s s y s t em wi t h o u t re gar d t o t h e ph y s i ca l re al i t y o f i d en t i fy i n g a s p ec i fi c s t o ra ge fac ility at which a

ny custom er' s volume of natura l ga s will be phy sically stored. Rather , Pipeline operates the pi peline on an " ag g reg ate" basis in which all the storag e fa cilities serve the pipeline as neede d to operate ef

ficiently and ef fe ct i v el y . Wit h these fa cts in mind, we conc lude that the14

stoppag e of natural g as in North L ansing does not serve the business pu rp o s e o f P eo p l es. To the contra ry , Pe o p le s h a s n o c o n tr o l o v e r w h e r e th e n a tu r a l g a s is s to r e d , an d w e c an n o t s ay th a t the sto pp a g e in Ha

rr iso n Coun ty se rv e s a busi ne ss pur po se a s c on te mpl a te d b y

the c a se s d e a lin g wi th the continuity

of transit of g oods in interstate commer ce. S econd, we examine law spe cifica lly conce rningthe storag e of natural g as. Commissi on regulations provide some g uidance as to w hether storag e would take the natura l ga s out of the stream of interstate commerc e: " Transpor tation includes storag e, exchang e, bac khaul, di s p l ace ment, or

o t h er m et h o d s o f t ra n s p o rt at i o n . " 1 8 C

. F. R

. § 2 8 4

. 1 (a ). By re gu l at i o n , t h en , at l ea s ts o m e s t o ra ge is considere d a par

t o f t h e t ransportation process. The ref ore, stora g e ca

n be a pa rt of int e rst

ate transportation. Storag e in N orth L ansing , then, as a matter of regulatory definiti o n , wo u l d not

nece ssarily

take the natural g as out of the stre am of interstate commer ce. I ndeed, the United States Supreme Court has spoke n on this iss ue: Petitioners argued below that Storag e wa s not a n at u ral ga s company within the meaning o f th e N G A , c o n te n d in g th a t th e s to r a g e o f g a s c o n s ti tute s n e it h e r the transportation nor the sale of g as i n interstate commerce

. Both c ourts below re jected this argument
. . . rea soning that "tra nsportation" inc ludes storag e. " Under g round g as storag e fa cilities are a

nece ssary

and int eg ral part of t he operation of piping g as fr om the ar ea of

production to the ar ea of consumption." Sch n eidewi nd , 485 U.S. at 295 n.1 (quoting Columbia Gas Tr ansmission Cor p. v. Ex clusive G as Storage Easeme nt , 776 F .2 d 125 , 129 (6 th C ir . 1 98 5) ); see also Mic higan-W isconsin Pipe Line Co.

v . C a l v e rt , 347 U.S. 157, 166–68 (1954) (e valuating Texas tax on "g ather ing" g as in context of int e rs ta te pip e lin e , c ha

ra c te ri zingsit

uatio n a nd " so c los e ly re la te d to int e rs ta te tr ans po rt a tio n a s to15

be pra ctically

a part of i t," and concludingthat the tax in t hat situation violated Commerce Clause ). This storag e of this natura l ga s in N orth L ansing does not take the g as out of interstate commerc e. To conclude otherwise would be to se g reg ate, f rom the pipeline itself, a

function dee med " nece ssary and integ ral" to the pipeline. We will not do so and, ins tead, conclude that this storag e does not take thi s n a tur a l g a s o ut o f t

he str e a m of

in ter st a te c omm e rc e it e nte re d b y inj e c tio n in to a

n in te rs ta te pip e lin e . T he natur a l g a s a llo c a te d to Pe op le s is in t he str e a m of int e rs ta te c omm e rc e , a nd thi s storag e does not re move it from interstate c ommerce . ( c) The District Cannot Tax this Gas I t remains possible that the District could still have the authority to ta x the portion of natura l gas al l o ca ted to Peoples, despite the f act that the natural g as has be en injecte d into and rema ins wi t h i n t h e s t r e a m o f i n t e r s t a t e c o m m e r c e . A s t a t e t a x d o e s n o t v i o l a t e t h e C o m m e r c e Claus e if it (1) is applied to a

n activity with a substantial ne x us with the taxi ng state, (2) is fairly apportioned, (3) doe s not discrimina t e aga i n s t i nterstate c ommerce , and (4) is fairly related to the servic es provided by

the state. See Vi nm ar

v . H arris Cou nty

Ap prais al D ist

. , 9 4 7 S.W.2d 5 5 4 , 5 5 5 ( T e x. 1 9 9 7 ) ( ci t i n g Complete Auto Transit, Inc . v. Brady , 4 30 U. S. 2 74 , 2 79 (1 97 7) ); Diamond Shamrock Re f. an d Mk tg. Co. v . Nu e c es Co un ty

Ap prais al. Di

st. , 876 S.W. 2d

29 8 ( Te x. 19 94 ); Rylander v . 3 Beall Bros. 3, Inc. , 2 S.W .3d 562, 570 (Tex. App.—Austin 1999, pet

. d en i ed ). I f a ta x does not satisfy this test, called the Com ple te Au to test, the Commerce Clause prohibits the ta x . Se e Ha rri s Co u n t y A p p r a isal Dist. v. Tr ansamerica Container Leasing, Inc. , 9 2 0 S. W. 2 d 6 7 8 , 6 8 2 ( T e x.Th e " su bs tanti a l ne xus" re qu ir e me nt i s n ot, lik e du e pro ces s' " min imum c on ta c ts" 6 require ment, a proxy

for notice , but r ather a means for limit ing state burde ns on interstate c ommerce . Quill Corp. , 504 U.S. at 313. Acc ording ly , an entity may have the "minimum c ontacts" with a taxing state as required by the Due Proc ess Clause, and y et lack the "substantial ne x us" w ith that state as require d by

the Commerce Clause. Id. 16 App.—Houston [1st Dist.] 1995, writ d en i ed). The second a nd third parts of the Com ple te Au to

ana ly sis , w hic h r e qu ir e fa ir a pp or tio nme nt a

nd no nd isc ri min a tio n, pr oh ibi t ta xes that pa ss an unf a ir share of the tax burden onto interstate commer ce. Quill Corp. v. N.D. , 504 U.S. 298, 313 (1992). The fir st and fourth prong s, which re quire a substantial nexus and a re lationship between the tax and state-pr ovided service s, limit the rea ch of state taxi ng authority so as to e nsure th at s t at e t axation does not unduly

burden inter state commer ce. Id. The Com merc e Clause r equire s "some de finite link, some minim um connec tion, betwee n 6 a st ate andth e per so n, pro pert y , o r t rans act io n i t s e e k s t o t ax ." Al lie d- Sig na l, I nc . v . D ire c tor

, Division of Tax , 5 0 4 U. S

. 7 6 8 , 7 7 7 (1 9 9 2 ) ( qu o t i n g Miller Bros. v. Mary land , 347 U.S. 340, 344–45 (1 95 4) ); 3 Beall Bros. 3, Inc. , 2 S.W .3d at 570. The Commerc e Clause r equire ment of a substantial nexus wit h the taxing state is satisfied by the taxpay er' s phy sical pre sence in the state. 3 B e all Br os . 3, Inc. , 2 S.W. 3d at 5 70 ; Lawr e nc e In du s. , I nc . v . S ha rp , 8 9 0 S. W. 2 d

8 8 6 , 8 9 2

– 9 3 ( T e x. Ap p. —A us tin

19 94 , w ri t de nie d) ; se e als o Quill Corp. , 504 U.S. at 312–14. The re cord de monstrates that Peoples m ai n t ai n s no office in Texas. Nor does it have a ny employ ees, r epre sentatives, or phy sical fa cilities in the St ate. The phy sical fa cilities in HarrisonWe also note our sister c ourt' s opinion in Rylander v . Bandag Licensing Corp. , 18 S.W .3d 7 296 (Tex. App.—Austin 2000, pet. denied). I n Bandag Licensing Corp. , th e Au sti n c ourt su g g e sts that "w hen the c orporation conducts its activi t y s o l el y throug h interstate c ommerce and lac ks any ph y si cal pres ence in th e st ate , no suff ici ent nex us ex is ts to perm it th e st ate to ass ess tax ." Id. at 300. That conne ction, along with the fac ts that the corporation' s only activity was the "pa ssive possession of a lice nse to do business in Texas" and that the corpor ation had no phy sical pre sence in Texas, led the cour t to conclude that the Commerc e Clause pr ohibited the impo s ition of a state tax in that situation. 17 County be lon g to P ipe lin e , a s doe s the de c isi on to u se the No rt

h L ans ingfa c ili ty . F ur

the r, the re is

no e vid e nc e that any of the natur a l g a s Pe op le s h a s p ur c ha se d is de liv e re d to any c us tom e r i n T e xas. If w e w e r e t o l o o k s t r i c t l y a t t h e g e n e r i c a c to f s t o r i n g g a s i na

r e s e r v o i r i nH ar r i s o nC o u n t y, it m ig ht a pp e ar t hat su c h a n a c tiv ity wo uld have a su bs tanti a l ne xus wi th the State
. We n ote a g a in that, as require d by the Commi ssion r eg ulations, Pipeline—not Peoples—direc ts that activity , and

we a re to c onsider not whethe r Pipeline' s activities have a substant i al n ex u s with the State, but wh e the r P e op le s' a c tiv iti e s d o. Pe op le s e ng a g e s in the purc ha se and

de liv e ry of natur a l g a s to its

cus to me r s in Ch ic a g o . I ts o n ly c o n n e c ti o n in th is r e s p e c t to T e xa s is thr o u g h th e s tr u c tu re a nd loc a tio n o f P ipe lin e ' s pip e lin e and Pip e lin e ' s de c isi on to sto re a sig nif ic ant a mou

nt o f n a tur a l g a s in No rt h L ans ing . Su c h a co nn e c tio n is too te nu ou s to su bje c t Pe op le s to a d v a lor e m ta xati on in Te xas. 7 Th e Di str ic t c on te nd s the ne xus lie s be tw e e n th e natur a l g a s and the State . T he natur a l g a s, it a rgue s, c ome s f

ro m Texas a

nd is, thu s, su

bs tanti a lly

c on ne c te d to the State su c h th a t th e Sta te should be allowed to ta x it. The rec ord sug g ests that much of the gas i s T ex as -p roduced.18

Neve rtheless, we do not have spe cific volumes of that p ro d u ct ion, nor could we ever know the location from whic h Peoples' allocation orig inated. We conclude that, despite the fact t hat P eoples owns some of t he natural g as on t he sy stem and thus under H arr ison County , the storag e of natural gas at the North L ansing field is an insufficient ne x us when we consider the par ticular, unique c ircumstance s at hand a nd the complex

r e l a t i o n s h i p s a m o n g t h e p art i e s i n v o l v e d

. W e f i n d i n s u f f i c i e n t n e x u s b e t w e e nT e x a s an d t h e e n t i t y, proper ty , or transa ction to be taxed. That said, the District' s tax fa ils to satisfy the first prongof the Com ple te Au to test and, there fore , violates the Commerce Clause. Moving to other

parts of the test, we look at t h e re l ation betwee n Peoples and ser vices provided in Ha

rris o n C o u n ty . Under

the Commerce Clause, the mea sure of the tax mus t be

re a so na bly re la te d to the e xten t of

the ta xpay e r' s pre se nc e or a c tiv iti e s with in the ta xing state a nd to the taxpay er' s conseque nt enjoy ment of the opportunities which the state has a ffor ded. 3 Beall Bros. 3, Inc. , 2 S.W .3d at 571. Even though fire and police se rvice s may not be invoked, protec tion confer

red by these " along with the usual and usually forg otten advanta g es conf err ed by the state' s maintenanc e of a civiliz ed socie ty

are justifications e noug h for the imposit ion of a tax." See Transamerica Container , 920 S.W .2d at 683. The D istrict presente d substa n t i al evidenc e of service s provided within the county . Whil e we do not doubt the value of those se rvice s, we note, ag ain, that servic es such as l aw enforc ement and the fire depar tment would serve the North L ansing19

fac ility itself, and the facility

undoubtedly

belong s to Pi peline, which doe s pay ad valor em taxes on both the "c ushion" g as it maintains in the fac ility and the phy sical plant of the f acility itself. Ha vin g fo un d tha t the Di str ic t' s tax on Pe op le s' g a s f a ils to m e e t, at le a st, the fi rs t and fo ur th prong s of the Com

ple te Au to te st, we c on c lud e that a sse ssm e nt o f a d va lor e m ta xes, on the se fa c ts, runs af oul of the Commerce Clause. We reve rse the tr ial court' s judgme nt and render judgment that assessing these ad valorem proper ty taxes for these y ear s is improper.

J o s h R

. M o r r i s s , III Chief J ustice Date Submitted: J une 18, 2008 Date D ecide d: September 24, 2008